This combined prospectus sets forth concisely the information about Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund, each a
series of Scudder California Tax Free Trust, an open-end management investment
company, that a prospective investor should know before investing. Please retain
it for future reference.
Shares of the Funds are not insured or guaranteed by the U.S. Government.
Scudder California Tax Free Money Fund seeks to maintain a constant net asset
value of $1.00 per share but there can be no assurance that the stable net asset
value will be maintained.
If you require more detailed information, a Statement of Additional Information
for the Funds dated August 1, 1996, as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103 or calling 1-800-225-2470. The
Statement, which is incorporated by reference into this prospectus, has been
filed with the Securities and Exchange Commission.
Because of its focus on California tax-exempt investments, the Scudder
California Tax Free Money Fund may have to concentrate a significant percentage
of its assets in a single issuer. An investment in this Fund may be riskier than
an investment in a money market fund that does not focus on investments from a
single state.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Contents--see page 5.
Scudder California
Tax Free Money Fund
------------------------------
Scudder California
Tax Free Fund
Prospectus
August 1, 1996
Two pure no-load(TM) (no sales charges) mutual fund series which seek to provide
double tax-free income, exempt from both California state personal income tax
and regular federal income tax.
<PAGE>
Expense information
How to compare a Scudder pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder California Tax Free Money Fund and Scudder
California Tax Free Fund (the "Funds"). By reviewing this table and those in
other mutual funds' prospectuses, you can compare each Fund's fees and expenses
with those of other funds. With Scudder's pure no-load(TM) funds, you pay no
commissions to purchase or redeem shares, or to exchange from one fund to
another. As a result, all of your investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in either Fund for various transactions.
Scudder Scudder
California Tax California
Free Money Tax Free
Fund Fund
Sales commissions to purchase shares (sales load) NONE NONE
Commissions to reinvest dividends NONE NONE
Redemption fees NONE* NONE*
Fees to exchange shares NONE NONE
2) Annual Fund operating expenses: Expenses paid by either Fund before it
distributes its net investment income, expressed as a percentage of its
average daily net assets for the fiscal year ended March 31, 1996.
Investment management fees 0.29%** 0.62%
12b-1 fees NONE NONE
Other expenses 0.31%** 0.15%
---- ----
Total Fund operating expenses 0.60%** 0.77%
===== =====
Example
Based on the levels of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by each Fund before it distributes its
net investment income to shareholders. (As noted above, the Funds have no
redemption fees of any kind.)
One year $ 6 $ 8
Three years 19 25
Five years 33 43
Ten years 75 95
See "Fund organization--Investment adviser" for further information about the
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than
those shown.
* You may redeem by writing or calling the Funds, or by Write-A-Check for
Scudder California Tax Free Money Fund. If you wish to receive redemption
proceeds via wire, there is a $5 wire service fee. For additional
information, please refer to "Transaction information--Redeeming shares."
** Until July 31, 1997, the Adviser has agreed to waive a portion of its fee
for Scudder California Tax Free Money Fund to the extent necessary so that
the total annualized expenses of the Fund do not exceed 0.60% of average
daily net assets. If the Adviser had not agreed to waive a portion of its
fee, Fund expenses would have been: investment management fee 0.50%, other
expenses 0.31% and total Fund operating expenses 0.81% for the fiscal year
ended March 31, 1996. To the extent that expenses fall below 0.60% during
the fiscal year, the Adviser reserves the right to recoup, during the
fiscal year incurred, amounts waived during the period, but only to the
extent that the Fund's expenses do not exceed 0.60%.
2
<PAGE>
Financial highlights
Scudder California Tax Free Money Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited
financial statements. If you would like more detailed information concerning
the Fund's performance, a complete portfolio listing and audited financial
statements are available in the Fund's Annual Report dated March 31, 1996 and
may be obtained without charge by writing or calling Scudder Investor
Services, Inc.
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
----------------------------------------------------------------------------------- TO MARCH 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income (a)........ .032 .027 .019 .023 .035 .047 .052 .049 .035
Distributions from net
investment income............ (.032) (.027) (.019) (.023) (.035) (.047) (.052) (.049) (.035)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%) (b)............ 3.28 2.72 1.92 2.35 3.54 4.79 5.35 5.04 3.86**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)................. 67 64 72 56 58 64 65 64 53
Ratio of operating expenses,
net to average daily net
assets (%) (a)................. .60 .60 .60 .60 .60 .65 .75 .67 .45*
Ratio of net investment income
to average daily net
assets (%)..................... 3.23 2.68 1.90 2.33 3.50 4.68 5.22 4.98 4.41*
(a) Reflects a per share amount
of expenses, exclusive of
management fees,
reimbursed by the
Adviser of.................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ .002
Reflects a per share amount
of management fee not
imposed by the Adviser of... $ .002 $ .002 $ .003 $ .003 $ .003 $ .003 $ .001 $ .002 $ .004
Operating expense ratio before
expense reductions (%)...... .81 .84 .90 .86 .88 .92 .90 .84 1.32*
</TABLE>
(b) Returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
3
<PAGE>
Financial highlights (cont'd)
Scudder California Tax Free Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated March 31, 1996 and may be obtained without charge by
writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
YEARS ENDED March 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $10.07 $10.02 $11.05 $10.60 $10.41 $10.29 $10.26 $ 9.99 $11.18 $10.95
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ................ .51 .51 .53 .59 .61 .63 .65 .68 .69 .71
Net realized and
unrealized gain
(loss) on investment
transactions .......... .29 .14 (.35) .94 .47 .21 .22 .27 (.93) .53
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................... .80 .65 .18 1.53 1.08 .84 .87 .95 (.24) 1.24
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income ................ (.51) (.51) (.53) (.59) (.61) (.63) (.65) (.68) (.69) (.71)
From net realized
gains on
investments ........... -- (.09) (.63) (.49) (.28) (.09) (.19) -- (.26) (.30)
In excess of net
realized gains ........ -- -- (.05) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ............. (.51) (.60) (1.21) (1.08) (.89) (.72) (.84) (.68) (.95) (1.01)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period ........................ $10.36 $10.07 $10.02 $11.05 $10.60 $10.41 $10.29 $10.26 $ 9.99 $11.18
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ................ 8.01 6.75 1.30 15.13 10.74 8.53 8.62 9.80 (1.70) 12.11
RATIO AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ........... 293 294 325 309 242 208 193 171 153 195
Ratio of operating
expenses, net to
average daily net
assets (%) .................... .77 .80 .78 .79 .81 .84 .83 .89 .88 .84
Ratio of net investment
income to average
daily net assets (%) .......... 4.88 5.18 4.85 5.42 5.79 6.13 6.23 6.71 6.95 6.55
Portfolio turnover rate ......... 49.2 87.3 126.5 208.6 143.0 170.6 70.4 158.9 52.3 68.0
</TABLE>
4
<PAGE>
A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $100 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
The Funds
o seek to provide double tax-free income, exempt from both California state
personal income tax and regular federal income tax
o active portfolio management by Scudder's professional team of credit
analysts and municipal bond market experts
o dividends declared daily and paid monthly
Scudder California Tax Free Money Fund
o seeks to maintain a constant share price of $1.00 and investment in high
quality, short-term municipal securities tax-exempt in California
Scudder California Tax Free Fund
o invests primarily in long-term investment-grade municipal securities
tax-exempt in California
Contents
Why invest in these funds? 6
Summary of important features 7
Tax-exempt vs. taxable income 8
Scudder California Tax Free Money Fund 9
Scudder California Tax Free Fund 10
Additional information about policies
and investments 11
Purchases 14
Exchanges and redemptions 15
Distribution and performance information 18
Fund organization 19
Transaction information 21
Shareholder benefits 25
Investment products and services 27
How to contact Scudder Back cover
Trustees and Officers Back cover
5
<PAGE>
Why invest in these funds?
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund (the
"Funds") are non-diversified and diversified series, respectively, of Scudder
California Tax Free Trust and are designed for California residents seeking
income exempt from both state and regular federal income tax. Because these
Funds are intended for investors subject to California state personal income and
regular federal income taxes, they may not be appropriate for all investors and
are not available in all states.
Tax-free income
As illustrated in the chart "Tax-exempt vs. taxable income," depending on your
tax bracket and individual situation, you may earn a substantially higher
after-tax return from these Funds than from comparable investments that pay
income subject to both California state personal and regular federal income tax.
For example, if your federal marginal tax rate is 36% and your California
marginal tax rate is 10%, your effective combined marginal tax rate is 42.40%.
Thus, you would need to earn a taxable return of 4.83% to receive after-tax
income equal to the 2.78% tax-free yield provided by Scudder California Tax Free
Money Fund for the seven-day period ended March 31, 1996, or earn a taxable
return of 8.47% to receive after-tax income equal to the 4.88% tax-free yield
provided by Scudder California Tax Free Fund for the 30-day period ended March
31, 1996. In other words, it would be necessary to earn $1,736 from a taxable
investment to equal $1,000 of tax-free income you receive from either Fund. The
yield levels of tax-free and taxable investments change continuously. Before
investing in either Fund, you should compare its yield to the after-tax yield
you would receive from a comparable investment paying taxable income. For
up-to-date yield information on either Fund, shareholders can call SAIL, Scudder
Automated Information Line, for toll-free information at any time.
Investment characteristics of each Fund
The Funds are income-oriented portfolios advised by Scudder, Stevens & Clark,
Inc. (the "Adviser"). Each Fund seeks to provide income free from both
California state personal income and regular federal income tax. Each Fund
normally invests at least 80% of its net assets in California municipal
securities. The two Funds, however, have different investment objectives and
characteristics. The two Funds' prospectuses are presented together so you can
understand their important differences and decide which Fund or combination of
the two is most suitable for your needs.
Scudder California Tax Free Money Fund seeks stability of capital and the
maintenance of a $1.00 net asset value per share. Scudder California Tax Free
Fund ordinarily provides a higher, more stable income stream, but its net asset
value per share fluctuates with market changes. As a result of these
differences, the average portfolio maturities of the Funds are different.
Scudder California Tax Free Money Fund invests primarily in short-term municipal
obligations (notes and bonds) with individual remaining maturities of 397
calendar days or less. The weighted average maturity of the portfolio is 90 days
or less. Scudder California Tax Free Fund has flexible investment policies
regarding maturity but normally invests primarily in long-term municipal bonds.
The yield and the potential for price fluctuation are generally greater, the
greater the maturity of the municipal security. Other factors affecting the
yield and price variability include the absolute level of interest rates, the
relationship among short-, medium- and long-term interest rates, the quality of
each Fund's investments and each Fund's expenses.
6
<PAGE>
Except as otherwise indicated, each Fund's investment objectives and policies
are not fundamental and may be changed without a vote of shareholders.
Shareholders will receive written notice of any changes in either Fund's
objective. If there is a change in investment objective, shareholders should
consider whether that Fund remains an appropriate investment in light of their
then current financial position and needs. There can be no assurance that either
Fund's objectives will be met.
In addition, the Funds offer all the benefits of the Scudder Family of Funds.
Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-load(TM)
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.
<TABLE>
<CAPTION>
Summary of important features
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Investments Maturity Quality Dividends
objectives
and characteristics
Scudder o price stability o short-term o average maturity o 100% of o declared daily
California California of 90 days or investments rated and paid
Tax Free o income exempt from municipal less; within top two monthly
Money Fund both California securities no single quality ratings
state personal investment or judged to be o option to
income tax and maturity longer of comparable receive in
regular federal than 397 quality cash or
income tax calendar days reinvest in
additional
shares
Scudder o prices will o primarily o primarily o 100% of o declared daily
California fluctuate with long-term long-term bonds investments rated and paid
Tax Free Fund changes in interest California within top six monthly
rates municipal quality ratings
bonds or judged to be o option to
o income exempt from of comparable receive in
both California quality cash or
state personal reinvest in
income tax and additional
regular federal shares
income tax
----------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Tax-exempt vs. taxable income
Tax Free Yields and Corresponding Taxable Equivalents: The table below shows
California taxpayers what an investor would have to earn from a comparable
taxable investment to equal the Scudder California Tax Free Money Fund and the
Scudder California Tax Free Fund's double tax free yield. Today, many investors
may find that regular federal and California state personal income tax rates
make either Fund an attractive alternative to investments paying taxable
income.
<TABLE>
COMBINED TO EQUAL HYPOTHETICAL TAX-FREE YIELDS
MARGINAL OF 5%, 7% AND TAX 9%, A TAXABLE
TAX INVESTMENT WOULD HAVE TO EARN*:
1995 TAXABLE INCOME: RATE: 5% 7% 9%
-----------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
-------------------------------------
<S> <C> <C> <C> <C> <C>
$24,000-25,083 32.32% 7.39% 10.34% 13.30%
25,084-31,700 33.76 7.55 10.57 13.59
31,701-58,150 34.70 7.66 10.72 13.78
58,151-109,936 37.42 7.99 11.19 14.38
109,937-121,300 37.90 8.05 11.27 14.49
121,301-219,872 42.40 8.68 12.15 15.63
219,873-263,750 43.04 8.78 12.29 15.80
OVER $263,750 46.24 9.30 13.02 16.74
-----------------------------------------------------------------------------------------------------------------------
JOINT RETURN
-------------------------------------
$40,001-50,166 32.32% 7.39% 10.34% 13.30%
50,167-63,400 33.76 7.55 10.57 13.59
63,401-96,900 34.70 7.66 10.72 13.78
96,901-147,700 37.42 7.99 11.19 14.38
147,701-219,872 41.95 8.61 12.06 15.50
219,873-263,750 42.40 8.68 12.15 15.63
263,751-439,745 45.64 9.20 12.88 16.56
OVER $439,745 46.24 9.30 13.02 16.74
* Combined marginal tax rates are adjusted for the deductibility of state taxes. These illustrations assume a
marginal federal income tax rate of 28% to 39.6% and that the federal alternative minimum tax is not applicable.
Upper income individuals may be subject to an effective federal income tax rate in excess of the applicable
marginal rate as a result of the phase-out of personal exemptions and itemized deductions made permanent by the
Revenue Reconciliation Act of 1993. Individuals subject to these phase-out provisions would have to invest in
taxable securities with a yield in excess of those shown on the table in order to achieve an after-tax yield equivalent
to the yield on a comparable tax-exempt security.
</TABLE>
8
<PAGE>
Scudder California Tax Free Money Fund
Investment objectives and policies
Scudder California Tax Free Money Fund seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while providing
California taxpayers income exempt from both California personal and regular
federal income tax. The Fund is a professionally managed portfolio of high
quality, short-term California municipal securities. All of the Fund's
investments are high quality, have a remaining maturity of 397 calendar days or
less and have minimal credit risk as determined by the Adviser. The weighted
average maturity of the Fund's portfolio is 90 days or less.
Quality
All of the Fund's municipal securities must meet certain quality criteria at the
time of purchase. Generally, the Fund may purchase only securities which are
rated, or issued by an issuer rated, within the two highest quality ratings of
two or more of the following rating agencies: Moody's Investors Service, Inc.
("Moody's") (Aaa and Aa, MIG-1 and MIG-2, and P1), Standard & Poor's ("S&P")
(AAA and AA, SP1+ and SP1, A1+ and A1), and Fitch Investors Service, Inc.
("Fitch") (AAA and AA, F1+, F1 and F2). Where only one rating agency has rated a
security (or its issuer), the Fund may purchase that security as long as the
rating falls within the categories described above. Where a security (or its
issuer) is unrated, the Fund may purchase that security if, in the judgment of
the Adviser, it is comparable in quality to securities described above. All of
the securities in which the Fund may invest are dollar-denominated and must meet
credit standards applied by the Adviser pursuant to procedures established by
the Trustees. Should an issue of municipal securities cease to be rated or if
its rating is reduced below the minimum required for purchase by a money market
fund, the Adviser will dispose of any such security unless the Trustees of the
Fund determine that such disposal would not be in the best interests of the
Fund.
Investments
The Fund invests in municipal securities of issuers located in California and
other qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam). It is the opinion of bond counsel, rendered on the date of issuance, that
the income from these obligations is exempt from both California personal income
tax and regular federal income tax ("California municipal securities"). These
securities include general obligation and revenue bonds and notes of issuers
located in California and of other qualifying issuers. General obligation bonds
and notes are secured by the issuer's pledge of its full faith, credit and
taxing power for payment of principal and interest. Revenue bonds and notes are
generally paid from the revenues of a particular facility or a specific excise
tax or other revenue source. The Fund may invest in municipal notes, which are
generally used to provide short-term capital needs, and have maturities of one
year or less. Municipal notes include tax anticipation notes, revenue
anticipation notes, bond anticipation notes and construction loan notes. The
Fund may also invest in municipal bonds with remaining maturities of 397
calendar days or less.
Ordinarily, the Fund expects that 100% of its portfolio securities will be
California municipal securities. The Fund may also, for temporary defensive
purposes, hold cash or invest its assets in short-term taxable securities.
The Fund is concentrated in securities issued by California governments and
related entities. Changes in the financial condition or market assessment of the
financial condition of these entities could have a significant adverse impact on
the Fund. Consequently, an investment in the Fund may be riskier than an
investment in a money market fund that does not concentrate in securities issued
by, or within, a single state.
9
<PAGE>
Scudder California Tax Free Money Fund (cont'd)
The Fund may invest in stand-by commitments, third party puts, when-issued
securities and enter into repurchase agreements and reverse repurchase
agreements, which may involve certain expenses and risks, including credit
risks. The Fund may invest in variable rate demand instruments. These securities
and techniques are not expected to comprise a major portion of the Fund's
investments.
See "Additional information about policies and investments" for more information
about these investment techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
Scudder California Tax Free Fund
Investment objective and policies
Scudder California Tax Free Fund seeks to provide California taxpayers with
income exempt from both California personal income and regular federal income
tax. The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.
The Adviser believes that investment results can be enhanced by active
professional management. Professional management distinguishes the Fund from
unit investment trusts, which cannot be actively managed.
Quality
Normally, at least 75% of the intermediate- and long-term securities purchased
by the Fund will be investment-grade municipal securities which are those rated
Aaa, Aa, A, or Baa by Moody's or AAA, AA, A, or BBB by S&P or Fitch, or unrated
securities judged by the Adviser to be of equivalent quality, or securities
issued or guaranteed by the U.S. Government. The Fund may also invest up to 25%
of its total assets in fixed-income securities rated below investment- grade,
that is, rated below Baa by Moody's or below BBB by S&P or Fitch, or in unrated
securities considered to be of equivalent quality as determined by the Adviser.
The Fund may not invest in fixed-income securities rated below B by Moody's, S&P
or Fitch, or their equivalent.
The Fund expects to invest principally in securities rated A or better by
Moody's, S&P or Fitch or unrated securities judged by the Adviser to be of
equivalent quality at the time of purchase. Securities in these three rating
categories are judged by the Adviser to have an adequate if not strong capacity
to repay principal and pay interest.
During the year ended March 31, 1996, the average monthly dollar-weighted market
value of the bonds in the Fund's portfolio rated lower than Baa by Moody's or
lower than BBB by S&P or Fitch, or of equivalent quality as determined by the
Adviser was 0%.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds") have
produced higher yields than investment-grade bonds in the past, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the Adviser.
Should the rating of a portfolio security be downgraded after being purchased by
the Fund, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
10
<PAGE>
Investments
The Fund invests in municipal securities of issuers located in California and
other qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam). It is the opinion of bond counsel, rendered on the date of issuance, that
the income from these obligations is exempt from both California personal income
tax and regular federal income tax ("California municipal securities"). The Fund
may invest in municipal bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued. These securities
include general obligation and revenue bonds, industrial development and
pollution control bonds of issuers located in California. The Fund may invest in
municipal notes, which are generally used to provide short-term capital needs
and have maturities of one year or less. Municipal notes include tax
anticipation notes, revenue anticipation notes, bond anticipation notes and
construction loan notes. General obligation bonds and notes are secured by the
issuer's pledge of its full faith, credit and taxing power for payment of
principal and interest. Revenue bonds and notes are generally paid from the
revenues of a particular facility, a specific excise tax or other revenue
source.
Under normal market conditions, the Fund expects to invest principally in
California municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in California municipal
securities with short- and medium-term maturities.
The Fund may also invest up to 20% of its total assets in municipal securities
the interest income from which is taxable or subject to the alternative minimum
tax ("AMT" bonds). Fund distributions from interest on certain municipal
securities subject to the alternative minimum tax, such as private activity
bonds, will be a preference item for purposes of calculating individual and
corporate alternative minimum taxes, depending upon investors' particular
situations. In addition, state and local taxes may apply, depending upon your
state and local tax laws.
Ordinarily, the Fund expects 100% of its portfolio securities to be California
municipal securities. The Fund may also, for temporary defensive purposes, hold
cash or invest its assets in taxable securities.
The Fund may invest in stand-by commitments, third party puts, when-issued
securities and enter into repurchase agreements and reverse repurchase
agreements, which may involve certain expenses and risks, including credit
risks. The Fund may also invest in variable rate demand instruments. These
securities and techniques are not expected to comprise a major portion of the
Fund's investments. The Fund may also utilize various other strategic
transactions, including derivatives. See "Additional information about policies
and investments" for more information about these investment techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
Additional information about policies and investments
Investment restrictions
Each Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Funds'
investment risk.
Each Fund may not borrow money except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse repurchase
agreements. Each Fund may not make loans except through the lending of portfolio
securities, the purchase of debt securities or through repurchase agreements.
Scudder California Tax Free Money Fund is a non-diversified fund (except to the
extent diversification is required for federal income tax purposes.
11
<PAGE>
Additional information about policies and investments (cont'd)
Scudder California Tax Free Fund is a diversified fund.
Each Fund may invest more than 25% of its assets in industrial development or
other private activity bonds. For purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, all such bonds
ultimately payable by companies within the same industry will be considered as
if they were issued by issuers in the same industry.
Each Fund normally invests at least 80% of its net assets in California
municipal securities.
When the Adviser determines that market conditions warrant, each Fund may, for
temporary defensive purposes, invest more than 20% of its net assets in taxable
securities.
In addition, as a matter of nonfundamental policy, each Fund may not invest more
than 10% of its net assets, in the aggregate, in securities which are not
readily marketable, restricted securities and in repurchase agreements maturing
in more than seven days. Each Fund may not invest more than 10% of its total
assets in restricted securities.
In addition, up to 20% of each Fund's net assets may be held in cash or invested
in short-term taxable investments, including repurchase agreements, U.S.
Government and other money market instruments and in California municipal
securities whose interest income is specifically treated as a tax preference
item under the individual alternative minimum tax.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Funds' Statement of Additional
Information.
Investing in California
Each Fund is more susceptible to factors adversely affecting issuers of
California municipal securities than are comparable municipal bond funds that do
not emphasize these issuers to this degree. Although the California economy is
in the second year of its recovery, it is impossible to predict the ultimate
impact of future fluctuations. On July 15, 1994, Moody's lowered California's
general obligation bond ratings from Aa to A1, citing the State's deteriorating
financial position. Also on July 15, 1994, S&P reduced the State's general
obligation bond ratings from A+ to A. For additional information about the
California economy, see the Funds' Statement of Additional Information dated
August 1, 1996.
When-issued securities
Each Fund may purchase securities on a when-issued or forward delivery basis,
for payment and delivery at a later date. The price and yield are generally
fixed on the date of commitment to purchase. During the period between purchase
and settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, each
Fund may enter into repurchase agreements with selected banks and
broker/dealers. Under a repurchase agreement, a Fund acquires securities,
subject to the seller's agreement to repurchase them at a specified time and
price. Income from repurchase agreements will be taxable when distributed to
shareholders.
Stand-by commitments
To facilitate liquidity, each Fund may enter into "stand-by commitments"
permitting them to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost to the Fund, and
any costs would be, in any event, limited to no more than 0.50% of the value of
the total assets of the Fund. Any such costs may, however, reduce yield.
12
<PAGE>
Third party puts
Each Fund may purchase long-term fixed rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Fund at
specified intervals (not exceeding 397 calendar days in the case of Scudder
California Tax Free Money Fund) to tender (or "put") its bonds to the
institution and receive the face value thereof. These third party puts are
available in several different forms, may be represented by custodial receipts
or trust certificates and may be combined with other features such as interest
rate swaps.
Variable rate demand instruments
Each Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit each Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent.
Municipal lease obligations
Scudder California Tax Free Fund may invest in municipal lease obligations and
participation interests in such obligations. These obligations, which may take
the form of a lease, an installment purchase contract or a conditional sales
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, the Fund will
not hold such obligations directly, but will purchase a certificate of
participation or other participation interest in a municipal obligation from a
bank or other financial intermediary. A participation interest gives the Fund a
proportionate interest in the underlying obligation.
Indexed securities
Scudder California Tax Free Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). The interest rate or (unlike
most fixed-income securities) the principal amount payable at maturity of an
indexed security may be increased or decreased, depending on changes in the
value of the reference instrument.
Strategic Transactions and derivatives
Scudder California Tax Free Fund may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates and broad or specific market movements), to manage the
effective maturity or duration of the Fund's portfolio, or to enhance potential
gain. These strategies may be executed through the use of derivative contracts.
Such strategies are generally accepted as a part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments may change over time as new instruments
and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, Scudder California Tax
Free Fund may purchase and sell exchange-listed and over-the-counter put and
call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
and enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such
(Continued on page 16)
13
<PAGE>
<TABLE>
<CAPTION>
Purchases
<S> <C>
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send your completed and signed application and check
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds Scudder Shareholder Service
P.O. Box 2291 Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number. Then call
1-800-225-5163 for instructions.
o In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
o In Person Visit one of our Funds Centers to make an additional investment in your
Scudder fund account. Funds Center locations are listed under Shareholder
benefits.
o By Telephone Please see Transaction information--Purchasing shares--
By AutoBuy for more details.
o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
14
<PAGE>
Exchanges and redemptions
Exchanging shares
Minimum investments: $1,000 to establish a new account;
$100 to exchange among existing accounts
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612
-----------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may have redemption
proceeds sent to your predesignated bank account, or redemption proceeds of up
to $50,000 sent to your address of record.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $50,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically. Call
Withdrawal Plan 1-800-225-5163 for more information and an enrollment form.
</TABLE>
15
<PAGE>
Additional information about policies and investments (cont'd)
(Continued from page 13)
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Some
Strategic Transactions may also be used to enhance potential gain although no
more than 5% of the Fund's assets will be committed to Strategic Transactions
entered into for non-hedging purposes. Any or all of these investment techniques
may be used at any time and in any combination, and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of Scudder California Tax Free Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes. Please refer to "Risk factors--Strategic
Transactions and derivatives" for more information.
Risk factors
The Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Funds may use from time to time.
Non-diversified investment company. As a "non-diversified" investment company,
Scudder California Tax Free Money Fund may invest a greater proportion of its
assets in the securities of a smaller number of issuers than a diversified
investment company. Investment in the Fund may involve greater risk than
investment in a diversified fund.
Investing in California. If either California or any of its local governmental
entities were to be unable to meet its financial obligations, the income derived
by each Fund, its net asset value or liquidity and the ability to preserve or
realize appreciation of each Fund's capital could be adversely affected.
In 1978, California passed Proposition 13 limiting the level of property taxes.
In 1988, California passed Proposition 98 guaranteeing public schools a minimum
share of State revenues. These propositions and subsequent legislation may
affect the State's creditworthiness in the future. See "Investing in California"
in the Funds' Statement of Additional Information for further details about the
risks of investing in California obligations.
Securities backed by guarantees. The Scudder California Tax Free Money Fund
invests in securities backed by guarantees from banks, insurance companies and
other financial institutions. The Fund's ability to maintain a stable share
price may depend upon such guarantees, which are not supported by federal
deposit insurance. Consequently, changes in the credit quality of these
institutions could have an adverse impact on securities they have guaranteed or
backed, which could cause losses to the Fund and affect its share price.
Debt securities. Scudder California Tax Free Fund may invest in securities rated
below Baa by Moody's or BBB by S&P or Fitch. Moody's considers bonds it rates
Baa to have speculative elements as well as investment-grade characteristics.
Securities rated below investment-grade are commonly referred to as "junk bonds"
and involve greater price volatility and higher degrees of speculation with
respect to the payment of principal and interest than higher quality
16
<PAGE>
fixed-income securities. The market prices of such lower rated debt securities
may decline significantly in periods of general economic difficulty. In
addition, the trading market for these securities is generally less liquid than
for higher rated securities and the Fund may have difficulty disposing of these
securities at the time it wishes to do so. The lack of a liquid secondary market
for certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing its portfolio and calculating
its net asset value.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted, or
the value of the securities may decline before the Fund is able to dispose of
them. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities.
Third party puts. In connection with third party puts, the financial institution
granting the option does not provide credit enhancement, and typically if there
is a default on or significant downgrading of the bond or a loss of its
tax-exempt status the put option will terminate automatically, the risk of the
Fund will be that of holding a long-term bond and, in the case of the Scudder
California Tax Free Money Fund, the weighted average maturity of the Fund's
portfolio would be adversely affected.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Fund. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property. For more information,
please refer to the Funds' Statement of Additional Information.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, the Fund will bear the
market risk of the reference instrument.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
17
<PAGE>
Additional information about policies and investments (cont'd)
other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all.
Although the use of futures contracts and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time they tend to limit any potential gain which
might result from an increase in value of such position. Finally, the daily
variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Funds' Statement of
Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Funds' dividends from net investment income are declared daily and
distributed monthly. The Funds intend to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of federal excise tax. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. An additional distribution may be made, if
necessary. According to preference, shareholders may receive distributions in
cash or have them reinvested in additional shares of the Funds.
Distributions derived from interest on California municipal securities are not
subject to California state personal income taxes or to regular federal income
taxes, except for the possible applicability of the federal alternative minimum
tax. Interest on obligations of Puerto Rico and other U.S. possessions may also
be distributed as dividends exempt from California state personal income taxes.
Other distributions are generally taxable to shareholders for California state
personal income tax purposes. For federal income tax purposes, a portion of each
Fund's income may be taxable to shareholders as ordinary income. Long-term
capital gains distributions, if any, are taxable as long-term capital gains for
federal and California state personal income tax purposes regardless of the
length of time shareholders have owned their shares. Short-term capital gains
and any other taxable income distributions are taxable as ordinary income.
Distributions of tax-exempt income are taken into consideration in computing the
portion, if any, of Social Security and railroad retirement benefits subject to
federal and, in some cases, state taxes.
Each Fund ordinarily provides income that is 100% free from California state
personal income and regular federal income taxes. However, income from
repurchase agreements and gains from certain Strategic Transactions are taxable.
Moreover, dividends paid to shareholders subject to California state franchise
18
<PAGE>
or corporate income taxes may be taxed as ordinary dividends for the purposes of
such taxes notwithstanding that all or a portion of such dividends is exempt
from California state personal income tax. Some of a Fund's interest income may
be treated as a tax preference item that may subject an individual investor to
liability (or increased liability) under the alternative minimum tax, depending
upon an investor's particular situation. However, at least 80% of each Fund's
net assets will normally be invested in California municipal securities whose
interest income is not treated as a tax preference item under the individual
alternative minimum tax. Tax-exempt income may also subject a corporate investor
to liability (or increased liability) under the corporate alternative minimum
tax.
Each Fund sends detailed tax information to shareholders about the amount and
type of its distributions by January 31 of each year.
Performance information
From time to time, quotations of the Funds' performance may be included in
advertisements, sales literature, or shareholder reports.
All performance figures are historical, show the performance of a hypothetical
investment and are not intended to indicate future performance. The "yield" of
Scudder California Tax Free Money Fund refers to income generated by an
investment in the Fund over a specified seven-day period. The "SEC yield" of
Scudder California Tax Free Fund is an annualized expression of the net income
generated by the Fund over a specified 30-day (one month) period, as a
percentage of the Fund's share price on the last day of that period. This yield
is calculated according to methods required by the Securities and Exchange
Commission (the "SEC"), and therefore may not equate to the level of income paid
to shareholders. The "effective yield" of Scudder California Tax Free Money Fund
is expressed similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested and will reflect the effects of
compounding. Each Fund's "tax-equivalent yield" is calculated by determining the
rate of return that would have to be achieved on a fully taxable investment to
produce the after-tax equivalent of each Fund's yield, assuming certain tax
brackets for a Fund shareholder. Yields are expressed as annualized percentages.
"Total return" is the change in value of an investment in each Fund for a
specified period. The "average annual total return" of each Fund is the average
annual compound rate of return of an investment in the Fund assuming the
investment has been held for one year, five years, ten years and the life of the
Fund. (If a Fund has not been in operation for at least ten years, the life of
the Fund is used where applicable.) "Cumulative total return" represents the
cumulative change in value of an investment in each Fund for various periods.
All types of total return calculations assume that all dividends and capital
gains distributions during the period were reinvested in shares of the Fund.
Performance will vary based upon, among other things, changes in market
conditions and the level of each Fund's expenses.
Fund organization
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund are
series of Scudder California Tax Free Trust (the "Trust"), an open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"). The Trust was organized as a Massachusetts business trust
in May 1983.
The Funds' activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Trustees, changing
19
<PAGE>
Fund organization (cont'd)
fundamental investment policies or approving an investment advisory contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Trustee as if Section 16(c) of the 1940 Act were
applicable.
The prospectuses of both Funds are combined in this prospectus. Each Fund offers
only its own shares, yet it is possible that a Fund might become liable for a
misstatement or omission in the prospectus of the other Fund. The Trustees of
the Trust have considered this and approved the use of a combined prospectus.
Investment adviser
Each Fund retains the investment management firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, to manage its daily investment and business
affairs subject to the policies established by the Board of Trustees. The
Trustees have overall responsibility for the management of the Trust under
Massachusetts law.
For the fiscal year ended March 31, 1996, the Adviser received monthly an
investment management fee of 0.62% of Scudder California Tax Free Fund's average
daily net assets.
The fee is graduated so that increases in the Fund's net assets may result in a
lower fee and decreases in the Fund's net assets may result in a higher fee.
The fee payable under Scudder California Tax Free Money Fund's Investment
Management Agreement is equal to an annual rate of 0.50% of the Fund's average
daily net assets. The Adviser has agreed to maintain the annualized expenses of
the Fund at not more than 0.60% of the average daily net assets of the Fund
until July 31, 1997.
For the fiscal year ended March 31, 1996, the Adviser received monthly an
investment management fee of 0.29% of Scudder California Tax Free Money Fund's
average daily net assets on an annual basis.
Each Fund's management fee is payable monthly, provided that a Fund will make
such interim payments as may be requested by the Adviser not to exceed 75% of
the amount of the fee then accrued on the books of a Fund and unpaid.
All of a Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment or administrative services.
Scudder, Stevens & Clark, Inc. is located at Two International Place, Boston,
Massachusetts.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Funds.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Funds'
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of the Funds. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Funds.
Custodian
State Street Bank and Trust Company is the Funds' custodian.
20
<PAGE>
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Funds' transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone or by "Write-A-Check" in the case of Scudder California
Tax Free Money Fund prior to the expiration of the seven-day period will not be
accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By telephone order. To a limited extent, certain financial institutions may
place orders to purchase shares of Scudder California Tax Free Fund
unaccompanied by payment prior to the close of regular trading on the New York
Stock Exchange (the "Exchange"), normally 4:00 p.m. eastern time, and receive
that day's price. Please call 1-800-854-8525 for more information, including the
dividend treatment and method and manner of payment for Fund shares.
By "AutoBuy." If you elected "AutoBuy" for your account, you can call toll-free
to purchase shares. The money will be automatically transferred from your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoBuy," call
1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
will be transferred from your bank checking account in two or three business
days following your call. For requests received by the close of regular trading
on the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "AutoBuy" requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day.
If you purchase shares by "AutoBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
21
<PAGE>
Transaction information (cont'd)
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "AutoBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.
By exchange. Your new account will have the same registration and address as
your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
Redeeming shares
Each Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL by calling
1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Funds' transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
By "AutoSell." If you elected "AutoSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoSell,"
call 1-800-225-5163 for more information.
To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "AutoSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
By "Write-A-Check." You may redeem shares of Scudder California Tax Free Money
Fund by writing checks against your account balance for at least $100. Your Fund
investments will continue to earn dividends until your check is presented to the
Fund for payment.
Checks will be returned by the Fund's transfer agent if there are insufficient
shares to meet the withdrawal amount. You should not attempt to close an account
by check, because the exact balance at the time the check clears will not be
known when the check is written.
22
<PAGE>
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $50,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (The Funds reserve the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. Each Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share for
Scudder California Tax Free Money Fund as of twelve o'clock noon and as of the
close of regular trading on the Exchange, normally 4 p.m. eastern time, on each
day the Exchange is open for trading. For Scudder California Tax Free Fund,
Scudder Fund Accounting Corporation determines net asset value per share once a
day as of the close of regular trading on the Exchange. Net asset value per
share is calculated by dividing the value of total Fund assets, less all
liabilities, by the total number of shares outstanding. In calculating the net
asset value per share, Scudder California Tax Free Fund uses the current market
value of the securities, and Scudder California Tax Free Money Fund uses the
amortized cost value.
Processing time
All purchase and redemption requests must be received in good order by the
Funds' transfer agent.
For Scudder California Tax Free Money Fund, purchases made by wire and received
by the Fund's transfer agent before noon on any business day are executed at
noon on that day and begin earning income the same day. Those made by wire
between noon and the close of regular trading on the Exchange on any business
day are executed at the close of trading the same day and begin earning income
the next business day. Purchases made by check are executed on the day the check
is received in good order by the Fund's transfer agent and begin earning income
on the next business day. Redemption requests received in good order by the
Fund's transfer agent between noon and the close of regular trading on the
Exchange are executed at the net asset value calculated at the close of regular
trading on that day and will earn a dividend on the redeemed shares that day. If
a redemption request for Scudder California Tax Free Money Fund is received by
23
<PAGE>
Transaction information (cont'd)
noon, proceeds will normally be wired that day, if requested by the shareholder,
but no dividend will be earned on the redeemed shares on that day.
For Scudder California Tax Free Fund, those requests received by the close of
regular trading on the Exchange are executed at the net asset value per share
calculated at the close of trading that day. Purchase and redemption requests
received after the close of regular trading on the Exchange will be executed the
following business day. Purchases made by federal funds wire before noon eastern
time will begin earning income that day; all other purchases received before the
close of regular trading on the Exchange will begin earning income the next
business day. Redeemed shares will earn income on the day on which the
redemption request is executed.
If you wish to make a purchase of $500,000 or more you should notify Scudder
Investor Relations by calling 1-800-225-5163.
Each Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Purchase Restrictions
Purchases and sales of Scudder California Tax Free Fund should be made for
long-term investment purposes only. The Fund and Scudder Investor Services, Inc.
each reserves the right to reject purchases of Fund shares (including exchanges)
for any reason including when a pattern of frequent purchases and sales made in
response to short-term fluctuations in the Fund's share price appears evident.
Tax information
A redemption of shares of Scudder California Tax Free Fund, including an
exchange into another Scudder fund, is a sale of shares and may result in a gain
or loss for income tax purposes. No gain or loss will be realized in the case of
a redemption or exchange of shares of Scudder California Tax Free Money Fund if
it maintains a constant net asset value per share.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires each Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. Each Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
Each Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $1,000, which amount
may be changed by the Board of Trustees. Each Fund reserves the right, following
60 days' written notice to shareholders, to redeem all shares in sub-minimum
accounts, including accounts of new investors, where a reduction in value has
occurred due to a redemption or exchange out of the account. Reductions in value
that result solely from market activity will not trigger an involuntary
redemption. Each Fund will mail the proceeds of the redeemed account to the
shareholder. The shareholder may restore the share balance to $1,000 or more
during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.
24
<PAGE>
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
Shareholder benefits
Experienced professional management
Scudder, Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.
A team approach to investing
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund are
each managed by a team of Scudder investment professionals who each play an
important role in the Funds' management process. Team members work together to
develop investment strategies and select securities for the Funds' portfolios.
They are supported by Scudder's large staff of economists, research analysts,
traders, and other investment specialists. We believe our team approach benefits
the Funds' investors by bringing together many disciplines and leveraging
Scudder's extensive resources.
Rebecca L. Wilson is Lead Portfolio Manager for Scudder California Tax Free
Money Fund and contributes 10 years of experience in municipal investing and
research. Ms. Wilson assumed responsibility for the Fund in 1987 after joining
Scudder in 1986. K. Sue Cote, Portfolio Manager, joined the Fund's team in 1987
and has spent 12 years working with short-term fixed-income investments.
Scudder California Tax Free Fund's Lead Portfolio Manager Jeremy L. Ragus has
had responsibility for the Fund's day-to-day operations since he joined Scudder
in 1990. Mr. Ragus has 15 years of experience in municipal investing. Donald C.
Carleton, Portfolio Manager, has 27 years of investment management experience
and has worked on the Fund's team since he arrived at Scudder in 1983.
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact Scudder" for the
address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
25
<PAGE>
Shareholder benefits (cont'd)
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
Scudder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
o Scudder No-Fee IRA
o 401(k) Plans
o Profit Sharing and Money Purchase Pension Plans (Keogh Plans)
o 403(b) Plans
o SEP-IRA
o Scudder Horizon Plan (a variable annuity)
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.
26
<PAGE>
<TABLE>
<CAPTION>
Investment products and services
<S> <C> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder Global Bond Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax free money market+ Scudder High Yield Bond Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Discovery Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
</TABLE>
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state and local taxes. *Not available
in all states. +++A no-load variable annuity contract provided by Charter
National Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens &
Clark, Inc., are traded on various stock exchanges. ++For information on
Scudder Treasurers Trust(TM), an institutional cash management service that
utilizes certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call:
1-800-541-7703.
27
<PAGE>
How to contact Scudder
Account Service and Information:
For existing account service Scudder Investor Relations
and transactions 1-800-225-5163
For personalized information Scudder Automated
about your Scudder accounts; Information Line
exchanges and redemptions; (SAIL)
or information on any 1-800-343-2890
Scudder fund
Investment Information:
To receive information Scudder Investor Relations
about the Scudder Funds, 1-800-225-2470
for additional applications
and prospectuses, or for
investment questions
For establishing Scudder Defined
401(k) and 403(b) plans Contribution
Services
1-800-323-6105
Please address all correspondence to:
The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291
Visit the Scudder World Wide Web Site at:
http://funds.scudder.com
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager,
WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics and President,
Driscoll Associates
Peter B. Freeman
Trustee; Corporate Director and Trustee
Daniel Pierce*
Trustee
Olin Barrett*
Vice President
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Jeremy L. Ragus*
Vice President
Rebecca L. Wilson*
Vice President
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
and
SCUDDER CALIFORNIA TAX FREE FUND
Two Pure No-Load(TM) (No Sales Charges) Mutual Funds
Specializing in the Management of
California Municipal Security Portfolios
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1996
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund dated August
1, 1996, as amended from time to time, a copy of which may be obtained without
charge by writing to Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objectives and Policies of Scudder California Tax Free Money Fund.........................1
General Investment Objective and Policies of Scudder California Tax Free Fund................................3
Investments, Investment Techniques and Considerations of the Funds..........................................12
Economic Factors............................................................................................15
Constitutional, Legislative and Other Factors...............................................................16
Trustees' Power to Change Objectives and Policies...........................................................23
Investment Restrictions.....................................................................................23
PURCHASES............................................................................................................25
Additional Information About Opening an Account.............................................................25
Checks......................................................................................................26
Wire Transfer of Federal Funds..............................................................................26
Additional Information About Making Subsequent Investments..................................................26
Additional Information About Making Subsequent Investments by AutoBuy.......................................26
Share Price.................................................................................................27
Share Certificates..........................................................................................27
Other Information...........................................................................................27
EXCHANGES AND REDEMPTIONS............................................................................................28
Exchanges...................................................................................................28
Redemption by Telephone.....................................................................................28
Redemption By AutoSell......................................................................................29
Redemption by Mail or Fax...................................................................................30
Redemption by Write-A-Check.................................................................................30
Other Information...........................................................................................30
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................31
The Pure No-Load(TM) Concept................................................................................31
Dividend and Capital Gain Distribution Options..............................................................32
Scudder Funds Centers.......................................................................................32
Reports to Shareholders.....................................................................................32
Transaction Summaries.......................................................................................33
THE SCUDDER FAMILY OF FUNDS..........................................................................................33
SPECIAL PLAN ACCOUNTS................................................................................................36
Automatic Withdrawal Plan...................................................................................36
Cash Management System -- Group Sub-Accounting Plan for Trust Accounts,
Nominees and Corporations..............................................................................37
Automatic Investment Plan...................................................................................37
Uniform Transfers/Gifts to Minors Act.......................................................................37
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................37
PERFORMANCE INFORMATION..............................................................................................38
Average Annual Total Return.................................................................................38
Cumulative Total Return.....................................................................................39
Total Return................................................................................................39
Yield.......................................................................................................39
Effective Yield.............................................................................................40
Tax-Equivalent Yield........................................................................................40
Comparison of Portfolio Performance.........................................................................40
ORGANIZATION OF THE FUNDS............................................................................................44
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER...................................................................................................45
Personal Investments by Employees of the Adviser............................................................47
TRUSTEES AND OFFICERS................................................................................................48
REMUNERATION.........................................................................................................49
DISTRIBUTOR..........................................................................................................50
TAXES................................................................................................................51
Federal Taxation............................................................................................51
State Taxation..............................................................................................54
PORTFOLIO TRANSACTIONS...............................................................................................55
Brokerage Commissions.......................................................................................55
Portfolio Turnover..........................................................................................56
NET ASSET VALUE......................................................................................................56
ADDITIONAL INFORMATION...............................................................................................58
Experts.....................................................................................................58
Shareholder Indemnification.................................................................................58
Ratings of Municipal Obligations............................................................................58
Commercial Paper Ratings....................................................................................59
Glossary....................................................................................................60
Other Information...........................................................................................60
FINANCIAL STATEMENTS.................................................................................................61
Scudder California Tax Free Money Fund......................................................................61
Scudder California Tax Free Fund............................................................................61
</TABLE>
ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See "Investment objectives and policies" in the Funds'
prospectus.)
Scudder California Tax Free Money Fund and Scudder California Tax Free
Fund (each a "Fund," collectively the "Funds") are each a series of Scudder
California Tax Free Trust (the "Trust"). The Trust is a pure no-load(TM),
open-end management investment company presently consisting of two series.
General Investment Objectives and Policies of Scudder California Tax Free Money
Fund
The investment objectives of Scudder California Tax Free Money Fund are
stability of capital and the maintenance of a constant net asset value of $1.00
per share, while providing California taxpayers income exempt from California
state personal income and regular federal income taxes. The Fund pursues these
objectives through the professional and efficient management of a high quality
portfolio consisting primarily of short-term municipal obligations (as defined
under "Investments, Investment Techniques and Considerations of the Funds --
Municipal Obligations") having remaining maturities 397 calendar days or less
with a dollar-weighted average portfolio maturity of 90 days or less. The Fund
seeks to maintain a constant net asset value of $1.00 per share, although in
certain circumstances this may not be possible. There can be no assurance that
the Fund's objectives will be met or that income to shareholders which is exempt
from regular federal income tax will be exempt from state and local taxes and
the federal alternative minimum tax. Because of its focus on California
tax-exempt investments, the Scudder California Tax Free Money Fund may have to
concentrate a significant percentage of its assets in a single issuer. An
investment in the Fund may be riskier than an investment in a money market fund
that does not focus on investments from a single state.
Scudder California Tax Free Money Fund invests in municipal securities
of issuers located in California and other qualifying issuers (including Puerto
Rico, the U.S. Virgin Islands and Guam). It is the opinion of bond counsel,
rendered on the date of issuance, that income from these obligations is exempt
from both California personal income tax and regular federal income tax
("California municipal securities"). Because the Fund is intended for investors
subject to both California state personal income and federal income taxes, it
may not be appropriate for all investors and is not available in all states. The
Fund may also invest in taxable obligations for temporary defensive purposes.
The Fund's Investments. The Fund seeks to provide California taxpayers with
income exempt from both California state personal and regular federal income tax
through a portfolio of high quality municipal securities. As a matter of
fundamental policy which cannot be changed without the approval of a majority of
the Fund's outstanding voting securities (as defined under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be invested in
municipal obligations the income from which is exempt from both regular federal
and California state personal income tax except that the Fund may invest more
than 20% of its net assets in securities the income from which may be subject to
federal and California income taxes during periods which, in the opinion of the
Fund's investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"),
require a temporary defensive position for the protection of shareholders. The
Fund is concentrated in securities issued by California governments and related
entities. Changes in the financial condition or market assessment of the
financial condition of these entities could have a significant adverse impact on
the Fund. Consequently, an investment in the Fund may be riskier than an
investment in a money market fund that does not concentrate in securities issued
by, or within, a single state.
Under normal market conditions, the Fund's portfolio securities consist
of California municipal securities. In addition, the Fund may make temporary
taxable investments as described below, and may hold cash. Generally, the Fund
may purchase only securities which are rated, or issued by an issuer rated,
within the two highest quality ratings categories of two or more of the
following rating agencies: Moody's Investors Service, Inc. ("Moody's") (Aaa and
Aa, MIG 1 and MIG 2, and P1), Standard & Poor's ("S&P") (AAA and AA, SP1+ and
SP1, A1+ and A1), and Fitch Investors Service, Inc. ("Fitch") (AAA and AA, F1+,
F1 and F2). Where only one rating agency has rated a security (or its issuer),
the Fund may purchase that security as long as the rating falls within the
categories described above. In addition, unrated municipal obligations are
considered as being within the foregoing quality ratings categories if other
equal or junior municipal obligations of the same issuer are rated and their
ratings are within the foregoing ratings. The Fund may also invest in municipal
obligations which are unrated if such securities possess creditworthiness
<PAGE>
comparable to those rated securities in which the Fund may invest. Comparability
is determined by the Adviser acting pursuant to guidelines adopted by, and under
the supervision of, the Trustees.
Subsequent to its purchase by the Fund, an issue of municipal
obligations may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. The Adviser will dispose of such security
unless the Board of Trustees of the Fund determines that such disposal is not in
the best interest of the Fund. To the extent that the ratings accorded by
Moody's, S&P or Fitch for municipal obligations may change as a result of
changes in these rating systems the Adviser attempts to use comparable ratings
as standards for its investment in municipal securities in accordance with the
investment policies contained herein.
From time to time on a temporary basis or for temporary defensive
purposes, the Fund may, subject to its investment restrictions, hold cash and
invest in temporary taxable investments which mature in one year or less at the
time of purchase, consisting of (1) other obligations issued by or on behalf of
municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and bankers' acceptances; and (5)
repurchase agreements with respect to any of the obligations which the Fund is
permitted to purchase. The Fund does not invest in instruments issued by banks
or savings and loan associations unless at the time of investment such issuers
have total assets in excess of $1 billion (as of the date of their most recently
published financial statements). Commercial paper investments are limited to
commercial paper rated A-1 by S&P, Prime 1 by Moody's or F-1 by Fitch. The Fund
may hold cash or invest in temporary taxable investments due, for example, to
market conditions or pending investment of proceeds of subscriptions for shares
of the Fund or proceeds from the sale of portfolio securities or in anticipation
of redemptions. However, the Adviser expects to invest such proceeds in
municipal obligations as soon as practicable. Interest income from temporary
investments may be taxable to shareholders as ordinary income.
Amortized Cost Valuation of Portfolio Securities. Pursuant to Rule 2a-7 of the
Securities and Exchange Commission (the "SEC"), Scudder California Tax Free
Money Fund uses the amortized cost method of valuing its investments, which
facilitates the maintenance of the Fund's per share net asset value at $1.00.
The amortized cost method, which is used to value all of the Fund's portfolio
securities, involves initially valuing a security at its cost and thereafter
amortizing to maturity any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
Consistent with the provisions of the Rule, the Fund maintains a
dollar-weighted average portfolio maturity of 90 days or less, purchases only
instruments having remaining maturities of 397 calendar days or less, and
invests only in securities determined by the Trustees to be of high quality with
minimal credit risks.
The Trustees have also established procedures designed to stabilize, to
the extent reasonably possible, the Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of the
Fund's portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Fund's net asset value calculated by using available
market quotations or market equivalents (i.e., determination of value by
reference to interest rate levels, quotations of comparable securities and other
factors) deviates from $1.00 per share based on amortized cost. Market
quotations and market equivalents used in such review may be obtained from an
independent pricing service approved by the Trustees.
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Trustees. If such deviation
exceeds l/2 of l%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00 the
Trustees have the authority (1) to reduce or increase the number of shares
outstanding on a pro-rata basis, and (2) to offset each shareholder's pro-rata
portion of the deviation between net asset value per share and $1.00 from the
shareholder's accrued dividend account or from future dividends. The Fund may
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hold cash for the purpose of stabilizing its net asset value per share. Holdings
of cash, on which no return is earned, would tend to lower the yield of the
Fund.
Special Considerations. The investment objectives and policies of
Scudder California Tax Free Money Fund are sought through the following
additional strategies employed in the management of the portfolio which are
described under "Investments, Investment Techniques and Considerations of the
Funds":
1. Income Level and Credit Risk.
2. Municipal Obligations.
3. Investing in California.
4. When-Issued Securities.
5. Stand-By Commitments.
6. Third Party Puts.
7. Repurchase Agreements.
8. Reverse Repurchase Agreements.
General Investment Objective and Policies of Scudder California Tax Free Fund
The investment objective of the Fund is to provide income that is
exempt from both California state personal income as well as regular federal
income taxes when distributed to California residents through the professional
and efficient management of a portfolio consisting principally of California
municipal securities. In pursuit of its objective, the Fund invests principally
in California municipal securities that are rated A or better by Moody's, S&P or
Fitch, or are of equivalent quality as determined by the Adviser. There can be
no assurance that the objective of the Fund will be met or that all income to
shareholders which is exempt from regular federal income taxes will be exempt
from state or local taxes, or from the federal alternative minimum tax.
Scudder California Tax Free Fund invests in municipal securities of
issuers located in California and other qualifying issuers (including Puerto
Rico, the U.S. Virgin Islands and Guam). It is the opinion of bond counsel,
rendered on the date of issuance, that income from these obligations is exempt
from both California personal income tax and regular federal income tax. The
Fund may also invest in taxable obligations for temporary or defensive purposes.
The Fund's Investments. As a matter of fundamental policy which cannot be
changed without the approval of a majority of the Fund's outstanding voting
securities (as defined under "Investment Restrictions"), at least 80% of the net
assets of the Fund will be invested in California municipal securities except as
stated in the second to last sentence of the following paragraph. Furthermore,
all of the Fund's portfolio securities, including short-term obligations, will
be (a) rated at the time of purchase within the six highest grades assigned by
Moody's, S&P or Fitch, (b) if not rated, judged at the time of purchase by the
Adviser, to be of a quality comparable to the six highest ratings categories of
Moody's, S&P or Fitch and to be readily marketable, or (c) issued or guaranteed
by the U.S. Government. Should the rating of a portfolio security be downgraded,
the Adviser will determine whether it is in the best interest of the Fund to
retain or dispose of the security.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term taxable
investments such as (1) U.S. Treasury notes, bills and bonds; (2) obligations of
agencies and instrumentalities of the U.S. Government; and (3) money market
instruments, such as domestic bank certificates of deposit, finance company and
corporate commercial paper, and bankers' acceptances. Notwithstanding the
foregoing, the Fund may invest more than 20% of its net assets in securities the
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income from which may be subject to federal and California income tax during
periods which, in the opinion of the Adviser, require a defensive position for
the protection of shareholders. Investors should be aware that shares of the
Fund do not represent a complete investment program.
The Fund may invest up to 25% of its total assets in fixed-income
securities rated below Baa by Moody's, or below BBB by S&P or Fitch, or in
unrated securities considered to be of equivalent quality. The Fund may not
invest in fixed-income securities rated below B by Moody's, S&P or Fitch, or
their equivalent. Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics. Securities rated below BBB
are commonly referred to as "junk bonds" and involve greater price volatility
and higher degrees of speculation with respect to the payment of principal and
interest than higher-quality fixed-income securities. In addition, the trading
market for these securities is generally less liquid than for higher-rated
securities and the Funds may have difficulty disposing of these securities at
the time they wish to do so. The lack of a liquid secondary market for certain
securities may also make it more difficult for the Funds to obtain accurate
market quotations for purposes of valuing their portfolios and calculating their
net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
the Fund will be purchased upon issuance, which may involve special risks
because the securities so acquired are new issues. In such instances the Fund
may be a substantial purchaser of the issue and therefore have the opportunity
to participate in structuring the terms of the offering. Although this may
enable the Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
During the year ended March 31, 1996, the average monthly
dollar-weighted market value of the bonds in the Fund's portfolio rated lower
than Baa by Moody's or lower than BBB by S&P or Fitch, or of equivalent quality
as determined by the Adviser was 0%.
Municipal Lease Obligations and Participation Interests. A municipal lease
obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
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premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover the Fund's original investment.
Participation interests represent undivided interests in municipal
leases, installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of the Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by the Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace in which the
security trades. In addition, the Adviser will consider factors unique to
particular lease obligations and participation interests affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund.
The Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide the Fund with the right to a pro rata undivided interest
in the underlying municipal lease obligations. In addition, such participations
generally provide the Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of the Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. The Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax and
state income tax, if applicable.
Indexed Securities. Scudder California Tax Free Fund may invest in
indexed securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.
Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
Strategic Transactions and Derivatives. Scudder California Tax Free Fund may,
but is not required to, utilize various other investment strategies as described
below to hedge various market risks (such as interest rates and broad or
specific market movements), to manage the effective maturity or duration of the
Fund's portfolio, or to enhance potential gain. These strategies may be executed
through the use of derivative contracts. Such strategies are generally accepted
as a part of modern portfolio management and are regularly utilized by many
mutual funds and other institutional investors. Techniques and instruments may
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change over time as new instruments and strategies are developed or regulatory
changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Some
Strategic Transactions may also be used to enhance potential gain although no
more than 5% of the Fund's assets will be committed to Strategic Transactions
entered into for non-hedging purposes. Any or all of these investment techniques
may be used at any time and in any combination, and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Fund to utilize these Strategic Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions involving financial futures and options
thereon will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes and not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
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which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers," or broker/dealers, domestic or foreign banks
or other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO") or are determined to be of equivalent
credit quality by the Adviser. The staff of the SEC currently takes the position
that OTC options purchased by the Fund, and portfolio securities "covering" the
amount of the Fund's obligation pursuant to an OTC option sold by it (the cost
of the sell-back plus the in-the-money amount, if any) are illiquid, and are
subject to the Fund's limitation on investing no more than 10% of its assets in
illiquid securities.
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If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by the Fund must be "covered"
(i.e., the Fund must own the securities or futures contract subject to the call)
or must meet the asset segregation requirements described below as long as the
call is outstanding. Even though the Fund will receive the option premium to
help protect it against loss, a call sold by the Fund exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities, including
U.S. Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right in return for the premium paid to assume a position in a
futures contract and obligates the seller to deliver such position.
The Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
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instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the Investment Company Act of 1940, as amended (the "1940 Act") and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The Fund will not enter into any swap, cap, floor or collar transaction unless,
at the time of entering into such transaction, the unsecured long-term debt of
the Counterparty, combined with any credit enhancements, is rated at least A by
S&P or Moody's or has an equivalent rating from an NRSRO or is determined to be
of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
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the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security or financial instrument.
In general, either the full amount of any obligation by the Fund to pay or
deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high-grade
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate liquid
high grade assets equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate liquid, high grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
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contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "TAXES.")
Management Strategies. In pursuit of its investment objectives, the Fund
purchases securities that it believes are attractive and competitive values in
terms of quality, yield, and the relationship of current price to maturity
value. However, recognizing the dynamics of municipal bond prices in response to
changes in general economic conditions, fiscal and monetary policies, interest
rate levels and market forces such as supply and demand for various bond issues,
the Adviser, subject to the Trustees' review, performs credit analysis and
manages the Fund's portfolio continuously, attempting to take advantage of
opportunities to improve total return, which is a combination of income and
principal performance over the long term. The primary strategies employed in the
management of the Fund's portfolio are:
Emphasis on Credit Analysis. As indicated above, the Fund's portfolio
is invested in municipal obligations rated within, or judged by the Adviser to
be of a quality comparable to, the six highest rating categories of Moody's, S&P
or Fitch. The ratings assigned by Moody's, S&P and Fitch represent their
opinions as to the quality of the securities which they undertake to rate. It
should be emphasized, however, that ratings are relative and are not absolute
standards of quality. Furthermore, even within this segment of the municipal
bond market, relative credit standing and market perceptions thereof may shift.
Therefore, the Adviser believes that it should review continuously the quality
of municipal obligations.
The Adviser has over many years developed an experienced staff to
assign its own quality ratings which are considered in making value judgments
and in arriving at purchase or sale decisions. Through the discipline of this
procedure the Adviser attempts to discern variations in credit rankings of the
published services and to anticipate changes in credit ranking.
Variations of Maturity. In an attempt to capitalize on the differences
in total return from municipal obligations of differing maturities, maturities
may be varied according to the structure and level of interest rates, and the
Adviser's expectations of changes therein. To the extent that a Fund invests in
short-term maturities, capital volatility will be reduced.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal obligations of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
disparities in yield relationships may afford opportunities to implement a
flexible policy of trading a Fund's holdings in order to invest in more
attractive market sectors or specific issues.
Market Trading Opportunities. In pursuit of the above the Fund may
engage in short-term trading (selling securities held for brief periods of time,
usually less than three months) if the Adviser believes that such transactions,
net of costs, would further the attainment of the Fund's objective. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that either Fund will be able to take advantage of
them. The Fund will limit its voluntary short-term trading to the extent such
limitation is necessary for it to qualify as a "regulated investment company"
under the Internal Revenue Code.
Special Considerations. The investment objectives and policies of Scudder
California Tax Free Fund are sought through the following additional strategies
employed in the management of the portfolio which are described under
"Investments, Investment Techniques and Considerations of the Funds":
1. Income Level and Credit Risk.
2. Municipal Obligations.
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3. Investing in California.
4. When-Issued Securities.
5. Stand-by Commitments.
6. Third Party Puts.
7. Repurchase Agreements.
8. Reverse Repurchase Agreements.
Investments, Investment Techniques and Considerations of the Funds
Income Level and Credit Risk. Because the Funds principally intend to hold
investment-grade (in the case of California Tax Free Fund) and high quality (in
the case of California Tax Free Money Fund) municipal obligations, the income
earned on shares of each Fund tend to be less than it might be on a portfolio
emphasizing lower quality securities. Municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy laws, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, principal of and
interest on its or their municipal obligations may be materially affected.
Scudder California Tax Free Fund may invest in municipal securities rated B by
S&P, Fitch or Moody's although it intends to invest principally in securities
rated in higher grades. Although each Fund's quality standards are designed to
minimize the credit risk of investing in the Fund, that risk cannot be entirely
eliminated. Shares of the Funds are not insured by any agency of California or
of the U.S. Government.
Municipal Obligations. Municipal obligations are issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities to obtain funds for various public
purposes. The interest on most of these obligations is generally exempt from
regular federal income tax in the hands of most individual investors, although
it may be subject to the individual and corporate alternative minimum tax. The
two principal classifications of municipal obligations are "notes" and "bonds."
1. Municipal Notes. Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: tax anticipation notes; revenue anticipation notes;
bond anticipation notes; and construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, such financing provides for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
2. Municipal Bonds. Municipal bonds which meet longer term capital
needs generally have maturities of more than one year when issued, have two
principal classifications: "general" obligation bonds and "revenue" bonds.
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Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial development and pollution control bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Under federal tax legislation, certain
types of Industrial Development Bonds and Pollution Control Bonds may no longer
be issued on a tax-exempt basis, although previously-issued bonds of these types
and certain refundings of such bonds are not affected. Each Fund may invest more
than 25% of its assets in industrial development or other private activity
bonds, subject to each Fund's fundamental investment policies, and also subject
to each Fund's current intention not to invest in municipal securities whose
investment income is taxable or subject to the Fund's 20% limitation on
investing in AMT bonds. For the purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, industrial
development or other private activity bonds ultimately payable by companies
within the same industry will be considered as if they were issued by issuers in
the same industry.
3. Other Municipal Obligations. There is, in addition, a variety of
hybrid and special types of municipal obligations as well as numerous
differences in the security of municipal obligations both within and between the
two principal classifications above.
The Funds may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. The Funds intend to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to the Funds, or (3) to maintain
their respective investment portfolio ratings standards. A bank that issues a
repurchase commitment may receive a fee from a Fund for this arrangement. The
issuer of a variable rate demand instrument may have a corresponding right to
prepay in its discretion the outstanding principal of the instrument plus
accrued interest upon notice comparable to that required for the holder to
demand payment.
The variable rate demand instruments that these Funds may purchase are
payable on demand on not more than thirty calendar days' notice. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily up to six months, and the adjustments are based upon the prime rate
of a bank or other appropriate interest rate adjustment index as provided in the
respective instruments. The Funds determine the variable rate demand instruments
that they purchase in accordance with procedures approved by the Trustees to
minimize credit risks. The Adviser may determine that an unrated variable rate
demand instrument meets a Fund's quality criteria by reason of being backed by a
letter of credit or guarantee issued by a bank that meets the quality criteria
for the Fund. Thus, either the credit of the issuer of the municipal obligation
or the guarantor bank or both meet the quality standards of a Fund. The Adviser
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reevaluates each unrated variable rate demand instrument held by a Fund on a
quarterly basis to determine that it continues to meet the Fund's quality
criteria.
The value of the underlying variable rate demand instruments may change
with changes in interest rates generally, but the variable rate nature of these
instruments should decrease changes in value due to interest rate fluctuations.
Accordingly, as interest rates decrease or increase, the potential for capital
gain and the risk of capital loss on the disposition of portfolio securities are
less than would be the case with the comparable portfolio of fixed income
securities. The Funds may purchase variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value of such variable rate
demand notes may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed interest
rate securities. Accordingly, interest rates on the variable rate demand
instruments may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar final maturities.
The maturity of the variable rate demand instruments held by the Funds
are ordinarily deemed to be the longer of (1) the notice period required before
the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
General Considerations. An entire issue of municipal obligations may be
purchased by one or a small number of institutional investors such as one of the
Funds. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933 prior to offer and
sale unless an exemption from such registration is available, municipal
obligations which are not publicly offered may nevertheless be readily
marketable. A secondary market exists for municipal obligations which were not
publicly offered initially.
Obligations purchased for the Funds are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal of and interest on such obligations.
Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue.
The Funds expect that each will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. Government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments, which might affect all
municipal obligations of a similar type. However, each Fund believes that the
most important consideration affecting risk is the quality of municipal
obligations.
Investing in California. The following information constitutes only a brief
summary, does not purport to be a complete description, and is based on
information available as of the date of this Prospectus from official statements
and prospectuses relating to securities offerings of the State of California and
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various local agencies in California. While the Sponsors have not independently
verified such information, they have no reason to believe that such information
is not correct in all material respects.
Economic Factors
Fiscal Years Prior to 1996-97. By the close of the 1989-90 Fiscal Year,
California's revenues had fallen below projections so that the State's budget
reserve, the Special Fund for Economic Uncertainties (the "Special Fund"), was
fully depleted by June 30, 1990. A recession which had begun in mid-1990,
combined with higher health and welfare costs driven by the State's rapid
population growth, adversely affected General Fund revenues and raised
expenditures above initial budget appropriations.
As a result of these factors and others, the State confronted a period
of budget imbalance. Beginning with the 1990-91 Fiscal Year and for several
years thereafter, the budget required multibillion dollar actions to bring
projected revenues and expenditures into balance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the Special Fund - approaching
$2.8 billion at its peak on June 30, 1993.
By the 1993-94 Fiscal Year, the accumulated deficit was too large to be
prudently retired in one year and a two-year program was implemented. This
program used revenue anticipation warrants to carry a portion of the deficit
over to the end of the fiscal year.
The 1994-95 Budget Act projected General Fund revenues and transfers of
$41.9 billion. Expenditures were projected to be $40.9 billion - an increase of
$1.6 billion over the prior year. As a result of the improving economy, however,
the fiscal year ultimately produced revenues and transfers of $42.7 billion
which more than offset expenditures of $42.0 billion and thereby reduced the
accumulated budget deficit.
With strengthening revenues and reduced caseload growth driven by an
improving economy, the State entered the 1995-96 Fiscal Year budget negotiations
with the smallest nominal "budget gap" to be closed in many years. The 1995-96
Budget Act projected General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year, and expenditures were budgeted at $43.4
billion. In addition, the Department of Finance projected that after repaying
the last of the carryover budget deficit, there would be a positive balance of
$28 million in the budget reserve as of June 30, 1996.
1996-97 Fiscal Year. Reflecting the belief shared by many analysts that
the California economy would remain strong, the 1996-1997 Budget Act established
a State budget of some $63 billion. Relying on the optimistic revenue
projections released by the Department of Finance, the Budget Act granted a $230
million tax cut to corporations while simultaneously providing an increase in
funding for education and prisons. However, only a relatively modest amount,
$287 million, was allocated to the reserve fund available for emergencies such
as earthquakes. The ultimate impact of these and other budgetary allocations is
impossible to predict. Indeed, constant fluctuations in other factors affecting
the State - including changes in welfare caseloads, property tax receipts and
federal funding - will undoubtedly create new budget challenges.
The Orange County Bankruptcy. On December 6, 1994, Orange County,
California and its Investment Pool (the "Pool") filed for bankruptcy under
Chapter 9 of the United States Bankruptcy Code. The subsequent restructuring led
to the sale of substantially all of the Pool's portfolio and resulted in losses
estimated to be approximately $1.7 billion (or approximately 22% of amounts
deposited by the Pool investors). Approximately 187 California public entities
substantially all of which are public agencies within the county - had various
bonds, notes or other forms of indebtedness outstanding. In some instances the
proceeds of such indebtedness were invested in the Pool.
In April, 1996, the County emerged from bankruptcy after closing on a
$900 million recovery bond deal. At that time, the County and its financial
advisors stated that the County had emerged from the bankruptcy without any
structural fiscal problems and assured that the County would not slip back into
bankruptcy. However, for many of the cities, schools and special districts that
lost money in the County portfolio, repayment remains contingent on the outcome
of litigation which is pending against investment firms and other finance
professionals. Thus, it is impossible to determine the ultimate impact of the
bankruptcy and its aftermath on these various agencies and their claims.
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Constitutional, Legislative and Other Factors
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could produce
the adverse effects described below, among others.
Revenue Distribution. Certain Debt Obligations in the Portfolio may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's general fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's general fund will be distributed in the future to counties, cities and
their various entities is unclear.
Health Care Legislation. Certain Debt Obligations in the Portfolio may
be obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide Health
Planning and Development for health facility construction loans. If a default
occurs on insured Debt Obligations, the State Treasurer will issue debentures
payable out of a reserve fund established under the insurance program or will
pay principal and interest on an unaccelerated basis from unappropriated State
funds. At the request of the Office of Statewide Health Planning and
Development, Arthur D. Little, Inc. prepared a study in December 1983, to
evaluate the adequacy of the reserve fund established under the insurance
program and based on certain formulations and assumptions found the reserve fund
substantially underfunded. In September of 1986, Arthur D. Little, Inc. prepared
an update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve fund,
the update recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.
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Mortgages and Deeds. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of foreclosure and the other on the type of debt secured.
Under the former, a deficiency judgment is barred when the foreclosure is
accomplished by means of a nonjudicial trustee's sale. Under the latter, a
deficiency judgment is barred when the foreclosed mortgage or deed of trust
secures certain purchase money obligations. Another California statute, commonly
known as the "one form of action" rule, requires creditors secured by real
property to exhaust their real property security by foreclosure before bringing
a personal action against the debtor. The fourth statutory provision limits any
deficiency judgment obtained by a creditor secured by real property following a
judicial sale of such property to the excess of the outstanding debt over the
fair value of the property at the time of the sale, thus preventing the creditor
from obtaining a large deficiency judgment against the debtor as the result of
low bids at a judicial sale. The fifth statutory provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to which
a deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. The debtor may
reinstate the mortgage, in the manner described above, up to five business days
prior to the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow of revenues
available to an issuer for the payment of debt service on the outstanding
obligations if such defaults occur with respect to a substantial number of
mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of
the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of the
Federal or State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain Debt Obligations in the Portfolio may be obligations which
finance the acquisition of single family home mortgages for low and moderate
income mortgagors. These obligations may be payable solely from revenues derived
from the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.
Proposition 13. Certain of the Debt Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA was to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
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Section 1 of Article XIIIA, as amended, limits the maximum ad valorem
tax on real property to 1% of full cash value to be collected by the counties
and apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975/76 tax bill under 'full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement Article
XIIIA provides that notwithstanding any other law, local agencies may not levy
any ad valorem property tax except to pay debt service on indebtedness approved
by the voters prior to July 1, 1978, and that each county will levy the maximum
tax permitted by Article XIIIA.
Proposition 9. On November 6, 1979, an initiative known as "Proposition
9" or the "Gann Initiative" was approved by the California voters, which added
Article XIIIB to the California Constitution. Under Article XIIIB, State and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General Fund
revenues, plus an additional small adjustment factor. If Test 3 is used in any
year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature - by two-thirds vote of both
houses, with the Governor's concurrence - to suspend the K-14 schools' minimum
funding formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues
for several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, California Teachers'
Association v. Gould, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
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education. A settlement was reached on April 12, 1996 which ensures that
future school funding will not be in jeopardy over repayment of these so-called
loans.
Proposition 111. On June 30, 1989, the California Legislature enacted
Senate Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 - on the June 5, 1990 ballot
as Proposition 111 - was approved by the voters and took effect on July 1, 1990.
Among a number of important provisions, Proposition 111 recalculated spending
limits for the State and for local governments, allowed greater annual increases
in the limits, allowed the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduced the amount of the funding
guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
Proposition 62. On November 4, 1986, California voters approved an
initiative statute known as Proposition 62. This initiative provided the
following:
1. Requires that any tax for general governmental purposes imposed by
local governments be approved by resolution or ordinance adopted by a
two-thirds vote of the governmental entity's legislative body and by a
majority vote of the electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for other
than general governmental purposes) imposed by a local governmental entity
be approved by a two-thirds vote of the voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the purposes or
for the service for which the special tax was imposed;
4. Prohibits the imposition of ad valorem taxes on real property by
local governmental entities except as permitted by Article XIIIA;
5. Prohibits the imposition of transaction taxes and sales taxes on the
sale of real property by local governments;
6. Requires that any tax imposed by a local government on or after
August 1, 1985 be ratified by a majority vote of the electorate within two
years of the adoption of the initiative;
7. Requires that, in the event a local government fails to comply with
the provisions of this measure, a reduction in the amount of property tax
revenue allocated to such local government occurs in an amount equal to the
revenues received by such entity attributable to the tax levied in
violation of the initiative; and
8. Permits these provisions to be amended exclusively by the voters of
the State of California.
In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after August
1, 1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in City of Woodlake v. Logan, (1991) 230 Cal.App.3d
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and the
City of Woodlake decisions.
In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28,
1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal.4th 344e,
the California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
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the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.
Senate Bill 1590 (O'Connell), introduced February 16, 1996, would make
the Guardino decision inapplicable to any tax first imposed or increased by an
ordinance or resolution adopted before December 14, 1995. The California State
Senate passed the Bill on May 16, 1996 and it is currently pending in the
California State Assembly. It is not clear whether the Bill, if enacted, would
be constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
The voters will be presented with a new initiative constitutional
amendment on the November 1996 ballot. The Right to Vote on Taxes Act, sponsored
by the Howard Jarvis Taxpayers Association, seeks to strengthen Proposition 62
by requiring majority voter approval for general taxes, two-thirds voter
approval for special taxes (including taxes imposed for specific purposes but
placed in the general fund), voter approval of existing local taxes enacted
after January 1, 1995, and placing other restrictions on fees and assessments.
As a constitutional amendment, the provisions would clearly apply to charter
cities.
Another initiative on the November 1996 ballot, a statutory initiative
sponsored by the California Tax Reform Association, would reimpose the now
sunseted temporary 10 and 11 percent tax brackets and use the revenues from the
increase to replace a portion of the property tax revenue shifted from cities,
counties and special districts to schools on an ongoing basis since 1992.
Proposition 87. On November 8, 1988, California voters approved
Proposition 87. Proposition 87 amended Article XVI, Section 16, of the
California Constitution by authorizing the California Legislature to prohibit
redevelopment agencies from receiving any of the property tax revenue raised by
increased property tax rates levied to repay bonded indebtedness of local
governments which is approved by voters on or after January 1, 1989.
When-Issued Securities. The Funds may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer and
no interest accrues to the purchaser. To the extent that assets of the Fund are
not invested prior to the settlement of a purchase of securities, a Fund earns
no income; however, it is intended that the Funds will be fully invested to the
extent practicable and subject to the policies stated herein. When-issued or
forward delivery purchases are negotiated directly with the other party, and are
not traded on an exchange. While when-issued or forward delivery securities may
be sold prior to the settlement date, it is intended that the Fund will purchase
such securities with the purpose of actually acquiring them unless a sale
appears desirable for investment reasons. At the time the Fund makes the
commitment to purchase securities on a when-issued or forward delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. The Trust does not believe that either Fund's net asset
value or income will be adversely affected by its purchase of securities on a
when-issued or forward delivery basis. Each Fund establishes a segregated
account in which it maintains cash, U.S. Government securities or other
high-grade debt obligations equal in value to commitments for when-issued or
forward delivery securities. Such segregated securities either will mature or,
if necessary, be sold on or before the settlement date. Neither Fund enters into
such transactions for leverage purposes.
Stand-by Commitments. Subject to the receipt of any required regulatory
authorization, a Fund may acquire "Stand-by Commitments," which will enable that
Fund to improve its portfolio liquidity by making available same-day settlements
on portfolio sales (and thus facilitate the payment of same-day payments of
redemption proceeds in federal funds). Each Fund may enter into such
transactions subject to the limitations in the rules under the 1940 Act. A
Stand-by Commitment is a right acquired by a Fund, when it purchases a municipal
obligation from a broker/dealer or other financial institution ("seller"), to
sell up to the same principal amount of such securities back to the seller, at
the Fund's option, at a specified price. Stand-by Commitments are also known as
"puts." Each Fund's investment policies permit the acquisition of Stand-by
Commitments solely to facilitate portfolio liquidity. The exercise by a Fund of
a Stand-by Commitment is subject to the ability of the other party to fulfill
its contractual commitment.
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Stand-by Commitments acquired by a Fund have the following features:
(1) they are in writing and are physically held by the Fund's custodian; (2) the
Fund's rights to exercise them are unconditional and unqualified; (3) they are
entered into only with sellers which in the Adviser's opinion present a minimal
risk of default; (4) although Stand-by Commitments are not transferable,
municipal obligations purchased subject to such commitments may be sold to a
third party at any time, even though the commitment is outstanding; and (5)
their exercise price is (i) the Fund's acquisition cost (excluding the cost, if
any, of the Stand-by Commitment) of the municipal obligations which are subject
to the commitment (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date. Each Fund expects to refrain from exercising a Stand-by Commitment in the
event that the amount receivable upon exercise of the Stand-by Commitment is
significantly greater than the then current market value of the underlying
municipal obligations, determined as described in the section entitled "Net
Asset Value," in order to avoid imposing a loss on a seller and thus
jeopardizing a Fund's business relationship with that seller.
Each Fund expects that Stand-by Commitments generally are available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, each Fund will pay for Stand-by Commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of nonfundamental policy,
the total amount "paid" by a Fund in either manner for outstanding Stand-by
Commitments will not exceed one-half of 1% of the value of the total assets of
that Fund calculated immediately after any Stand-by Commitment is acquired. If
the Fund pays additional consideration for a Stand-by Commitment, the yield on
the security to which the Stand-by Commitment relates will, in effect, be lower
than if the Fund had not acquired such Stand-by Commitment.
It is difficult to evaluate the likelihood of use or the potential
benefit of a Stand-by Commitment. Therefore, it is expected that the Trustees
will determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the Stand-by Commitment is less than
the exercise price of the Stand-by Commitment, such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a Stand-by Commitment,
its cost will be reflected as unrealized depreciation for the period during
which the commitment is held.
Management understands that the Internal Revenue Service (the "IRS")
has issued a revenue ruling to the effect that, under specified circumstances, a
registered investment company is the owner of tax-exempt municipal obligations
acquired subject to a put option. The IRS has also issued private letter rulings
to certain taxpayers (which do not serve as precedent for other taxpayers) to
the effect that tax-exempt interest received by a regulated investment company
with respect to such obligations is tax-exempt in the hands of the company and
may be distributed to its shareholders as exempt-interest dividends. The IRS has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each Fund intends to take the position that
it is the owner of any municipal obligations acquired subject to a Stand-By
Commitment and that tax-exempt interest earned with respect to such municipal
obligations is tax-exempt in its hands. There is no assurance that the IRS will
agree with such position in any particular case. There is no assurance that
Stand-by Commitments will be available to a Fund nor has either Fund assumed
that such commitments would continue to be available under all market
conditions.
Third Party Puts. The Funds may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund, at specified intervals, (not exceeding 397 calendar days in the
case of Scudder California Tax Free Money Fund) to tender (or "put") the bonds
to the institution and receive the face value thereof (plus accrued interest).
These third party puts are available in several different forms, may be
represented by custodial receipts or trust certificates and may be combined with
other features such as interest rate swaps. The Fund receives a short-term rate
of interest (which is periodically reset), and the interest rate differential
between that rate and the fixed rate on the bond is retained by the financial
institution. The financial institution granting the option does not provide
credit enhancement, and in the event that there is a default in the payment of
principal, or interest on, or downgrading of, a bond to below investment grade,
or a loss of the bond's tax-exempt status, the put option will terminate
automatically, and the risk to the Fund will be that of holding such a long-term
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bond and, in the case of Scudder California Tax Free Money Fund, the weighted
average maturity of the Fund's portfolio would be adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-by
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations are tax-exempt in its hands. There is no assurance that the IRS will
agree with such position in any particular case. Additionally, the federal
income tax treatment of certain other aspects of these investments, including
the treatment of tender fees and swap payments, in relation to various regulated
investment company tax provisions is unclear. However, the Adviser intends to
manage the Funds' portfolios in a manner designed to minimize any adverse impact
from these investments.
Repurchase Agreements. The Funds may enter into repurchase agreements with any
member bank of the Federal Reserve System or any domestic broker/dealer which is
recognized as a reporting Government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other obligations the Funds may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable
income on funds for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Fund) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price on the date of repurchase. In either
case, the income to a Fund (which is taxable) is unrelated to the interest rate
on the Obligation itself. Obligations will be held by the custodian or in the
Federal Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the Obligation before repurchase of the Obligation under a
repurchase agreement, a Fund may encounter delay and incur costs before being
able to sell the security. Delays may involve loss of interest or decline in
price of the Obligation. If the court characterized the transaction as a loan
and a Fund has not perfected an interest in the Obligation, that Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund is at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt obligation purchased for each Fund, the Adviser seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the Obligation, in which case the
Fund may incur a loss if the proceeds to the Fund of the sale to a third party
are less than the repurchase price. However, if the market value of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), each Fund will direct the seller of the Obligation
to deliver additional securities so that the market value of all securities
subject to the repurchase agreement will equal or exceed the repurchase price.
It is possible that a Fund will be unsuccessful in seeking to enforce the
seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. The Funds may enter into "reverse repurchase
agreements," which are repurchase agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. Each Fund
maintains a segregated account, as described under "When-Issued Securities" in
connection with outstanding reverse repurchase agreements. Reverse repurchase
agreements are deemed to be borrowings subject to each Fund's investment
restrictions applicable to that activity. Each Fund will enter into reverse
repurchase agreements only when the Adviser believes that the interest income to
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be earned from the investment of the proceeds of the transaction will be greater
than the interest expense of the transaction. Each Fund does not intend to
invest more than 5% of its net assets in reverse repurchase agreements.
Securities backed by guarantees. The Funds invests in securities backed by
guarantees from banks, insurance companies and other financial institutions.
Scudder California Tax Free Money Fund's ability to maintain a stable share
price may depend upon such guarantees, which are not supported by federal
deposit insurance. Consequently, changes in the credit quality of these
institutions could have an adverse impact on securities they have guaranteed or
backed, which could cause losses to the Fund and affect its share price.
Trustees' Power to Change Objectives and Policies
Except as specifically stated to the contrary, the objectives and
policies of the Funds stated above may be changed by the Trustees without a vote
of the shareholders.
Investment Restrictions
The following restrictions are fundamental policies and may not be
changed with respect to each Fund without the approval of a majority of the
outstanding voting securities of such Fund which, under the 1940 Act and the
rules thereunder and as used in this Statement of Additional Information, means
the lesser of (1) 67% or more of the voting securities of such Fund present at
such meeting, if the holders of more than 50% of the outstanding voting
securities of such Fund are present or represented by proxy, or (2) more than
50% of the outstanding voting securities of a Fund. Any investment restrictions
herein which involve a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, the Trust may not, on behalf of each
Fund:
(1) borrow money except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse
repurchase agreements; provided that the Fund maintains asset
coverage of 300% for all borrowings;
(2) purchase or sell real estate (except that the Fund may invest
in (i) securities of companies which deal in real estate or
mortgages and (ii) securities secured by real estate or
interests therein, and the Trust, on behalf of Scudder
California Tax Free Fund only, reserves freedom of action to
hold and to sell real estate acquired as a result of Scudder
California Tax Free Fund's ownership of securities); and the
Trust, on behalf of each Fund, may not purchase or sell
physical commodities or contracts relating to physical
commodities;
(3) act as underwriter of the securities issued by others, except
to the extent that it may be deemed an underwriter in
connection with the disposition of portfolio securities of the
Funds;
(4) make loans to other persons, except (a) loans of portfolio
securities and (b) to the extent the purchase of debt
securities in accordance with its investment objective and
investment policies and the entry into repurchase agreements
may be deemed to be loans;
(5) issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for
shares of the separate classes or series of the Trust,
provided, in the case of Scudder California Tax Free Fund
only, that collateral arrangements with respect to
currency-related contracts, futures contracts, options or
other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction;
(6) purchase (a) private activity bonds, or (b) securities which
are neither municipal obligations nor securities of the U.S.
Government, its agencies or instrumentalities, if in either
case the purchase would cause more than 25% of the market
value of its total assets at the time of such purchase to be
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invested in the securities of one or more issuers having their
principal business activities in the same industry (for the
purposes of this restriction, telephone companies are
considered to be in a separate industry from gas and electric
public utilities, and wholly-owned finance companies are
considered to be in the industry of their parents if their
activities are primarily related to financing the activities
of their parents); or
(7) (Scudder California Tax Free Money Fund only) invest more
than 25% of the value of its total assets in the securities of
any one issuer;
As a matter of nonfundamental policy, the Trust, on behalf of each
Fund, may not:
(a) purchase or retain securities of any open-end investment
company, or securities of closed-end investment companies
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchases, or
except when such purchase, though not made in the open market,
is part of a plan of merger, consolidation, reorganization or
acquisition of assets; in any event the Fund may not purchase
more than 3% of the outstanding voting securities of another
investment company, may not invest more than 5% of its assets
in another investment company, and may not invest more than
10% of its assets in other investment companies;
(b) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(c) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer, director or trustee of the Trust or a member,
officer, director or trustee of the investment adviser of the
Trust if one or more of such individuals owns beneficially
more than one-half of one percent (1/2%) of the outstanding
shares or securities or both (taken at market value) of such
issuer and such individuals owning more than one-half of one
percent (1/2%) of such shares or securities together own
beneficially more than 5% of such shares or securities or
both;
(d) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions, except in connection with
arbitrage transactions (for Scudder California Tax Free Fund
only,) and except that the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of securities;
(e) invest more than 10% of its net assets in securities which are
not readily marketable, the disposition of which is restricted
under Federal securities laws, or in repurchase agreements not
terminable within 7 days and the Fund will not invest more
than 10% of its total assets in restricted securities;
(f) purchase securities of any issuer with a record of less than
three years continuous operations, including predecessors
(except U.S. Government securities, securities of such issuers
which are rated by at least one nationally recognized
statistical rating organization, municipal obligations and
obligations issued or guaranteed by any foreign Government or
its agencies or instrumentalities, if such purchase would
cause the investments of the Fund in all such issuers to
exceed 5% of the total assets of the Fund taken at market
value;
(g) (Scudder California Tax Free Fund only) purchase from or sell
to any of the Trust's officers or Trustees, its investment
adviser, its principal underwriter or the officers and
Directors of its investment adviser or principal underwriter,
portfolio securities of the Fund;
(h) (Scudder California Tax Free Fund only) buy options on
securities or financial instruments, unless the aggregate
premiums paid on all such options held by the Fund at any time
do not exceed 20% of its net assets; or sell put options on
securities if, as a result, the aggregate value of the
obligations underlying such put options would exceed 50% of
the Fund's net assets;
24
<PAGE>
(i) (Scudder California Tax Free Fund only) enter into futures
contracts or purchase options thereon unless immediately after
the purchase, the value of the aggregate initial margin with
respect to all futures contracts entered into on behalf of the
Fund and the premiums paid for options on futures contracts
does not exceed 5% of the fair market value of the Fund's
total assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5% limit;
(j) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which
own or invest in such interests);
(k) borrow money (including reverse repurchase agreements), except
for temporary or emergency purposes, in excess of 5% of its
total assets (taken at market value) or borrow other than from
banks;
(l) (Scudder California Tax Free Fund only) purchase warrants if
as a result warrants taken at the lower of cost or market
value would represent more than 5% of the value of the Fund's
total net assets or more than 2% of its net assets in warrants
that are not listed on the New York or American Stock
Exchanges or on an exchange with comparable listing
requirements (for this purpose, warrants attached to
securities will be deemed to have no value);
(m) (Scudder California Tax Free Money Fund only) purchase
warrants, unless attached to other securities in which it
is permitted to invest;
(n) invest more than 25% of its total assets in municipal
obligations the security of which is derived from any one of
the following categories: hospitals and health facilities;
turnpikes and toll roads; ports and airports; or colleges and
universities;
(o) enter into Stand-by Commitments if, the total amount "paid" by
a Fund in either manner for outstanding Stand-by Commitments
will not exceed 1/2 of 1% of the value of the total assets of
that Fund calculated immediately after any Stand-by Commitment
is acquired;
(p) purchase or sell real estate limited partnership interests; or
(q) make securities loans unless all loans of portfolio securities
are fully collateralized and marked to market daily.
PURCHASES
(See "Purchases" and "Transaction information" in the
Funds' prospectus.)
Additional Information About Opening an Account
Shareholders of other Scudder funds who have submitted an account
application and have a certified tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the
National Association of Securities Dealers, Inc. ("NASD"), and banks may open an
account by wire. These investors must call 1-800-225-5163 to get an account
number. During the call, the investor will be asked to indicate the Fund name,
amount to be wired ($1,000 minimum), name of bank or trust company from which
the wire will be sent, the exact registration of the new account, the tax
identification number or Social Security number, address and telephone number.
The investor must then call the bank to arrange a wire transfer to State Street
Bank, Attention: Mutual Funds, 225 Franklin Street, Boston, MA 02110. The
investor must give the Scudder fund name, account name and the new account
number. Finally, the investor must send a completed and signed application to
the Fund promptly.
25
<PAGE>
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves
uncollectible, that Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancelation. If the purchaser is a
shareholder, the Trust shall have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from or restricted in placing future orders in any of the Scudder
funds.
Wire Transfer of Federal Funds
To purchase shares of Scudder California Tax Free Fund and obtain the
same day dividend you must have your bank forward federal funds by wire transfer
and provide the required account information so as to be available to the Fund
prior to twelve o'clock noon eastern time on that day. If you wish to make a
purchase of $500,000 or more you should notify the Fund's transfer agent,
Scudder Service Corporation (the "Transfer Agent") of such a purchase by calling
1-800-225-5163. If either the federal funds or the account information is
received after twelve o'clock noon eastern time, but both the funds and the
information are made available before the close of regular trading on the New
York Stock Exchange (the "Exchange") (normally 4 p.m. eastern time) on any
business day, shares will be purchased at net asset value determined on that day
but will not receive the dividend; in such cases, dividends commence on the next
business day.
In the case of Scudder California Tax Free Money Fund, to obtain the
net asset value determined as of twelve o'clock noon and the same day dividend
your bank must forward federal funds by wire transfer and provide the required
account information so as to be available to the Fund prior to twelve o'clock
noon eastern time on that day. If the federal funds are made available or the
account information is received after twelve o'clock noon eastern time but both
the funds and the information are made available before the close of regular
trading on the Exchange, normally 4 p.m. eastern time, on any day, shares will
be purchased at the net asset value determined as of the close of trading on
that day but will not receive the dividend; in such cases, dividends commence on
the next business day.
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are presently closed on certain holidays although the
Exchange may be open. These holidays include Martin Luther King, Jr. Day (the
3rd Monday in January), Columbus Day (the 2nd Monday in October) and Veterans
Day (November 11). Investors are not able to purchase shares by wiring federal
funds on such holidays because the Custodian is not open to receive such federal
funds on behalf of a Fund.
Additional Information About Making Subsequent Investments
To a limited extent, certain financial institutions may place orders to
purchase shares of Scudder California Tax Free Fund unaccompanied by payment
prior to the close of regular trading on the Exchange, normally 4:00 p.m.
eastern time, and receive that day's price. Please call 1-800-854-8525 for more
information, including the dividend treatment and method and manner of payment
for Fund shares.
Additional Information About Making Subsequent Investments by AutoBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the AutoBuy program, may purchase shares of a Fund by telephone. Through this
service shareholders may purchase up to $250,000 but not less than $250. To
purchase shares by AutoBuy, shareholders should call before 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
26
<PAGE>
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. AutoBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
AutoBuy and redeem them within seven days of the purchase, the Fund may hold the
redemption proceeds for a period of up to seven business days. If you purchase
shares and there are insufficient funds in your bank account the purchase will
be canceled and you will be subject to any losses or fees incurred in the
transaction. Auto Buy transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
In order to request purchases by AutoBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish AutoBuy may so indicate on the application.
Existing shareholders who wish to add AutoBuy to their account may do so by
completing an AutoBuy Enrollment Form. After sending in an enrollment form
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
Share Price
Purchases are filled without sales charge at the net asset value next
computed after receipt of the purchase order in good order. Net asset value per
share for Scudder California Tax Free Money Fund normally is computed twice a
day, as of twelve o'clock noon and the close of regular trading on each day
during which the Exchange is open for trading. Net asset value per share for
Scudder California Tax Free Fund normally is computed once a day, as of the
close of regular trading on each day during which the Exchange is open for
trading. Orders received after the close of regular trading on the Exchange are
executed at the next business day's net asset value. If the order has been
placed by a member of the NASD other than Scudder Investor Services, Inc., it is
the responsibility of that member broker, rather than a Fund, to forward the
purchase order to the Funds' Transfer Agent by the close of regular trading on
the Exchange.
Share Certificates
Due to the desire of the Trust to afford ease of redemption,
certificates are not issued to indicate ownership in a Fund.
Other Information
If purchases or redemptions of Fund shares are arranged and settlement
is made, at an investor's election through a member of the NASD other than the
Distributor, that member may, at its discretion, charge a fee for that service.
The Board of Trustees and the Distributor each has the right to limit
the amount of purchases by, and to refuse to sell to any person and each may
suspend or terminate the offering of shares of each Fund at any time.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations, certification of exempt status) may be
returned to the investor.
The Trust may issue shares of each Fund at net asset value in
connection with any merger or consolidation with, or acquisition of the assets
of, any investment company (or series thereof) or personal holding company,
subject to the requirements of the 1940 Act.
27
<PAGE>
EXCHANGES AND REDEMPTIONS
(See "Exchanges and redemptions" and "Transaction information"
in the Funds' prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be
either an additional investment into an existing account or may involve opening
a new account in the other fund. When an exchange involves a new account, the
new account is established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features do not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $1,000. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee as described under "Transaction information -- Redeeming shares --
Signature guarantees" in the Funds' prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily are executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
No commission is charged to the shareholder for any exchange described
above. An exchange into another Scudder fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder and
the proceeds of such exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Trust employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trust will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem up to $50,000 and have the proceeds mailed to their
address of record. Shareholders may request to have the proceeds mailed or wired
to their predesignated bank account. In order to request redemptions by
telephone, shareholders must have completed and returned to the Transfer Agent
the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
28
<PAGE>
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section
on the application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a designated bank account or who want to change
the bank account previously designated to receive redemption
proceeds should either return a Telephone Redemption Option
Form (available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve Bank wire to the bank
account designated on the application unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.
Note: Investors designating that a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Trust employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Trust does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Trust will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between a Fund and the shareholder) of shares purchased by check are not
accepted until the purchase check has cleared.
Redemption By AutoSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the AutoSell program may sell shares of a Fund by telephone. To sell shares by
AutoSell, shareholders should call before 4 p.m. eastern time. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be redeemed at the net asset value per share
calculated at the close of trading on the day of your call. AutoSell requests
received after the close of regular trading on the Exchange will begin their
processing and be redeemed at the net asset value calculated the following
business day. AutoSell transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
In order to request redemptions by AutoSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish AutoSell may so indicate on the application.
Existing shareholders who wish to add AutoSell to their account may do so by
completing an AutoSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
29
<PAGE>
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding shares or share certificates
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
When shares are held in the name of a corporation, trust, fiduciary agent,
attorney or partnership, the Transfer Agent requires, in addition to the stock
power, certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption are sent within seven business days after
receipt by the Transfer Agent of a request for redemption that complies with the
above requirements. Delays in payment of more than seven business days for
shares tendered for repurchase or redemption may result because the purchase
check has not yet cleared.
Redemption by Write-A-Check
All new investors and existing shareholders of Scudder California Tax
Free Money Fund who apply to the Custodian for checks may use them to pay any
person, provided that each check is for at least $100 and not more than $5
million. By using the checks, the shareholder receives daily dividend credit on
his or her shares until the check has cleared the banking system. Investors who
purchased shares by check may write checks against those shares only after they
have been on the Fund's books for seven business days. Shareholders who use this
service may also use other redemption procedures. No shareholder may write
checks against certificated shares. Scudder California Tax Free Money Fund pays
the bank charges for this service. However, Scudder California Tax Free Money
Fund reviews the cost of operation periodically and reserves the right to
determine if direct charges to the persons who avail themselves of this service
are appropriate.
Checks are returned by the Custodian if there are insufficient shares
to meet the withdrawal amount. Possible fluctuations in the per share value of
the Fund, although not anticipated, should be considered in determining the
amount of the check. An investor should not attempt to close an account by
check, because the exact balance at the time the check clears cannot be known
when the check is written. The Trust, on behalf of Scudder California Tax Free
Money Fund, the Transfer Agent, and the Custodian each reserves the right at any
time to suspend or terminate the "Write-A-Check" procedure.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives, in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than a shareholder's cost depending upon the
net asset value at the time of redemption or repurchase. The Trust does not
impose a redemption charge, although a wire charge may be applicable for
redemption proceeds wired to an investor's bank account. Redemptions of shares,
including an exchange for shares of another Scudder fund, may result in tax
consequences (gain or loss) to the shareholder and the proceeds of such
redemptions may be subject to backup withholding. (See "TAXES.")
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment may be suspended at
times during which (a) the Exchange is closed, other than customary weekend and
holiday closings, (b) trading on the Exchange is restricted for any reason, (c)
an emergency exists as a result of which disposal by a Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for a
Fund fairly to determine the value of its net assets, or (d) the SEC may by
order permit such a suspension for the protection of the Trust's shareholders;
provided that applicable rules and regulations of the SEC (or any succeeding
governmental authority) shall govern as to whether the conditions prescribed in
(b) or (c) exist.
If transactions at any time reduce a shareholder's account balance in
the Fund to below $1,000 in value, such Fund notifies the shareholder that,
unless the account balance is brought up to at least $1,000, the Trust will
30
<PAGE>
redeem all shares, close the account, and send redemption proceeds to the
shareholder. The shareholder has sixty days to bring the account balance up to
$1,000 before any action is taken by the Trust. No transfer from an existing
account to a new fund account may be for less than $1,000 or the new account
will be redeemed as described above. (This policy applies to accounts of new
shareholders, but does not apply to certain Special Plan Accounts.) The Trustees
have the authority to change the minimum account size.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "Shareholder benefits" in the Funds' prospectus)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its funds from the
vast majority of mutual funds available today. The primary distinction is
between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the NASD
Rules of Fair Practice, a mutual fund can call itself a "no-load" fund only if
the 12b-1 fee and/or service fee does not exceed 0.25% of a fund's average
annual net assets.
Because Scudder funds do not pay any asset-based sales charges or
service fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual funds. Scudder pioneered the
no-load concept when it created the nation's first no-load fund in 1928, and
later developed the nation's first family of no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart show the value
of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
======================== ====================== ====================== ====================== ======================
Scudder No-Load Fund with
YEARS Pure No-Load(TM)Fund 8.50% Load Fund Load Fund with 0.75% 0.25% 12b-1 Fee
12b-1 Fee
======================== ====================== ====================== ====================== ======================
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
======================== ====================== ====================== ====================== ======================
15 41,772 38,222 37,698 40,371
======================== ====================== ====================== ====================== ======================
20 67,275 61,557 58,672 64,282
======================== ====================== ====================== ====================== ======================
</TABLE>
Investors are encouraged to review the fee tables on page 2 of the
Funds' prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See "How to
contact Scudder" in the prospectus for the address.
Reinvestment is usually made on the day following the record date.
Investors may leave standing instructions with the Transfer Agent designating
their option for either reinvestment or cash distribution of any income
dividends or capital gains distributions. If no election is made, dividends and
distributions will be invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Funds Centers
Investors may visit any of the Funds Centers maintained by Scudder
Investor Services, Inc. and listed in the Funds' prospectus. The Centers are
designed to provide individuals with services during any business day. Investors
may pick up literature, or find assistance with opening an account, adding
monies or special options to existing accounts, making exchanges within the
Scudder Family of Funds, redeeming shares or opening retirement plans. Checks
should not be mailed to the Centers but should be mailed to "The Scudder Funds"
at the address listed under "How to Contact Scudder" in the prospectus.
Reports to Shareholders
Each Fund issues to shareholders semiannual financial statements
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets and financial highlights for each Fund.
32
<PAGE>
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.
MONEY MARKET
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital, and consistent therewith, to maintain the liquidity of
capital and to provide current income through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.
INCOME
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued in
emerging markets.
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.
Scudder High Yield Bond Fund seeks to provide a high level of current
income and, secondarily, capital appreciation through investment
primarily in below investment grade domestic debt securities.
Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.
Scudder International Bond Fund seeks to provide income from a
portfolio of high-grade bonds denominated in foreign currencies. As a
secondary objective, the Fund seeks protection and possible enhancement
of principal value by actively managing currency, bond market and
maturity exposure and by security selection.
Scudder Short Term Bond Fund seeks to provide a higher and more stable
level of income than is normally provided by money market investments,
and more price stability than investments in intermediate- and
long-term bonds.
33
<PAGE>
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with the minimization of
reinvestment risks through investments primarily in zero coupon
securities.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") is designed to provide investors
with income exempt from regular federal income tax while seeking
stability of principal. STFMF seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may
not be possible.
Scudder California Tax Free Money Fund* is designed to provide
California taxpayers income exempt from California state and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
Scudder New York Tax Free Money Fund* is designed to provide New York
taxpayers income exempt from New York state, New York City and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
TAX FREE
Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in investment-grade
municipal securities.
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Managed Municipal Bonds seeks to provide income which is exempt
from regular federal income tax primarily through investments in
long-term municipal securities with an emphasis on high quality.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.
Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.
Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.
Scudder New York Tax Free Fund* seeks to provide income exempt from New
York state, New York City and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
investments in New York state, municipal and local government
obligations.
Scudder Ohio Tax Free Fund* seeks to provide income exempt from both
Ohio and regular federal income taxes through the professional and
efficient management of a portfolio consisting of Ohio state, municipal
and local government obligations.
- ----------
* These funds are not available for sale in all states. For
information, contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
both Pennsylvania and regular federal income taxes through a portfolio
consisting of Pennsylvania state, municipal and local government
obligations.
GROWTH AND INCOME
Scudder Balanced Fund seeks to provide a balance of growth and income,
as well as long-term preservation of capital, from a diversified
portfolio of equity and fixed income securities.
Scudder Growth and Income Fund seeks to provide long-term growth of
capital, current income, and growth of income through a portfolio
invested primarily in common stocks and convertible securities by
companies which offer the prospect of growth of earnings while paying
current dividends.
GROWTH
Scudder Capital Growth Fund seeks to maximize long-term growth of
capital through a broad and flexible investment program emphasizing
common stocks.
Scudder Development Fund seeks to achieve long-term growth of capital
primarily through investments in marketable securities, principally
common stocks, of relatively small or little-known companies which in
the opinion of management have promise of expanding their size and
profitability or of gaining increased market recognition for their
securities, or both.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Global Discovery Fund seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.
Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S.
and foreign issuers. Income is an incidental consideration.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Quality Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
- ----------
* These funds are not available for sale in all states. For
information, contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.
The Japan Fund, Inc. seeks capital appreciation through investment
in Japanese securities, primarily in common stocks of Japanese
companies.
The net asset values of most Scudder Funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder Funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; easy telephone exchanges
into other Scudder funds; shares redeemable at net asset value at any time.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By
Automatic Investment Plan" and "Exchanges and redemptions--By
Automatic Withdrawal Plan" in the Funds' prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to the IRS requirements, may be obtained by contacting Scudder Investor
Services, Inc., Two International Place, Boston, Massachusetts 02110-4103 or by
calling toll free, 1-800-225-2470. It is advisable for an investor considering
the funding of the investment plans described below to consult with an attorney
or other investment or tax adviser with respect to the suitability requirements
and tax aspects thereof.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Payments are mailed at the end
of each month. The check amounts may be based on the redemption of a fixed
dollar amount, fixed share amount, percent of account value or declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be reinvested in additional shares. Shares are then liquidated as
necessary to provide for withdrawal payments. Since the withdrawals are in
amounts selected by the investor and have no relationship to yield or income,
payments received cannot be considered as yield or income on the investment and
the resulting liquidations may deplete or possibly extinguish the initial
investment. Requests for increases in withdrawal amounts or to change payee must
be submitted in writing, signed exactly as the account is registered and contain
signature guarantee(s) as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Funds' prospectus. Any such requests must
be received by the Fund's transfer agent by the 15th of the month in which such
change is to take effect. An Automatic Withdrawal Plan may be terminated at any
time by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the Trust of notice of death of the shareholder.
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<PAGE>
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Cash Management System -- Group Sub-Accounting Plan
for Trust Accounts, Nominees and Corporations
To minimize record-keeping by fiduciaries and corporations,
arrangements have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund or Portfolio.
In its discretion, a Fund may accept minimum initial investments of
less than $1,000 (per Fund) as part of a continuous group purchase plan by
fiduciaries and others (e.g., brokers, bank trust departments, employee benefit
plans) provided that the average single account in any one Fund or Portfolio in
the group purchase plan will be $1,000 or more. A Fund may also wire all
redemption proceeds where the group maintains a single designated bank account.
Shareholders who withdraw from the group purchase plan through which
they were permitted to initiate accounts under $1,000 will be subject to the
minimum account restrictions described under "EXCHANGES AND REDEMPTIONS--Other
Information."
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan ("AIP") involves an investment strategy
called dollar cost averaging. Dollar cost averaging is a method of investing
whereby a specific dollar amount is invested at regular intervals. Such a plan
involves continuous investment in securities regardless of fluctuating price
levels of such securities. By investing the same dollar amount each period, when
shares are priced low the investor will purchase more shares than when the share
price is higher. Over a period of time this investment approach may allow the
investor to reduce the average price of the shares purchased. However, this
investment approach does not assure a profit or protect against loss. This type
of regular investment program may be suitable for various investment goals such
as, but not limited to, college planning or saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through AIP. In this
case, the minimum initial investment is $500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and performance
information--Dividends and capital gains
distributions" in the Funds' prospectus.)
Each Fund follows the practice of distributing substantially all, and
in no event less than 90% of its net investment income (defined under
"ADDITIONAL INFORMATION--Glossary") and any excess of net realized short-term
capital gains over net realized long-term capital losses. Each Fund may follow
the practice of distributing the entire excess of net realized long-term capital
gains over net realized short-term capital losses. However, if it appears to be
in the best interest of a Fund and its shareholders, such Fund may retain all or
part of such gain for reinvestment.
37
<PAGE>
Dividends are declared daily and distributions from net investment
income are made monthly. Any dividends or capital gains distributions declared
in October, November or December with a record date in such a month and paid
during the following January are treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared.
Distributions from net short-term and net long-term capital gains realized
during each fiscal year, if any, are made annually within three months after the
end of the Funds' fiscal year end. An additional distribution may be made (or
treated as made) in November or December if necessary to avoid the excise tax
described under "TAXES." Both types of distributions are made in shares of the
Funds and confirmations are mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check is sent.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Fund issues to each shareholder a statement of the
federal income tax status of all distributions, including a statement of the
percentage of the prior calendar year's distributions which the Fund has
designated as tax-exempt and the percentage of such tax-exempt distributions
treated as a tax-preference item for purposes of the alternative minimum tax.
PERFORMANCE INFORMATION
(See "Distribution and performance information--Performance
information" in the Funds' prospectus.)
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of
return for the periods of one year, five years and the life of the Fund, where
applicable, all ended on the last day of a recent calendar quarter. Average
annual total return quotations reflect changes in the price of the Funds' shares
and assume that all dividends and capital gains distributions during the
respective periods were reinvested in Fund shares. Average annual total return
is calculated by finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Average Annual Total Return for periods ended March 31, 1996
<S> <C> <C> <C> <C>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
Scudder California Tax Free Money Fund 3.28% 2.76% - 3.71% (1)
Scudder California Tax Free Fund 8.01% 8.29% 7.82% -
</TABLE>
(1) For the period beginning May 28, 1987 (commencement of operations)
38
<PAGE>
Cumulative Total Return
Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect the change in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P)-1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Cumulative Total Return for periods ended March 31, 1996
<S> <C> <C> <C> <C>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
Scudder California Tax Free Money Fund 3.28% 14.58% - 38.00% (1)
Scudder California Tax Free Fund 8.01% 48.90% 112.40% -
</TABLE>
(1) For the period beginning May 28, 1987 (commencement of operations)
Total Return
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.
Yield
Yield for Scudder California Tax Free Money Fund is the net annualized
yield based on a specified seven calendar days calculated at simple interest
rates. Yield is calculated by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return. The yield is annualized by multiplying the base period return by
365/7. The yield figure is stated to the nearest hundredth of one percent. The
yield of the Fund for the seven-day period ended March 31, 1996 was 2.78%.
Yield for Scudder California Tax Free Fund is the SEC net annualized
yield based on a specified 30-day or one month) period assuming a semiannual
compounding of income. Yield is calculated by dividing the net investment income
per share earned during the period by the maximum offering price per share on
the last day of the period, according to the following formula:
YIELD = 2[(a-b/cd + 1)^6-1]
Where:
a = dividends and interest earned during the period
including the amortization of market premium or
accretion of market discount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last day
of the period.
39
<PAGE>
The SEC 30-day net annualized yield of the Fund for the period ended
March 31, 1996 was 4.88%.
Effective Yield
Effective Yield for Scudder California Tax Free Money Fund is the net
annualized yield for a specified seven calendar days assuming a reinvestment of
the income or compounding. Effective yield is calculated by the same method as
yield except the yield figure is compounded by adding one, raising the sum to a
power equal to 365 divided by seven, and subtracting one from the result,
according to the following formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1
The effective yield of the Fund for the seven-day period ended March
31, 1996 was 2.82%.
Tax-Equivalent Yield
Tax-Equivalent Yield for Scudder California Tax Free Money Fund is the
net annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified seven day period assuming a reinvestment of
all dividends paid during such period. Tax-equivalent yield is calculated by
dividing that portion of the Fund's yield (as computed in the yield description
above) which is tax-exempt by one minus a stated income tax rate and adding the
product to that portion, if any, of the yield of the Fund that is not
tax-exempt.
Thus, taxpayers with an effective combined marginal income tax rate of
42.40% would need to earn a taxable yield of 4.83% to receive the after-tax
income equal to the 2.78% tax-free effective yield of Scudder California Tax
Free Money Fund for the seven-day period ended March 31, 1996.
Tax-Equivalent Yield for Scudder California Tax Free Fund is the net
annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified 30-day (or one month) period assuming
semiannual compounding of income. Tax-equivalent yield is calculated by dividing
that portion of the Fund's yield (as computed in the yield description above)
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt. Thus,
taxpayers with an effective combined marginal income tax rate of 42.40% would
have to earn 8.47% to receive the after-tax income equal to the 4.88% tax-free
yield of Scudder California Tax Free Fund for the 30-day period ended March 31,
1996.
Quotations of a Fund's performance are historical, show the performance
of a hypothetical investment and are not intended to indicate future
performance. Performance of the Fund will vary based on changes in market
conditions and the level of the Fund's expenses. An investor's shares when
redeemed may be worth more or less than their original cost.
Investors should be aware that the principal of each Fund is not
insured.
Comparison of Portfolio Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
40
<PAGE>
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
41
<PAGE>
Scudder's Theme: Build Create Provide. Marketing and fund literature may refer
to Scudder's theme: "Build Create Provide." This theme intends to encapsulate
the composition of a sound investment philosophy, one through which Scudder can
help provide investors appropriate avenues for pursuing dreams. Individuals
recognize the need to build investment plans that are suitable and directed at
achieving one's financial goals. The desired result from planning and a
long-term commitment to it is the ability to build wealth over time. While there
are no guarantees in the pursuit of wealth through investing, Scudder believes
that a sound investment plan can enhance one's ability to achieve financial
goals that are clearly defined and appropriately approached. Wealth, while a
relative term, may be defined as the freedom to provide for those interests
which you hold most important -- your family, future, and/or your community.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
42
<PAGE>
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic, and
business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
43
<PAGE>
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectus.)
The Funds are series of Scudder California Tax Free Trust. The Trust is
a Massachusetts business trust established under a Declaration of Trust dated
May 3, 1983. Such Declaration of Trust was amended and restated on December 8,
1987. Its authorized capital consists of an unlimited number of shares of
beneficial interest of $.01 par value. The shares are currently divided into two
series. Each share of each Fund has equal rights with each other share of that
Fund as to voting, dividends and liquidation. Shareholders have one vote for
each share held on matters on which they are entitled to vote. All shares issued
and outstanding are fully paid and nonassessable by the Trust, and redeemable as
described in this Statement of Additional Information and in the Funds'
prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with its equitable share of the
general liabilities of the Trust, as determined by the Trustees. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust or any
series, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such shares available for distribution to
shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Trustees, in their discretion, may authorize the division of shares
of the Fund (or shares of a series) into different classes permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution. The Trustees have no present
intention of taking the action necessary to effect the division of shares into
separate classes (which under present regulations requires the Fund first to
obtain an exemptive order of the SEC), or of changing the method of distribution
of shares of the Fund.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers are not liable for errors of judgment or mistakes
of fact or law, and that the Trust indemnifies its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Trust except if it is
determined in the manner provided in the Declaration of Trust that they have not
acted in good faith in the reasonable belief that their actions were in the best
interests of the Trust. However, nothing in the Declaration of Trust protects or
44
<PAGE>
indemnifies a Trustee or officer against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
INVESTMENT ADVISER
(See "Fund organization-Investment adviser" in the Funds' prospectus.)
Scudder, Stevens & Clark, Inc., an investment counsel firm, acts as
investment adviser to the Funds. This organization is one of the most
experienced investment management firms in the United States. It was established
as a partnership in 1919 and pioneered the practice of providing investment
counsel to individual clients on a fee basis. In 1928, it introduced the first
no-load mutual fund to the public. In 1953, the Adviser introduced Scudder
International Fund, the first mutual fund available in the U.S. investing
internationally in several foreign countries. The firm reorganized from a
partnership to a corporation on June 28, 1985.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder Institutional Fund,
Inc., Scudder International Fund, Inc., Scudder Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Securities Trust, Scudder State Tax Free
Trust, Scudder Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S.
Treasury Money Fund, Scudder Variable Life Investment Fund, Scudder World Income
Opportunities Fund, Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The
First Iberian Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The
Latin America Dollar Income Fund, Inc. Some of the foregoing companies or trusts
have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $12 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.
In selecting the securities in which the Funds may invest, the
conclusions and investment decisions of the Adviser with respect to the Funds
are based primarily on the analyses of its own research department. The Adviser
receives published reports and statistical compilations of the issuers
themselves, as well as analyses from broker/dealers who may execute portfolio
transactions for the Adviser's clients. However, the Adviser regards this
information and material as an adjunct to its own research activities.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for the Funds and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions are allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a Fund. Purchase and sale orders for a Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to a Fund.
The Investment Management Agreements (the "Agreements") for each Fund
are dated December 12, 1990. The Agreements were most recently approved by the
Trustees on August 8, 1995 and by the shareholders of the Funds on December 11,
1990 and will continue in effect until September 30, 1996. The Agreements will
continue in effect thereafter by its terms from year to year only so long as its
continuance is specifically approved at least annually by the vote of a majority
of those Trustees who are not parties to such Agreements or "interested persons"
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<PAGE>
of the Adviser or the Trust cast in person at a meeting called for the purpose
of voting on such approval and either by vote of the majority of the Trustees or
a majority of the outstanding voting securities of each Fund. The Agreements may
be terminated at any time without payment of penalty by either party on sixty
days' written notice, and automatically terminates in the event of its
assignment.
Under the Agreements, the Adviser regularly provides each Fund with
continuing investment management consistent with each Fund's investment
objectives, policies and restrictions and determines what securities shall be
purchased for each Fund's portfolio, what securities shall be held or sold by
each Fund, and what portion of each Fund's assets shall be held uninvested,
subject always to the provisions of the Trust's Declaration of Trust and
By-Laws, of the 1940 Act and of the Internal Revenue Code of 1986 and to each
Fund's investment objectives, policies and restrictions, and subject further to
such policies and instructions as the Trustees of the Trust may from time to
time establish. The Adviser also advises and assists the officers of the Trust
in taking such steps as are necessary or appropriate to carry out the decisions
of its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Trust.
Under the Agreements, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Trust's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to each Fund (such as the Transfer Agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of each
Fund's federal, state and local tax returns; preparing and filing each Fund's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of each Fund under applicable
federal and state securities laws; maintaining each Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of each Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring each Fund's operating budget;
processing the payment of each Fund's bills; assisting each Fund in, and
otherwise arranging for, the payment of distributions and dividends and
otherwise assisting each Fund in the conduct of its business, subject to the
direction and control of the Trustees.
The Adviser pays the compensation and expenses (except those of
attending Board and committee meetings outside New York, New York and Boston,
Massachusetts) of all affiliated Trustees, officers and executive employees of
the Trust and makes available, without expense to the Trust, the services of
such of the Adviser's directors, officers and employees as may duly be elected
officers of the Trust, subject to their individual consent to serve and to any
limitations imposed by law, and provides the Trust's office space and
facilities.
For these services, Scudder California Tax Free Fund pays an annual fee
of 0.625 of 1% of the first $200 million of average daily net assets of such
Fund and 0.60 of 1% of such net assets in excess of $200 million, and Scudder
California Tax Free Money Fund pays an annual fee of 0.50 of 1% of the average
daily net assets of such Fund. The fees are payable monthly, provided the Funds
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Funds and unpaid.
For the fiscal years ended March 31, 1996, 1995 and 1994 the investment
management fees incurred by Scudder California Tax Free Fund were $1,842,488,
$1,861,185 and $2,087,343, respectively, and the investment management fees
incurred by Scudder California Tax Free Money Fund were $193,014, $180,098 and
$112,218, respectively.
With respect to Scudder California Tax Free Money Fund, the Adviser has
agreed to continue not to impose all or a portion of its management fee and to
take other action, (to the extent necessary) until July 31, 1997, and during
such time to maintain the annualized expenses at not more than 0.60% of average
daily net assets. For the fiscal year ended March 31, 1996, the Adviser did not
impose a portion of the fee which would have amounted to $138,996.
Under the Agreements, the Funds are responsible for all of their other
expenses, including fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing or
accounting expenses; taxes and governmental fees; the fees and expenses of the
Transfer Agent; any other expenses, including clerical expenses of issue, sale,
underwriting, distribution, redemption or repurchase of shares; the expenses of
46
<PAGE>
and fees for registering or qualifying securities for sale; the fees and
expenses of the Trustees, officers and employees of the Fund who are not
affiliated with the Adviser; the cost of printing and distributing reports and
notices to shareholders; and the fees or disbursements of custodians. Each Fund
may arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of such Fund. The Trust is also
responsible for its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees with respect thereto.
Each Agreement requires the Adviser to return to each Fund all or a
portion of advances of its management fee to the extent annual expenses of such
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which such Fund's shares are offered for sale.
Management has been advised that, while most states have eliminated expense
limitations, the lowest of such limitations is currently 2 1/2% of average daily
net assets up to $30 million, 2% of the next $70 million of average daily net
assets and 1 1/2% of average daily net assets in excess of that amount. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitations.
Any such fee advance required to be returned to a Fund is returned as
promptly as practicable after the end of the Funds' fiscal year. However, no fee
payment is made to the Adviser during any fiscal year which causes year-to-date
expenses to exceed the cumulative pro rata expense limitation at the time of
such payment. The amortization of organizational costs is described herein under
"ADDITIONAL INFORMATION--Other Information."
The Agreements also provide that the Trust may use any name derived
from the name "Scudder, Stevens & Clark" only as long as the Agreements or any
extension, renewal or amendment thereof remains in effect.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning the Agreements, Trustees who are not "interested persons" of
the Adviser are represented by independent counsel at the Trust's expense.
Each Agreement provides that the Adviser is not liable for any error of
judgment or mistake of law or for any loss suffered by a Fund in connection with
matters to which the Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Custodian. It is the Adviser's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Trust
relationships.
None of the Trustees or officers of the Trust may have dealings with
the Trust as principals in the purchase or sale of securities, except as
individual subscribers to or holders of shares of the Funds.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
47
<PAGE>
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
<S> <C> <C> <C>
Position with
Underwriter,
Principal Occupation** Scudder Investor
Name, Age and Address Position with Trust and Affiliations Services, Inc.
- --------------------- ------------------- ---------------- --------------
David S. Lee (62)*++@ President and Trustee Managing Director of Scudder, Director, President
Stevens & Clark, Inc. and Assistant
Treasurer
Henry P. Becton, Jr. (52)++ Trustee President and General Manager, --
WGBH WGBH Educational Foundation
125 Western Avenue
Allston, MA 02134
Dawn-Marie Driscoll (49) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics and President,
Cape Coral, FL 33914 Driscoll Associates
Peter B. Freeman (63)++ Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
Daniel Pierce (62)*++@ Trustee Chairman of the Board and Director, Vice
Managing Director of Scudder, President and
Stevens & Clark, Inc. Assistant Treasurer
Olin Barrett (58) Vice President Managing Director of Scudder, --
333 South Hope Street Stevens & Clark, Inc.
Los Angeles, CA 90071
Donald C. Carleton (62)@ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Jerard K. Hartman (63)+ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Thomas W. Joseph (57)@ Vice President Principal of Scudder, Stevens & Director, Vice
Clark, Inc. President, Treasurer
and Assistant Clerk
Thomas F. McDonough (49)@ Vice President and Principal of Scudder, Stevens & Clerk
Secretary Clark, Inc.
Pamela A. McGrath (42)@ Vice President and Managing Director of Scudder, --
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell (51)+ Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Jeremy L. Ragus (44) Vice President Principal of Scudder, Stevens & --
Clark, Inc.
48
<PAGE>
Position with
Underwriter,
Principal Occupation** Scudder Investor
Name, Age and Address Position with Trust and Affiliations Services, Inc.
- --------------------- ------------------- ---------------- --------------
Rebecca L. Wilson (34) Vice President Assistant Vice President of --
Scudder, Stevens & Clark, Inc.
Coleen Downs Dinneen (35)@ Assistant Secretary Vice President of Scudder, Assistant Clerk
Stevens & Clark, Inc.
</TABLE>
* Messrs. Lee and Pierce are considered by the Trust and its counsel to
be Trustees who are "interested persons" of the Adviser or of the
Trust, within the meaning of the Investment Company Act of 1940, as
amended.
** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
++ Messrs. Becton, Freeman, Lee and Pierce are members of the Executive
Committee which has the power to declare dividends from ordinary income
and distributions of realized capital gains to the same extent as the
Board is so empowered.
+ Address: 345 Park Avenue, New York, New York 10154
@ Address: Two International Place, Boston, Massachusetts 02110
As of June 30, 1996, all Trustees and officers of the Trust as a group
owned beneficially (as defined in Section 13(d) of the Securities Exchange Act
of 1934) less than 1% of Scudder California Tax Free Money Fund and less than 1%
of Scudder California Tax Free Fund.
As of June 30, 1996, 1,567,480 shares, in the aggregate, or 5.59% of
the outstanding shares of Scudder California Tax Free Fund were held in the name
of Charles Schwab, 101 Montgomery Street, San Francisco, CA 94101-4122, who may
be deemed to be the beneficial owner of certain of these shares but disclaims
any beneficial ownership therein.
Certain accounts for which the Adviser acts as investment adviser owned
6,251,194 shares in the aggregate, or 9.21% of the outstanding shares of Scudder
California Tax Free Money Fund. The Adviser may be deemed to be the beneficial
owner of such shares but disclaims any beneficial ownership in such shares.
Certain accounts for which the Adviser acts as investment adviser owned
1,578,083 shares in the aggregate, or 5.63%, of the outstanding shares of
Scudder California Tax Free Fund. The Adviser may be deemed to be the beneficial
owner of such shares but disclaims any beneficial ownership in such shares.
To the best of the Funds' knowledge, as of June 30, 1996, no person
owned beneficially more than 5% of each Fund's outstanding shares except as
stated above.
The Trustees and officers of the Trust also serve in similar capacities
with other Scudder Funds.
REMUNERATION
Several of the officers and Trustees of the Trust may be officers of
the Adviser, or of the Distributor, the Transfer Agent, Scudder Trust Company or
Scudder Fund Accounting Corporation from whom they receive compensation, as a
result of which they may be deemed to participate in fees paid by the Trust. The
Trust pays no direct remuneration to any officer of the Trust. However, each of
the Trustees who is not affiliated with the Adviser will be compensated for all
expenses relating to Trust business (specifically including travel expenses
relating to Trust business). Each of these unaffiliated Trustees receives an
annual Trustee's fee of $4,000 from the Trust plus $300 for attending each
Trustees' meeting, audit committee meeting or meeting held for the purpose of
considering arrangements between the Trust on behalf of a Fund and the Adviser
or any affiliates. Each unaffiliated Trustee also receives $100 per committee
meeting, other than those set forth above, attended. For the fiscal year ended
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<PAGE>
March 31, 1996, such fees totaled $13,032 for Scudder California Tax Free Fund
and $13,032 for Scudder California Tax Free Money Fund.
The following Compensation Table provides, in tabular form, the following data:
Column (1): All Trustees who receive compensation from the Trust.
Column (2): Aggregate compensation received by a Trustee from all the series of
the Trust, Scudder California Tax Free Trust which is comprised of Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund. Columns (3)
and (4): Pension or retirement benefits accrued or proposed be paid by the Fund
Complex. Scudder California Tax Free Trust does not pay its Trustees such
benefits. Column (5): Total compensation received by a Trustee from Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund, plus
compensation received from all funds managed by Scudder for which a Trustee
serves. The total number of funds from which a Trustee receives such
compensation is also provided in column (5). Generally, compensation received by
a Trustee for serving on the board of a closed-end fund is greater than the
compensation received by a Trustee for serving on the board of an open-end fund.
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1995
<S> <C> <C> <C> <C>
===================== ============================== ==================== ===================== =========================
(1) (2) (3) (4) (5)
Aggregate Compensation
from Scudder California
Tax Free Trust (consisting
of two Funds: Scudder Pension or Total Compensation From
California Tax Free Money Retirement Estimated Annual Scudder California Tax
Name of Person, Fund and Scudder California Benefits Accrued Benefits Upon Free Trust and Fund
Position Tax Free As Part of Fund Retirement Complex Paid to Trustee
Fund.) Expenses
===================== ============================== ==================== ===================== =========================
Henry P. Becton, Jr., $8,600 N/A N/A $82,800
Trustee (15 funds)
Dawn-Marie Driscoll, $8,900 N/A N/A $92,800
Trustee (16 funds)
Peter B. Freeman, $8,600 N/A N/A $126,750
Trustee (31 funds)
</TABLE>
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor") a Massachusetts corporation, which is a subsidiary of
the Adviser, a Delaware corporation. The Trust's underwriting agreement dated
June 1, 1987, will remain in effect until September 30, 1996, and from year to
year thereafter only if its continuance is approved annually by a majority of
the members of the Board of Trustees who are not parties to such agreement or
interested persons of any such party and either by vote of a majority of the
Board of Trustees or a majority of the outstanding voting securities of the
Trust. The underwriting agreement was last approved by the Trustees on August 8,
1995.
Under the principal underwriting agreement, the Trust is responsible
for: the payment of all fees and expenses in connection with the preparation and
filing with the SEC of its registration statement and prospectus and any
amendments and supplements thereto; the registration and qualification of shares
for sale in the various states, including registering the Trust as a
broker/dealer in various states as required; the fees and expenses of preparing,
printing and mailing prospectuses annually to existing shareholders (see below
for expenses relating to prospectuses paid by the Distributor), notices, proxy
statements, reports or other communications to shareholders of a Fund; the cost
of printing and mailing confirmations of purchases of shares and the
prospectuses accompanying such confirmations; any issuance taxes and/or any
initial transfer taxes; a portion of shareholder toll-free telephone charges and
expenses of shareholder service representatives; the cost of wiring funds for
share purchases and redemptions (unless paid by the shareholder who initiates
50
<PAGE>
the transaction); the cost of printing and postage of business reply envelopes;
and a portion of the cost of computer terminals used by both the Trust and the
Distributor.
The Distributor pays for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of a Fund to the public.
The Distributor pays all fees and expenses in connection with its qualification
and registration as a broker/dealer under federal and state laws, a portion of
the cost of toll-free telephone service and expenses of shareholder service
representatives, a portion of the cost of computer terminals, and expenses of
any activity which is primarily intended to result in the sale of shares issued
by each Fund, unless a Rule 12b-1 plan is in effect which provides that each
Fund shall bear some or all of such expenses.
Note: Although the Trust does not currently have a 12b-1 Plan and the
Trustees have no current intention of adopting one, the Trust will also
pay those fees and expenses permitted to be paid or assumed by the
Trust pursuant to a 12b-1 Plan, if any, were adopted by the Trust,
notwithstanding any other provision to the contrary in the underwriting
agreement.
As agent the Distributor currently offers shares of each Fund on a
continuous basis to investors in all states in which shares of each Fund may
from time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of either Fund.
TAXES
(See "Transaction information--Tax information, tax
identification number" and "Distribution and performance
information -- Dividends and capital gains
distributions" in the Funds' prospectus.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situation.
Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in the Funds.
Federal Taxation
Each Fund within the Trust is separate for investment and accounting
purposes, and is treated as a separate taxable entity for federal income tax
purposes. Each Fund therefore has qualified and elected to be treated as a
separate regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code") and intends to continue to so qualify.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90% of
its taxable net investment income (including net short-term capital gain in
excess of net long-term capital loss) and at least 90% of its tax-exempt net
investment income and is not subject to federal income tax to the extent that it
distributes annually all of its taxable net investment income and net realized
capital gains in accordance with the timing requirements of the Code. Each Fund
intends to distribute at least annually substantially all, and in no event less
than 90% of its taxable and tax-exempt net investment income and net realized
capital gains.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by a Fund, the Fund will elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a share of federal income taxes paid by a Fund on such gains as a
credit against any personal federal income tax liability, and will be entitled
to increase the adjusted tax basis of Fund shares owned by the difference
between the pro rata share of such gains and any tax credit.
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Each Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of a Fund's taxable ordinary income for the calendar
year and at least 98% of the excess of its capital gains over capital losses
realized during the one-year period ending October 31 during such year, together
with any undistributed, untaxed amounts of ordinary income and capital gains
from the previous calendar year. Each Fund has adjusted its distribution
policies to minimize any adverse impact from this tax or eliminate its
application.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward or post-October loss of a Fund. Each
Fund intends to offset realized capital gains by using their capital loss
carryforwards before distributing any capital gains. In addition, each Fund
intends to offset realized capital gains by using its post-October losses before
distributing any capital gains. As of March 31, 1996 Scudder California Tax Free
Money Fund had a net tax basis capital loss carryforward of approximately
$94,000, which may be applied against any realized net taxable capital gains of
each succeeding year until fully utilized or until March 31, 2000 ($14,000),
March 31, 2002 ($7,000), March 31, 2003 ($55,000) and March 31, 2004 ($18,000),
the respective expiration dates, whichever occurs first. As of March 31, 1996,
Scudder California Tax Free Fund had a net tax basis capital loss carryforward
of approximately $9,355,000, which may be applied against any realized net
taxable capital gains of each succeeding year until fully utilized or until
March 31, 2003 ($8,963,000) and March 31, 2004 ($392,000), the respective
expiration dates, whichever occurs first.
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations the interest on which is excluded from gross
income under Section 103(a) of the Code. Each Fund intends to satisfy this 50%
requirement in order to permit its distributions of tax-exempt interest to be
treated as such for federal income tax purposes in the hands of its
shareholders. Distributions to shareholders of tax-exempt interest earned by the
Fund for the taxable year are therefore not subject to federal income tax,
although they may be subject to the individual and corporate alternative minimum
taxes described below. A portion of discount from certain stripped tax-exempt
obligations or their coupons, however, may be taxable.
The Revenue Reconciliation Act of 1993 requires that market discount
recognized on a tax-exempt bond is taxable as ordinary income. This rule applies
only for disposals of bonds purchased after April 30, 1993. A market discount
bond is a bond acquired in the secondary market at a price below its redemption
value. Under prior law, the treatment of market discount as ordinary income did
not apply to tax-exempt obligations. Instead, realized market discount on
tax-exempt obligations was treated as capital gain. Under the new law, gain on
the disposition of a tax-exempt obligation or any other market discount bond
that is acquired for a price less than its principal amount will be treated as
ordinary income (instead of capital gain) to the extent of accrued market
discount. This rule is effective only for bonds purchased after April 30, 1993.
Since no portion of either Fund's income is comprised of dividends from
domestic corporations, none of the income distributions of a Fund are eligible
for the dividends-received deduction available for certain taxable dividends
received by corporations.
Distributions of the excess of net long-term capital gains over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of a Fund have been held by such
shareholders. Such distributions to corporate shareholders of a Fund are not
eligible for the dividends-received deduction. Any loss realized upon the
redemption of shares within six months from the date of their purchase are
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gains with respect to such shares.
Any loss realized upon the redemption of shares within six months from
the date of their purchase are disallowed to the extent of any tax-exempt
dividends received with respect to such shares, although the period may be
reduced under Treasury regulations to be prescribed. Any loss realized on the
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redemption of shares of Scudder California Tax Free Fund may be disallowed if
shares of such Fund are purchased within 30 days before or after such
redemption.
Distributions derived from interest exempt from regular federal income
tax may subject corporate shareholders to, or increase their liability under,
the 20% corporate alternative minimum tax. A portion of such distributions may
constitute a tax preference item for shareholders and may subject them to, or
increase their liability under, the two-tiered 26%/28% individual alternative
minimum tax, but normally no more than 20% of a Fund's net assets are invested
in securities the interest on which is such a tax preference item for
individuals.
Distributions of taxable net investment income and net realized capital
gains are taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of taxable net investment income and net realized
capital gains, whether received in shares or in cash, must be reported by each
shareholder on a federal income tax return. Dividends and capital gains
distributions declared and payable to shareholders of record as of a specified
date in October, November or December are deemed to have been received by
shareholders in December if paid during January of the following year.
Shareholders are also required to report tax-exempt interest. Redemptions of
shares of Scudder California Tax Free Fund, including exchanges for shares of
another Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
Interest which is tax-exempt for federal income tax purposes is
included as income for purposes of determining the amount of social security or
railroad retirement benefits subject to tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Fund is not deductible for federal income tax purposes. Under rules
used by the IRS to determine when borrowed funds are used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain Governmental obligations to persons who are "substantial
users" (or persons related thereto) of facilities financed by such obligations.
The Trust has not undertaken any investigation as to the users of the facilities
financed by bonds in a Fund's portfolio.
Distributions by Scudder California Tax Free Fund result in a reduction
in the net asset value of the Fund's shares. Should a distribution reduce the
net asset value below a shareholder's cost basis, such distribution would
nevertheless be taxable to the shareholder, to the extent it is derived from
other than tax-exempt interest, as ordinary income or capital gains as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution receive a partial return of capital upon the
distribution, which, to the extent it is derived from other than tax-exempt
interest, is nevertheless taxable to them.
All futures contracts entered into by Scudder California Tax Free Fund
and all listed nonequity options written or purchased by that Fund (including
options on futures contracts and options on securities indices) are governed by
Section 1256 of the Code. Absent a tax election to the contrary, gain or loss
attributable to the lapse, exercise or closing out of any such position are
treated as 60% long-term and 40% short-term capital gain or loss, and on the
last trading day of the Fund's fiscal year, all outstanding Section 1256
positions are marked to market (i.e. treated as if such positions were closed
out at their closing price on such day), with any resulting gain or loss
recognized as 60% long-term and 40% short-term capital gain or loss. Under
certain circumstances, entry into a futures contract to sell a security may
constitute a short sale for federal income tax purposes, causing an adjustment
in the holding period of the underlying security or a substantially identical
security in the Fund's portfolio.
Positions of Scudder California Tax Free Fund which consist of at least
one debt security not governed by Section 1256 and at least one futures contract
or nonequity option governed by Section 1256 which substantially diminishes the
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Fund's risk of loss with respect to such debt security will be treated as a
"mixed straddle." Mixed straddles are subject to the straddle rules of Section
1092 of the Code, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses. Certain tax elections, however,
exist for them which reduce or eliminate the operation of these rules. The Trust
monitors the Fund's transactions in options and futures and may make certain tax
elections in order to mitigate the operation of these rules and prevent
disqualification of the Fund as a regulated investment company for federal
income tax purposes.
Under the federal income tax law, each Fund is required to report to
the IRS all distributions of taxable income and capital gains as well, as in the
case of Scudder California Tax Free Fund, gross proceeds from the redemption or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code,
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company are
generally subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt shareholders who fail to furnish the investment company with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. Under a special exception,
distributions of taxable income and capital gains of a Fund are not subject to
backup withholding if the Fund reasonably estimates that at least 95% of all of
its distributions consist of tax-exempt interest. However, in this case, the
proceeds from the redemption or exchange of shares may be subject to backup
withholding. Under another special exception, proceeds from the redemption or
exchange of Fund shares are exempt from withholding if the Fund maintains a
constant net asset value per share. Withholding may also be required if a Fund
is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, are reduced by the amounts required to be
withheld.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of a Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her.
State Taxation
The Trust is organized as a Massachusetts business trust, and neither
the Trust nor the Funds are liable for any income or franchise tax in the
Commonwealth of Massachusetts provided that each Fund qualifies as a regulated
investment company.
In any year in which the Funds qualify as regulated investment
companies under Subchapter M of the Code and are exempt from federal income tax,
the Funds will also be relieved of liability for California state franchise and
corporate income tax to the extent their earnings are distributed to their
shareholders. Each Fund may be taxed on its undistributed taxable income. If for
any year either of the Funds does not qualify for the special tax treatment
afforded regulated investment companies, then all of such Fund's taxable income
(including interest income on California municipal securities for franchise tax
purposes only) may be subject to California state franchise or income tax at
regular corporate rates.
If at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company (or series
thereof) consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California, then the regulated investment
company (or series thereof) will be qualified to pay dividends exempt from
California personal income tax (hereinafter referred to as "California
exempt-interest dividends"). Each of the Funds intends to qualify under the
above requirements so it can pay California exempt-interest dividends. However,
if a Fund fails to so qualify, then no part of its dividends to shareholders
will be exempt from California personal income tax.
Within 60 days after the close of its taxable year, each Fund will
notify each shareholder of the portion of the dividends paid by the Fund with
respect to such taxable year which is exempt from California state personal
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income tax. Interest on obligations of Puerto Rico and other U.S. Possessions,
as well as interest on obligations of the State of California or its political
subdivisions, may be distributed as California tax-exempt interest dividends.
Distributions from the Funds which are attributable to sources other than those
described in the preceding sentence generally are taxable to such shareholders
as ordinary income. However, distributions derived from interest on U.S.
Government obligations, if any, may also be designated by a Fund and treated by
shareholders as exempt under the California personal income tax provided the 50%
requirement of the preceding paragraph is satisfied.
In cases where shareholders of a Fund are "substantial users" or
"related persons" with respect to California municipal securities held by the
Fund, such shareholders should consult their own tax advisers to determine
whether California exempt-interest dividends paid by the Fund with respect to
such securities retain California state personal income tax exclusion for such
shareholders. In this connection, rules similar to those regarding the possible
unavailability of exempt interest treatment of Fund dividends to "substantial
users" (or persons related thereto) for federal income tax purposes are
applicable for California state tax purposes. See "Federal Taxation" above.
To the extent, if any, dividends paid to shareholders of a Fund are
derived from the excess of net long-term capital gains over net short-term
capital losses, such dividends will not constitute California exempt-interest
dividends. Such dividends will generally be taxed as long-term capital gains
under rules similar to those regarding the treatment of capital gain dividends
for federal income tax purposes; provided that California has not adopted the
federal rule that allows a regulated investment company to elect to treat such
capital gains as having been distributed even though no capital gain dividend
has actually been paid. See "Federal Taxation" above. In the case where the
Funds make this election for federal income tax purposes, any such capital gains
may be subject to tax at the Fund level for California franchise or corporate
income tax purposes.
Shares of the Funds are not subject to the California property tax.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of a Fund are not deductible for California personal
income tax purposes. In addition, any loss realized by a shareholder of a Fund
upon the sale of shares held for six months or less may be disallowed to the
extent of any exempt-interest dividends received with respect to such shares.
Moreover, any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains distribution on such shares is treated as long-term capital loss to the
extent of such long-term capital gains distribution. Finally, any loss realized
upon the redemption shares within 30 days before or after the acquisition of
other shares of the same Fund may be disallowed under the "wash sale" rules.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the Funds and their
shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the Funds or their
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of any Fund dividends
constituting California exempt-interest dividends is excludable for California
state personal income tax only. Any dividends paid to shareholders subject to
California state franchise or California state corporate income tax may
therefore be taxed as ordinary dividends to such shareholders notwithstanding
that all or a portion of dividends is exempt from California state personal
income tax. Accordingly, potential investors in a Fund, excluding, in
particular, corporate investors which may be subject to either California
franchise tax or California corporate income tax, should consult their tax
advisers with respect to the application of such taxes to the receipt of Fund
dividends and as to their own California state tax situation, in general.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
To the maximum extent feasible, the Adviser places orders for portfolio
transactions for each Fund through the Distributor which in turn places orders
on behalf of a Fund with issuers, underwriters or other broker/dealers. The
Distributor receives no commissions, fees or other remuneration from the Funds
for this service. Allocation of brokerage is supervised by the Adviser.
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Each Fund's purchases and sales of portfolio securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made which will involve an underwriting fee paid to
the underwriter.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund's portfolio is to obtain the most favorable
net results taking into account such factors as price, commission, where
applicable (negotiable in the case of U.S. national securities exchange
transactions), size of order, difficulty of execution and skill required of the
executing broker/dealer. The Adviser seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of the Distributor with commissions charged on comparable
transactions, as well as by comparing commissions paid by a Fund to reported
commissions paid by others. The Adviser reviews on a routine basis commission
rates, execution and settlement services performed, making internal and external
comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes or who supply research, market and
statistical information to the Trust or the Adviser. The term "research, market
and statistical information" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the availability
of securities or purchasers or sellers of securities; and analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. The Adviser is not
authorized, when placing portfolio transactions for a Fund, to pay a brokerage
commission (to the extent applicable) in excess of that which another broker
might charge for executing the same transaction, solely on account of the
receipt of research, market or statistical information. The Adviser does not
place orders with broker/dealers on the basis that a broker/dealer has or has
not sold shares of a Fund. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
Although certain research, market and statistical information from
broker/dealers may be useful to the Trust and to the Adviser, it is the opinion
of the Adviser that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Trust and not all such information is used by
the Adviser in connection with the Funds. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Trust.
The Trustees review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
Portfolio Turnover
Each Fund's portfolio experiences turnover. The portfolio turnover
rates of Scudder California Tax Free Fund (defined by the SEC as the ratio of
the lesser of sales or purchases of securities to the monthly average value of
the portfolio, excluding all securities with remaining maturities at the time of
acquisition of one year or less) for the fiscal years ended March 31, 1996 and
1995, were 49.2% and 87.3%, respectively.
NET ASSET VALUE
Scudder California Tax Free Fund. The net asset value of shares of the Fund is
computed as of the close of regular trading on the Exchange on each day the
Exchange is open for trading (the "Value Time"). The Exchange is scheduled to be
closed on the following holidays: New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset
value per share is determined by dividing the value of the total assets of a
Fund, less all liabilities, by the total number of shares outstanding.
An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
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quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
Scudder California Tax Free Money Fund. The net asset value per share of Scudder
California Tax Free Money Fund is determined (twice daily as of twelve o'clock
noon and the close of trading on the Exchange) on each day when the Exchange is
open for trading (as noted above). Net asset value per share is determined by
dividing the total assets of the Fund, less all of its liabilities, by the total
number of shares of the Fund outstanding. The valuation of the Fund's portfolio
securities is based upon their amortized cost which does not take into account
unrealized securities gains or losses. This method involves initially valuing an
instrument at its cost and thereafter amortizing to maturity any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
During periods of declining interest rates, the quoted yield on shares of the
Fund may tend to be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio instruments. Thus, if the
use of amortized cost by the Fund resulted in a lower aggregate portfolio value
on a particular day, a prospective investor in the Fund would be able to obtain
a somewhat higher yield if he purchased shares of the Fund on that day, than
would result from investment in a fund utilizing solely market values, and
existing investors in the Fund would receive less investment income. The
converse would apply in a period of rising interest rates. Other assets for
which market quotations are not readily available are valued in good faith at
fair value using methods determined by the Trustees and applied on a consistent
basis. For example, securities with remaining maturities of more than 60 days
for which market quotations are not readily available are valued on the basis of
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market quotations for securities of comparable maturity, quality and type. The
Trustees review the valuation of the Fund's securities through receipt of
regular reports from the Adviser at each regular Trustees' meeting.
Determinations of net asset value made other than as of the close of the
Exchange may employ adjustments for changes in interest rates and other market
factors.
ADDITIONAL INFORMATION
Experts
The Financial highlights of each Fund included in the prospectus and
the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of Coopers & Lybrand L.L.P. , One Post Office Square,
Boston, MA 02109, independent accountants, and given on the authority of that
firm as experts in accounting and auditing.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with each Fund's property or
the acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the respective Fund's property of any
shareholder held personally liable for the claims and liabilities to which a
shareholder may become subject by reason of being or having been a shareholder.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself would
be unable to meet its obligations.
Ratings of Municipal Obligations
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A,
Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be of the best quality.
Bonds rated Aa are judged to be of high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-quality bonds.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future. Securities rated
Baa are considered medium grade, with factors giving security to principal and
interest adequate at present but may be unreliable over any period of time. Such
bonds have speculative elements as well as investment-grade characteristics.
Securities rated Ba or below by Moody's are considered below investment grade,
with factors giving security to principal and interest inadequate and
potentially unreliable over any period of time. Such securities are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High-grade), A (Good-grade), BBB (Investment-grade) and BB and B (Below
investment-grade). Bonds rated AAA have the highest rating assigned by S&P to a
municipal obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions. Bonds rated BBB have an adequate capacity to pay principal
and interest. Adverse economic conditions or changing circumstances are likely
58
<PAGE>
to lead to a weakened capacity to pay interest and repay principal for bonds of
this category than for bonds of higher rated categories. Securities rated BB or
below by S&P are considered below investment grade, with factors giving security
to principal and interest inadequate and potentially unreliable over any period
of time. Such securities are commonly referred to as "junk" bonds and as such
they carry a high margin of risk.
S&P's top ratings for municipal notes issued after July 29, 1984 are
SP-1 and SP-2. The designation SP-1 indicates a very strong capacity to pay
principal and interest. A "+" is added for those issues determined to possess
overwhelming safety characteristics. An "SP-2" designation indicates a
satisfactory capacity to pay principal and interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A,
BBB, BB and B. Bonds rated AAA are considered to be investment-grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated 'AAA.'
Because bonds rated in the 'AAA' and 'AA' categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated 'f-1+.' Bonds rated A are considered to be investment grade
and of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher rates.
Bonds rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with greater ratings. Securities
rated BB or below by Fitch are considered below investment grade, with factors
giving security to principal and interest inadequate and potentially unreliable
over any period of time. Such securities are commonly referred to as "junk"
bonds and as such they carry a high margin of risk.
Commercial Paper Ratings
Commercial paper rated A-1 or better by S&P has the following
characteristics: liquidity ratios are adequate to meet cash requirements;
long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed; the issuer has access to at least two additional
channels of borrowing; and basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances. Typically, the issuer's industry
is well established and the issuer has a strong position within the industry.
The reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationship which exists with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
The rating F-1+ is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1+.
Relative strength or weakness of the above factors determine how the
issuer's commercial paper is rated within the above categories.
59
<PAGE>
Glossary
1. Bond
A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity
date) and to pay a stated rate of interest until maturity. Interest is
generally paid semi-annually in amounts equal to one half the annual
interest rate.
2. Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.
3. Discount and Premium
A discount (premium) bond is a bond selling in the market at a price
lower (higher) than its face value. The amount of the market discount
(premium) is the difference between market price and face value.
4. Maturity
The date on which the principal amount of a debt obligation comes due
by the terms of the instrument.
5. Municipal Obligation
Obligations issued by or on behalf of states, territories and
possessions of the U.S., their political subdivisions, agencies and
instrumentalities, the District of Columbia and other issuers, the
interest from which is, at the time of issuance in the opinion of bond
counsel for the issuers, exempt from regular federal income tax.
6. Net Asset Value Per Share
The value of each share of a Fund for purposes of sales and
redemptions.
7. Net Investment Income
The net investment income of each Fund is comprised of its interest
income, including amortizations of original issue discounts, less
amortizations of premiums and expenses paid or accrued.
8. Unit Investment Trust
An investment company organized under a trust or similar agreement
which does not have a board of trustees and which issues only
redeemable securities each of which represents an undivided interest in
a portfolio of specified securities.
Other Information
The CUSIP number of Scudder California Tax Free Money Fund is
811115-20-3. The CUSIP number of Scudder California Tax Free Fund is
811115-10-4.
Each Fund has a fiscal year ending on March 31.
Portfolio securities of each Fund are held separately, pursuant to a
custodian agreement, by the Funds' custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02101.
The law firm of Willkie Farr & Gallagher is counsel for the Trust.
60
<PAGE>
The name "Scudder California Tax Free Trust" is the designation of the
Trustees for the time being under an Amended and Restated Declaration of Trust
dated December 8, 1987, as amended from time to time, and all persons dealing
with a Fund must look solely to the property of that Fund for the enforcement of
any claims against a Fund as neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of a Fund. No series of the Trust is liable for the obligations of any
other series of the Trust. Upon the initial purchase of shares, the shareholder
agrees to be bound by the Fund's Declaration of Trust, as amended from time to
time. The Declaration of Trust of the Trust is on file at the Massachusetts
Secretary of State's Office in Boston, Massachusetts. All persons dealing with a
Fund must look only to the assets of that Fund for the enforcement of any claims
against such Fund as no other series of the Trust assumes any liabilities for
obligations entered into on behalf of a Fund.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts 02110-4103, a subsidiary of the Adviser, computes net asset value
for the Funds. Scudder California Tax Free Money Fund pays Scudder Fund
Accounting Corporation an annual fee equal to 0.0200% of the first $150 million
of the average daily net assets, 0.0060% of such assets in excess of $150
million and 0.0035% of such assets in excess of $1 billion, plus holding and
transaction charges. Scudder California Tax Free Fund pays Scudder Fund
Accounting Corporation an annual fee equal to 0.024% of the first $150 million
of the average daily net assets, 0.007% of such assets in excess of $150 million
and 0.004% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. For the fiscal year ended March 31, 1996, Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund incurred
fees to Scudder Fund Accounting Corporation amounting to $30,000 and $66,107,
respectively.
Scudder Service Corporation (the "Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
shareholder service and dividend-paying agent for the Funds and provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Scudder California Tax Free Fund pays
Service Corporation an annual fee of $25.00 for each account maintained for a
shareholder. Of this total, $13.25 is for its services as transfer and
dividend-paying agent and $11.75 is for its services as shareholder service
agent. Scudder California Tax Free Money Fund pays Service Corporation an annual
fee of $28.90. The Service Corporation fees incurred by Scudder California Tax
Free Fund and Scudder California Tax Free Money Fund for the years ended March
31, 1996 and 1995, amounted to $164,689 and $188,774 and $71,043 and $84,167,
respectively.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Trust has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement for further information with respect to the Funds
and the securities offered hereby. This Registration Statement is available for
inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder California Tax Free Money Fund
The financial statements, including the investment portfolio, of
Scudder California Tax Free Money Fund, together with the Report of Independent
Accountants, Financial Highlights and the Notes to Financial Statements, are
incorporated by reference and attached hereto in the Annual Report to the
Shareholders of the Fund dated March 31, 1996, and are hereby deemed to be a
part of this Statement of Additional Information.
Scudder California Tax Free Fund
The financial statements, including the investment portfolio, of
Scudder California Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and the Notes to Financial Statements, are
incorporated by reference and attached hereto in the Annual Report to the
Shareholders of the Fund dated March 31, 1996, and are hereby deemed to be a
part of this Statement of Additional Information.
61
<PAGE>
Shares of Scudder California Tax Free Money Fund are not insured or guaranteed
by the U.S. government. Scudder California Tax Free Money Fund seeks to maintain
a constant net asset value of $1.00 per share, but there can be no assurance
that the stable net asset value will be maintained.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
Scudder California
Tax Free Money Fund
- -------------------------
Scudder California
Tax Free Fund
Annual Report
March 31, 1996
o For investors seeking double-tax-free income exempt from both California
and regular federal income taxes.
o Pure no-load(TM) funds with no commissions to buy, sell, or exchange
shares.
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
SCUDDER CALIFORNIA TAX FREE FUND
CONTENTS
2 In Brief
3 Letter from the Funds' President
4 Scudder California Tax Free Fund Performance Update
5 Scudder California Tax Free Fund Portfolio Summary
6 Scudder California Tax Free Money Fund Portfolio Management Discussion
7 Scudder California Tax Free Fund Portfolio Management Discussion
12 Scudder California Tax Free Money Fund Investment Portfolio
16 Scudder California Tax Free Money Fund Financial Statements
19 Scudder California Tax Free Money Fund Financial Highlights
20 Scudder California Tax Free Fund Investment Portfolio
27 Scudder California Tax Free Fund Financial Statements
30 Scudder California Tax Free Fund Financial Highlights
31 Notes to Financial Statements
36 Report of Independent Accountants
37 Tax Information
37 Officers and Trustees
38 Investment Products and Services
39 How to Contact Scudder
IN BRIEF
Scudder California Tax Free Money Fund
* Scudder California Tax Free Money Fund offered a 7-day yield of 2.78% on
March 31, 1996, equivalent to a 5.17% taxable yield for investors in the
top federal and state income tax brackets.
(bar chart title)
7-Day Effective Yields on March 31, 1996
(bar chart data)
Scudder
California Tax Taxable
Free Money Fund Equivalent Yield
--------------- ----------------
2.78% 5.17%
Scudder California Tax Free Fund
* Scudder California Tax Free Fund provided a 4.88% 30-day net annualized SEC
yield on March 31, 1996.
* For shareholders subject to the 46.24% maximum combined federal and state
income tax rate, the Fund's yield was equal to a taxable yield of 9.08%.
(bar chart title)
30-Day Yield on March 31, 1996
(bar chart data)
Scudder
California Tax Taxable
Free Fund Equivalent Yield
-------------- ----------------
4.88% 9.08%
* Scudder California Tax Free Fund has exceeded the average performance of
California tax-exempt funds over one-, two-, three-, four-, five-, and
10-year periods, according to Lipper.
2
<PAGE>
LETTER FROM THE FUNDS' PRESIDENT
Dear Shareholders,
Widespread declines in U.S. interest rates helped create generally
hospitable conditions for bonds during the past 12 months. Scudder California
Tax Free Fund wrapped up the fiscal year ended March 31, 1996, with a total
return of 8.01%, reflecting appreciation in the Fund's share price and an
attractive stream of double-tax-free income to investors. From a competitive
standpoint, these results were especially rewarding, as the Fund outpaced the
average performance of similar California tax-free funds over all time periods
tracked by Lipper Analytical Services, Inc. For money fund investors in the
highest state and federal tax brackets, Scudder California Tax Free Money Fund
posted a 5.17% tax equivalent yield as of the close of the period.
As bond markets regained strength during 1995, taxable bonds led the pack,
while tax-free municipal bonds recovered at a more leisurely pace. By fall,
municipal bonds had become attractively valued versus Treasuries, which helped
renew investor interest and resulted in outperformance over taxable bonds.
Recent indicators raised concerns that the economy may be stronger than
originally believed, which unsettled investors. Still, ample evidence of slower
economic growth and the absence of mounting inflationary pressures suggest that
the economic expansion is indeed winding down. This latter scenario would be
beneficial to bonds. Given the current economic uncertainties, the Fund's
challenge is to stand ready to participate in potential price rallies but also
provide a measure of price stability should the market weaken.
In closing, we wish to take this opportunity to announce that a new member
joins the Scudder Family of Funds as of May 8 -- Scudder Emerging Markets Growth
Fund. The new Fund focuses on stocks of developing nations around the globe. For
more information about Scudder Emerging Markets Growth Fund and other Scudder
products and services, please see page 38. For questions about Scudder
California Tax Free Money Fund or Scudder California Tax Free Fund, please call
a Scudder Investor Relations representative at 1-800-225-2470.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder California Tax Free Fund
Scudder California Tax Free Money Fund
3
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
PERFORMANCE UPDATE as of March 31, 1996
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER CALIFORNIA TAX FREE FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,801 8.01% 8.01%
5 Year $14,890 48.90% 8.29%
10 Year $21,240 112.40% 7.82%
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,838 8.38% 8.38%
5 Year $14,745 47.45% 8.07%
10 Year $21,713 117.13% 8.05%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED MARCH 31
Scudder California Tax Free Fund
Year Amount
- ----------------------
'86 $10,000
'87 $11,211
'88 $11,020
'89 $12,100
'90 $13,143
'91 $14,264
'92 $15,795
'93 $18,185
'94 $18,420
'95 $19,664
'96 $21,240
Lehman Brothers Municipal Bond Index
Year Amount
- ----------------------
'86 $10,000
'87 $11,097
'88 $11,376
'89 $12,196
'90 $13,482
'91 $14,726
'92 $16,197
'93 $18,225
'94 $18,648
'95 $20,034
'96 $21,713
The unmanaged Lehman Brothers Municipal Bond Index is a market value-
weighted measure of municipal bonds issued across the United States.
Index issues have a credit rating of at least Baa and a maturity
of at least two years. Index returns assume reinvestment of dividends
and, unlike Fund returns, do not reflect any fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
YEARLY PERIODS ENDED MARCH 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
--------------------------------------------------------------------------------
NET ASSET VALUE... $11.18 $ 9.99 $10.26 $10.29 $10.41 $10.60 $11.05 $10.02 $10.07 $10.36
INCOME DIVIDENDS.. $ .71 $ .69 $ .68 $ .65 $ .63 $ .61 $ .59 $ .53 $ .51 $ .51
CAPITAL GAINS
DISTRIBUTIONS..... $ .30 $ .26 $ -- $ .19 $ .09 $ .28 $ .49 $ .68 $ .09 $ --
FUND TOTAL
RETURN (%)........ 12.11 -1.70 9.80 8.62 8.53 10.74 15.13 1.30 6.75 8.01
INDEX TOTAL
RETURN (%)........ 10.97 2.52 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
4
<PAGE>
PORTFOLIO SUMMARY as of March 31, 1996
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Lease Rentals 29%
Hospital/Health 19%
Housing Finance
Authority 16% We continue to emphasize
Sales & Special Tax 11% careful overall credit
Water/Sewer Revenue 8% selection and portfolio
Electric Utility Revenue 5% diversification.
Toll Revenue 4%
School District/Lease 4%
Pollution Control 2%
Miscellaneous Municipal 2%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 52% We increased somewhat
AA 2% the percentage of BBB and
A 29% non-rated bonds in the
BBB 14% Fund's portfolio to
Not Rated 3% enhance yield while
---- maintaining our
100% higher-quality orientation.
====
Weighted average quality: AA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
EFFECTIVE MATURITY
- --------------------------------------------------------------------------
Less than 1 year 8% Bonds with effective
1 - 5 years 9% maturities from five to 20
5 - 10 years 25% years represented 61% of
10 - 20 years 36% the Fund's portfolio as of
Greater than 20 years 22% the close of its fiscal year,
---- compared with 48% a year
100% earlier.
====
Weighted average effective maturity: 13 years
- -----------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 20.
5
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
During the course of Scudder California Tax Free Money Fund's
most recent fiscal year, short-term interest rates generally declined. As fears
of renewed inflation diminished, the Fed lowered interest rates in July and
December of 1995, and most recently in January of 1996. These rate decreases
fueled a strong recovery in the bond markets. Since then, intermediate- and
long-term rates have risen on news of stronger-than-expected economic growth.
Short-term interest rates held firm, however, as sellers of long-term issues
seeking a temporary haven created strong demand for money market securities. For
California investors, the combination of low supply and high demand, along with
the pending maturity of $4 billion of California Revenue Anticipation Warrants
in April resulted in lower short-term rates than in comparable national issues.
In addition, with the revitalization of California's economy and a final
resolution to the Orange County crisis, many investors have been willing to pay
a premium for California short-term tax-free securities.
In this environment, our strategy has been to seek a
relatively high yield by maintaining an average maturity slightly longer than
Scudder California Tax Free Money Fund's peers. As of March 31, 1996, the Fund's
average maturity stood at 54 days, compared with 39 days on March 31, 1995. The
Fund's 7-day yield as of March 31, 1996, was 2.78%. For investors in the highest
combined state and federal income tax bracket, the Fund's yield equaled a 5.17%
taxable yield, higher than the 4.76% average for taxable money funds, according
to IBC/Donoghue, Inc., an independent firm that tracks money fund performance.
The Fund provided a total return of 3.28% for the 12 months ended March 31,
1996, assuming reinvestment of all income distributions, which totaled $0.032
during the period.
If you have any questions about the Fund or your investments,
please call a Scudder Investor Relations representative at 1-800-225-2470. Page
39 provides more information on how to contact Scudder. Thank you for choosing
Scudder California Tax Free Money Fund to help meet your investment needs.
Sincerely,
Your Portfolio Management Team
/s/Rebecca Wilson /s/K. Sue Cote
Rebecca Wilson K. Sue Cote
Scudder California Tax Free Money Fund:
A Team Approach to Investing
Rebecca L. Wilson is Lead Portfolio Manager for California Tax
Free Money Fund and contributes 10 years of experience in municipal investing
and research. Rebecca assumed responsibility for the Fund in 1987 after joining
Scudder in 1986. K. Sue Cote, Portfolio Manager, joined the Fund's team in 1987
and has spent 12 years working with short-term fixed-income investments.
6
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Through the ups and downs of the past year, Scudder California Tax Free
Fund performed well and continued to provide a high double-tax-free yield. On
March 31, 1996, the Fund's 30-day net annualized SEC yield was 4.88%--equivalent
to a taxable yield of 9.08% for shareholders subject to the 39.6% maximum
federal income tax rate and the 11% maximum California state income tax rate.
With such a yield, the Fund has a clear advantage over yields provided by
taxable investments of comparable credit quality. During the 12-month period
ended March 31, 1996, the Fund's shareholders received $0.51 per share of income
exempt from both federal and California state income taxes.
Over the period, the Fund's share price increased $0.29 to $10.36 per
share. The combination of share price appreciation and interest income of $0.51
per share during the fiscal year enabled the Fund to post a positive total
return of 8.01% over the 12-month period. This return compares favorably with
the 7.27% average total return of the 94 California municipal bond funds tracked
by Lipper Analytical Services for the same period.
Scudder California Tax Free Fund also exceeded the average performance of
California tax-exempt funds over one-, two-, three-, four-, five-, and 10-year
periods. The chart below provides the Fund's specific rankings over these
periods:
Scudder California Tax Free Fund's Average Annual Return
Versus Lipper Average of All California Tax Free Funds
(returns for periods ended March 31, 1996)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Period Scudder Lipper Rank Number of
California average funds
Tax Free annual return tracked
Fund return
- --------------------------------------------------------------------------------
1 year 8.01% 7.27% 26 94
2 years 7.37 6.65 15 72
3 years 5.31 5.07 24 60
4 years 7.68 6.93 3 51
5 years 8.29 7.48 3 45
10 years 7.82 7.18 6 22
<FN>
Past performance does not guarantee future results.
</FN>
</TABLE>
7
<PAGE>
Major Market Influences
During the Fund's 1995-1996 fiscal year, credit markets in general were
choppy as a result of alternating periods of increasing and declining interest
rates. As we mentioned in our September 1995 report, April through June 1995 was
marked by steadily rising bond prices and declining yields as a relatively slow
U.S. economy created the conditions for a rally. In July the Federal Reserve
made the first of three moves to ease interest rates, but the market reacted
with a two-month downturn, temporarily losing faith that the Fed would ease
rates further.
From there, other influences spurred a sustained rally. From August through
December the Republican majority in Congress staged a series of partial
government shutdowns in their efforts to achieve a balanced budget agreement on
their terms. Many bond market participants viewed these events as indications
that significant U.S. budget deficit reduction would now be possible. Another
plus for bonds during this period was low Japanese borrowing rates--as low as
0.5%. With these rates in mind, many arbitrageurs took the opportunity to borrow
Japanese yen inexpensively and then purchase U.S. Treasury securities in heavy
volume over the five-month period, providing an additional boost for U.S. bond
prices. In the first quarter of 1996, however, bonds were once again set back as
Congressional balanced budget efforts failed and the Japanese and U.S. economies
showed some signs of heating up.
Municipals Regain Momentum
The municipal market, which typically follows the Treasury market but at a
more moderate pace, was significantly affected by Congressional discussions of
"flat tax" legislation beginning in the second quarter of 1995. The flat tax
cloud overhanging the market did not completely lift until the Presidential
primaries were underway in early 1996, when additional scrutiny from the press
and public deflated the proposal. As a result, municipal bonds underperformed
Treasuries during the first three quarters of the Fund's fiscal year, but more
than made up lost ground during the first quarter of 1996, when Treasuries and
many taxable bonds were negatively affected by stronger-than-expected economic
indicators.
8
<PAGE>
Near- and Long-Term Strategy
To take advantage of the fact that municipals were undervalued compared to
Treasuries for most of the Fund's fiscal year, we generally maintained an
average effective maturity slightly longer than the average California tax free
fund. Additionally, to maintain as high a yield as possible given the Fund's
broad diversification and conservative strategy, we increased somewhat the
number of BBB-rated and non-rated bonds in the Fund's portfolio. These bonds,
while carrying some additional credit risk, generally exhibit less price
volatility than municipal bonds rated A and above. As of March 31, the Fund's
portfolio held 17% of bonds in these two categories. (For a summary of the
Fund's quality, diversification, and maturity structure, see page 5.)
The Fund's longer-term investment strategy continues to focus on four basic
elements: (1) purchasing bonds with effective maturities of less than 20 years;
(2) purchasing noncallable bonds at yields close to those of callable bonds with
comparable maturities; (3) purchasing high-yielding callable bonds; and (4)
diversifying investments based on careful credit selection.
Bonds with effective maturities of at least five but less than 20 years
represented almost 61% of the portfolio on March 31, 1996, compared with
approximately 48% a year earlier. Bonds in this maturity range currently offer
good value and provide attractive yields with less price volatility than
longer-term bonds. These bonds are also generally less price sensitive to
changes in interest rates because of their shorter maturities.
While shorter-maturity bonds and noncallable bonds offer a relative degree
of price stability, they also typically yield less than longer-maturity,
callable debt instruments. In order to enhance the portfolio's overall yield, we
selectively purchased higher-coupon bonds that can be called by their issuer in
a relatively short time. Typically, these bonds provide yields three quarters to
one percentage point higher than bonds maturing on similar dates.
Scudder California Tax Free Fund continues to emphasize careful overall
credit selection and portfolio diversification, investing in a variety of
issues, including lease rentals, hospital/health, and housing finance authority
bonds as of March 31, 1996. The Fund's average credit quality at the close of
its fiscal year was AA.
9
<PAGE>
California On the Rebound
California's economy and finances are well on the road to complete recovery
from the recession that began almost six years ago. California has balanced its
operating budget for the past five years and in April 1996 paid off the balance
of the California Revenue Anticipation Warrants issued to fund its accumulated
deficit. In addition, the state continues to add jobs, gaining 600,000 new ones,
for example, in 1994. Despite its steady employment growth, California's economy
has been unable to keep up with the growth in its population. Thus California's
unemployment rate of 7.6%, while steadily declining during the past three years,
is still above the national average of 5.5%.
California's economy is well positioned for growth into the next century.
The state's recession was not cyclical, but was caused by declines in the
construction and aerospace industries. These declines forced the state to
re-invent itself to create new jobs -- California is now home to the majority of
the nation's "Inc. (Magazine) 500" companies, the fastest-growing small
companies in the country. Additionally, 1995 was a record year for the state's
agricultural, high-tech, and entertainment exports.
Our Near-Term Outlook
As we stated earlier, demand for municipals has improved now that the
low-rate flat tax proposal has disappeared from current political discourse. In
terms of the U.S. economy, we still believe that consumers' heavy debt loads
could hinder momentum and create a slowdown sometime later this year or early
next year, which would benefit bonds. But economic indicators are sufficiently
mixed that it is unclear to us when and to what extent this might occur.
Meanwhile, the Federal Reserve is in a neutral stance, neither easing nor
tightening credit, and inflation remains in check. Adding to the uncertainty is
the wait until Presidential and Congressional elections, which will play a
significant role in how optimistically the bond market will view the prospects
for federal budget deficit reduction. Market participants have applauded,
however, as both parties have claimed fiscal responsibility as part of their
respective political platforms.
10
<PAGE>
For these reasons we are currently maintaining a neutral average effective
maturity for the Fund, and will continue to do so until the direction of the
U.S. economy becomes clearer. In pursuit of Scudder California Tax Free Fund's
objectives, we will continue to emphasize noncallable bonds with effective
maturities between five and 20 years. We will also pay close attention to credit
quality as we position the Fund to seek high double-tax-free income and a
competitive total return.
Sincerely,
Your Portfolio Management Team
/s/Jeremy L. Ragus /s/Donald C. Carleton
Jeremy L. Ragus Donald C. Carleton
Scudder California
Tax Free Fund:
A Team Approach to Investing
Scudder California Tax Free Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Scudder California Tax Free Fund's Lead Portfolio Manager Jeremy L. Ragus
has had responsibility for the Fund's day-to-day operations since he joined
Scudder in 1990. Jeremy has 15 years of experience in municipal investing.
Donald C. Carleton, Portfolio Manager, has over 26 years of investment
management experience and has worked on the Fund since he arrived at Scudder in
1983.
11
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
INVESTMENT PORTFOLIO as of March 31, 1996
<TABLE>
<CAPTION>
Unaudited
-----------------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- ------------------------------------------------------------------------------------------------------------------------
100.0% MUNICIPAL INVESTMENTS
<S> <C> <C> <C> <C>
CALIFORNIA Anaheim, CA, Electric Revenue Tax, Commercial
Paper, 3.2%, 5/17/96 ............................... 750,000 A1+ 750,000
Anaheim, CA, Electric Utility Revenue Anticipation
Notes, Tax Exempt Commercial Paper,
3.45%, 7/15/96 ..................................... 1,000,000 A1+ 1,000,000
Anaheim, CA, Multi-Family Housing Revenue,
Harbor Cliff Project, Variable Rate Demand Note,
3%, 7/1/06* ........................................ 400,000 MIG1 400,000
California Health Facilities Finance Authority:
Catholic Healthcare West, Series C, Variable Rate
Demand Note, 3.05%, 7/1/20* (c) ................... 1,000,000 A1+ 1,000,000
Pooled Loan Program, Series 1985 B, Weekly
Demand Note, 3.1%, 10/1/10* (c) ................... 100,000 MIG1 100,000
California Pollution Control Revenue:
Minnesota Mining & Manufacturing, Weekly
Demand Bond, 3%, 11/1/96* ......................... 400,000 MIG1 400,000
Southern California Edison Co., Daily Demand Note,
Series 1986 A, 3.4%, 2/28/08* ..................... 500,000 A-1 500,000
Southern California Edison Co., Daily Demand Note,
Series 1986 B, 3.4%, 2/28/08* ..................... 100,000 A1+ 100,000
California State Revenue Anticipation Warrants,
Series C, 5.75%, 4/25/96 ........................... 3,000,000 SP-1 3,002,235
City of Industry, Los Angeles County, CA, Industrial
Development Revenue, Helene Curtis, Inc., Weekly
Demand Bond, 3.3%, 10/1/06* ....................... 1,900,000 A1+ 1,900,000
Delmar Race Track Authority, CA, Tax Exempt
Commercial Paper, 3.1%, 5/17/96 .................... 2,000,000 A1+ 2,000,000
East Bay, CA, Municipal Utility District, Tax Exempt
Commercial Paper, 3.4%, 7/15/96 .................... 500,000 A1+ 500,000
Eastern Municipal Water District, CA, Water & Sewer
Revenues Series 1993 B Weekly Demand Notes,
3%, 7/1/20* (c) .................................... 1,100,000 MIG1 1,100,000
El Cerrito, CA, Tax & Revenue Anticipation Note,
4.5%, 7/5/96 ....................................... 1,000,000 MIG1 1,001,247
Escondido, CA, Multi-Family Housing Revenue,
Series 1985 A, Morning View Terrace Project,
Variable Rate Demand Note, 3%, 2/15/07* ............ 600,000 MIG1 600,000
Fontana, CA, Unified School District, Tax and
Revenue Anticipation Note, 4.5%, 7/5/96 ............ 1,500,000 SP1+ 1,501,496
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
-----------------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Huntington Beach, CA, Multi-Family Housing
Revenue, River Meadows Apartments, Series B,
Weekly Demand Bonds, 3.675%, 10/1/05* ................ 1,500,000 SS&C 1,500,000
Irvine Ranch, CA, Series A, Variable Rate Demand
Note, 3.6%, 10/1/00* ................................. 200,000 A1+ 200,000
Kern County, CA, Certificate of Participation, Public
Facilities Project:
Series A, Variable Rate Demand Bond,
3.05%, 8/1/06* ..................................... 1,400,000 MIG1 1,400,000
Series D, Variable Rate Demand Bond,
3.05%, 8/1/06* ..................................... 1,700,000 MIG1 1,700,000
Lancaster, CA, Redevelopment Agency, Multi-Family
Housing Revenue, Westwood Park Apartments,
Variable Rate Demand Notes, 3%, 12/1/07* ............ 600,000 MIG1 600,000
Los Angeles County, CA, Tax and Revenue
Anticipation Note, 4.5%, 7/1/96 ..................... 2,000,000 MIG1 2,004,114
Los Angeles, CA, Dept. of Water & Power Electric
Plant, Commercial Paper, Tax Exempt, 3.2%, 4/8/96 ... 1,000,000 A1+ 1,000,000
Los Angeles, CA, Wastewater Revenues, Tax Exempt
Commercial Paper, Series 1991, 3.15%, 7/8/96 ........ 3,000,000 P1 3,000,000
Los Angeles, CA, Wastewater Revenues, Tax Exempt
Commercial Paper, 3.45%, 7/15/96 .................... 1,400,000 P1 1,400,000
Los Angeles, CA, Multi-Family Housing Revenue,
Series K, Variable Rate Demand Bond,
3.15%, 7/1/10* ...................................... 3,800,000 A1+ 3,800,000
Los Rios Community College District, Sacramento
County, CA, Tax & Revenue Anticipation Notes,
4.75%, 9/19/96 ...................................... 2,000,000 MIG1 2,006,550
MSR Public Power Agency, San Juan, CA, San Juan
Project Revenue, Subordinate Lien, Series B,
Weekly Demand Bonds, 3.05%, 7/1/22* ................. 1,000,000 A1+ 1,000,000
Ontario, CA, Multi-Family Residential Mortgage
Revenue, Park Centre Partners, Variable
Rate Demand Bond, 3.1%, 8/1/07* ..................... 2,000,000 MIG1 2,000,000
Ontario, CA, Redevelopment Agency, Multi-Family
Housing Revenue, Weekly Demand Bond,
3%, 4/1/98* ......................................... 1,000,000 A1+ 1,000,000
Ontario, CA, Redevelopment Agency, Multi-Family
Housing Revenue, Daisy Associates, Ltd. Project,
Variable Rate Demand Note, 3%, 11/1/04* ............. 100,000 MIG1 100,000
Orange County, CA, Local Transportation Authority,
Sales Tax Revenue, 4.6%, 2/15/97 (c) ................ 1,500,000 AAA 1,515,276
Orange County, CA, Water District Public Facilities
Corp., Commercial Paper, Tax Exempt:
3%, 8/13/96 ......................................... 1,000,000 P1 1,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
-----------------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3.15%, 5/22/96 ...................................... 1,000,000 A1+ 1,000,000
Riverside County, CA, School Financing Authority,
School Districts Financing, Revenue Anticipation
Notes, 4.75%, 7/18/96 ................................ 2,000,000 SP1+ 2,005,113
Sacramento Municipal Utility District, CA, Series I,
Tax Exempt Commercial Paper:
3.25%, 8/23/96 ....................................... 1,500,000 A1+ 1,500,000
3.1%, 8/12/96 ........................................ 1,000,000 A1+ 1,000,000
San Bernadino County, CA, Multi-Family Housing
Revenue, Variable Rate Demand Bond:
Western Properties 1, 3%, 2/1/05* ................... 900,000 MIG1 900,000
Western Properties 2, 3.15%, 5/1/05* ................ 400,000 MIG1 400,000
San Bernadino, CA, Multi-Family Housing Revenue,
Woodview Apartment Project, Variable Rate
Demand Note, 3.15%, 4/1/07* .......................... 1,100,000 MIG1 1,100,000
San Diego, CA, Multi-Family Housing Revenue, Lusk
Mira Mesa Project, Issue E, Variable Rate Demand
Bond, 3.15%, 4/1/07* ................................. 1,900,000 MIG1 1,900,000
San Jose, CA, Clean Water Financing Sewer Revenue
Bonds, Series 1995 B, Weekly Demand Note,
2.95%, 11/15/20* (c) ................................. 1,000,000 AAA 1,000,000
San Jose, CA, Multi-Family Housing Revenue,
Kimberly Woods Project, Variable Rate
Demand Bond, 3%, 11/1/08* ............................ 500,000 MIG1 500,000
San Marcos, CA, Redevelopment Agency,
Multi-Family Rental Housing Agency, Variable Rate
Demand Notes, 3.675%, 6/1/05* ........................ 2,700,000 SS&C 2,700,000
Santa Clara County, CA, Housing Authority, Fox
Chase I Project, Weekly Demand Bond,
3.25%, 11/1/08* (c) .................................. 1,000,000 MIG1 1,000,000
Santa Clara, CA, Electric Revenue, Junior Lien,
Variable Rate Demand Bond:
Series B, 3.1%, 7/1/10* ............................. 1,100,000 MIG1 1,100,000
Series C, 3.1%, 7/1/10* ............................. 1,300,000 MIG1 1,300,000
Santa Cruz, CA, Tax & Revenue Anticipation Notes,
4.5%, 7/11/96 ........................................ 1,000,000 SP1+ 1,001,172
South Coast, CA, Local Education Agencies, Pooled
Tax and Revenue Anticipation Note Program,
5%, 8/14/96 .......................................... 2,000,000 SP1+ 2,003,634
South San Francisco, CA, 1991 Water Quality Control,
Variable Rate Demand Bond, 3.4%, 7/1/12* ............. 500,000 MIG1 500,000
Southern California Public Power Authority,
Transmission Project, Series 1991, Weekly
Demand Note, 2.95%, 7/1/19* (c) ...................... 1,700,000 A1+ 1,700,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
-----------------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Southern California, Metropolitan Water District,
Commercial Paper, Tax Exempt, 3.05%, 5/17/96 ......... 1,000,000 A1+ 1,000,000
Ventura, CA, Unified School District, Tax and
Revenue Anticipation Notes, 4.75%, 7/5/96 ............ 1,500,000 SP1+ 1,502,794
----------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $66,193,631) (a) ............................... 66,193,631
==========
</TABLE>
(a) The cost for the federal income tax purposes was $66,193,631.
(b) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings
shown are assigned by either Standard & Poor's Rating Group, Moody's
Investors Service, Inc. or Fitch Investors Service, Inc. Unrated securities
(NR) and securities rated by Scudder (SS&C) have been determined to be of
comparable quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand notes
are securities whose yields are periodically reset at levels that are
generally comparable to tax-exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit from a major bank. These notes are carried,
for purposes of calculating average weighted maturity, at the longer of the
period remaining until the next rate change or to the extent of the demand
period.
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at value (identified cost $66,193,631)
(Note A) ............................................... $ 66,193,631
Cash ...................................................... 144,987
Receivables:
Interest ............................................... 754,090
Fund shares sold ....................................... 22,641
Other assets .............................................. 647
------------
Total assets ....................................... 67,115,996
LIABILITIES
Payables:
Fund shares redeemed ................................... $ 54,877
Dividends .............................................. 23,861
Accrued management fee (Note C) ........................ 22,483
Other accrued expenses (Note C) ........................ 48,727
--------
Total liabilities ................................... 149,948
Net assets, at value ...................................... $ 66,966,048
============
NET ASSETS
Net assets consist of:
Accumulated net realized loss ......................... $ (94,492)
Shares of beneficial interest ......................... 669,765
Additional paid-in capital ............................ 66,390,775
------------
Net assets, at value ...................................... $ 66,966,048
============
NET ASSET VALUE, offering and redemption price per share
($66,966,048/66,976,491 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized) ................................. $1.00
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest ............................................... $ 2,542,099
Expenses:
Management fee (Note C) ................................ $ 332,010
Services to shareholders (Note C) ...................... 81,659
Custodian and accounting fees (Note C) ................. 52,253
Trustees' fees and expenses (Note C) ................... 13,032
Auditing ............................................... 26,711
Reports to shareholders ................................ 11,674
Legal .................................................. 6,723
Other .................................................. 14,250
---------
Total expenses before reductions ....................... 538,312
Expense reductions (Note C) ............................ (138,996)
---------
Expenses, net .......................................... 399,316
---------
Net investment income .................................. 2,142,783
NET REALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from investments ..................... (1,913)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ... $ 2,140,870
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ................................ $ 2,142,783 $ 1,830,748
Net realized loss from investments.................... (1,913) (16,732)
------------ ------------
Net increase in net assets resulting from
operations ....................................... 2,140,870 1,814,016
------------ ------------
Distributions to shareholders from net investment
income ($.032 and $.027 per share,
respectively) .................................... (2,142,783) (1,830,748)
------------ ------------
Fund share transactions at net asset value of
$1.00 per share:
Shares sold .......................................... 53,468,668 88,435,904
Net asset value of shares issued to
shareholders in reinvestment of
distributions ................................ 1,832,601 1,538,711
Shares redeemed ...................................... (52,560,504) (97,929,860)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions ...................... 2,740,765 (7,955,245)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS .................... 2,738,852 (7,971,977)
Net assets at beginning of period .................... 64,227,196 72,199,173
------------ ------------
NET ASSETS AT END OF PERIOD .......................... $ 66,966,048 $ 64,227,196
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
----------------------------------------------------------------------------------- TO MARCH 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period............. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment income (a)........ .032 .027 .019 .023 .035 .047 .052 .049 .035
Distributions from net
investment income............ (.032) (.027) (.019) (.023) (.035) (.047) (.052) (.049) (.035)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%) (b)............ 3.28 2.72 1.92 2.35 3.54 4.79 5.35 5.04 3.86**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)................. 67 64 72 56 58 64 65 64 53
Ratio of operating expenses,
net to average daily net
assets (%) (a)................. .60 .60 .60 .60 .60 .65 .75 .67 .45*
Ratio of net investment income
to average daily net
assets (%)..................... 3.23 2.68 1.90 2.33 3.50 4.68 5.22 4.98 4.41*
(a) Reflects a per share amount
of expenses, exclusive of
management fees,
reimbursed by the
Adviser of.................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ .002
Reflects a per share amount
of management fee not
imposed by the Adviser of... $ .002 $ .002 $ .003 $ .003 $ .003 $ .003 $ .001 $ .002 $ .004
Operating expense ratio before
expense reductions (%)...... .81 .84 .90 .86 .88 .92 .90 .84 1.32*
</TABLE>
(b) Returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
19
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
----------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7.3% SHORT-TERM MUNICIPAL INVESTMENTS
CALIFORNIA California Health Facilities Finance Authority, Sutter
Health, Series 1990 A, Daily Demand Note,
3.55%, 3/1/20* .................................................... 300,000 A1+ 300,000
Irvine, CA, Improvement Bond, Assessment
District 89-10, Daily Demand Bond, 3.5%, 9/2/15* .................. 1,040,000 MIG1 1,040,000
Irvine Ranch Water District, CA:
Capital Improvements Projects, Daily Demand
Bond, 3.2%, 8/1/16* ............................................. 1,300,000 MIG1 1,300,000
Daily Demand Note, 3.35%, 6/1/15* ................................. 1,300,000 A1 1,300,000
Daily Demand Note, 3.55%, 8/1/16* ................................. 400,000 MIG1 400,000
Series A, Variable Rate Demand Note,
3.6%, 10/1/00* .................................................. 200,000 A1+ 200,000
Series A, Daily Demand Note, 3.35%, 11/15/13* ..................... 600,000 A1 600,000
Series B, Variable Rate Demand Note,
3.35%, 10/1/1999* ............................................... 200,000 A1 200,000
Series 1985, Variable Rate Demand Note,
3.35%, 10/1/09* ................................................. 2,200,000 A1 2,200,000
Los Angeles, CA, Regional Airport Improvement Lease:
Series 1984, Daily Demand Note, 3.8%, 12/1/24* .................. 2,300,000 A1+ 2,300,000
Series 1985, Daily Demand Note, 3.8%, 12/1/25* .................. 2,000,000 MIG1 2,000,000
Orange County, CA, Daily Demand Note,
3.55%, 8/1/15* .................................................. 9,200,000 A1+ 9,200,000
Southern California Pollution Control Revenue,
Edison Co. Series 1986 A, Daily Demand Note,
3.4%, 2/28/08* .................................................. 300,000 A1+ 300,000
----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $21,340,000) .............................................. 21,340,000
----------
92.7% LONG-TERM MUNICIPAL INVESTMENTS
CALIFORNIA ABAG Financing Authority:
Non-Profit Corps., Certificate of Participation,
5.75%, 8/15/14 (c) ............................................ 1,000,000 A 965,840
Stanford Health Systems, Certificates of
Participation, 6%, 11/1/07 (c) ................................ 605,000 AAA 644,531
Anaheim County, CA, Convention Center Financing,
Certificate of Participation, Zero Coupon, 8/1/05 (c) ........ 1,250,000 AAA 764,138
Benecia, CA, Unified School District, Series B, Zero
Coupon, 8/1/18 (c) ........................................... 545,000 AAA 136,397
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Health Facilities Finance Authority:
Catholic Healthcare West, Series A, 5%, 7/1/06 (c) ....... 2,000,000 AAA 1,976,160
Downey Community Hospital, 5.625%, 5/15/08 ............... 6,000,000 A 5,945,040
Catholic Healthcare West, 5%, 7/1/08 (c) ................. 5,745,000 AAA 5,580,521
Hospital Revenue, Downey Community Hospital,
5.75%, 5/15/15 ......................................... 1,000,000 A 938,210
Catholic Healthcare West, Series A, 5.75%, 7/1/15 (c) .... 2,250,000 AAA 2,206,170
Catholic Healthcare West, Series A, 5%, 7/1/21 (c) ....... 1,935,000 AAA 1,691,596
Kaiser Permanente Medical Care Program,
5.55%, 8/15/25 ......................................... 4,000,000 AA 3,705,880
Henry Mayo Newhall, Series A, 8%, 10/1/18 ................ 3,655,000 A 3,990,200
St. Francis Medical Center, Series A,
5.65%, 10/1/14 (c) ..................................... 1,500,000 AAA 1,523,820
California Housing Finance Agency:
Home Mortgage, Series F1:
6.2%, 8/1/05 (c) ....................................... 845,000 AAA 874,076
6.3%, 8/1/06 (c) ....................................... 1,325,000 AAA 1,369,600
Series 1996 C, 7.816%, 2/1/27, Inverse
Floaters (c)** ......................................... 11,800,000 AAA 10,929,750
Series G, 5.7%, 2/1/07 (c) ............................... 500,000 AAA 502,605
Series G, 5.8%, 2/1/08 (c) ............................... 1,330,000 AAA 1,332,075
Series G, 5.9%, 2/1/09 (c) ............................... 200,000 AAA 200,014
Series G, 6%, 8/1/10 (c) ................................. 1,400,000 AAA 1,394,540
Series K, 5.55%, 2/1/21 (c) .............................. 1,000,000 AAA 987,970
Multi-Unit Rental Housing Revenue:
Series A, 7.1%, 8/1/96 ................................. 1,475,000 A 1,491,977
Series II, 6.75%, 8/1/96 ............................... 265,000 A 267,192
Series A, 7.2%, 8/1/97 ................................. 1,620,000 A 1,686,663
Series II, 7%, 8/1/97 .................................. 280,000 A 289,638
Series II, 7.25%, 8/1/98 ............................... 300,000 A 317,685
Series A, 7.3%, 8/1/99 ................................. 2,435,000 A 2,632,065
Series II, 7.3%, 8/1/99 ................................ 325,000 A 351,218
Series A, 7.35%, 8/1/00 ................................ 2,615,000 A 2,868,446
Series II, 7.3%, 8/1/00 ................................ 345,000 A 375,857
Series A, 7.4%, 8/1/01 ................................. 1,555,000 A 1,690,674
Series II, 7.3%, 8/1/01 ................................ 375,000 A 412,365
Series A, 7.45%, 8/1/02 ................................ 1,015,000 A 1,141,662
Series II, 7.35%, 8/1/02 ............................... 400,000 A 441,584
Series II, 7.35%, 8/1/03 ............................... 430,000 A 475,004
Series II, 7.35%, 8/1/04 ............................... 460,000 A 511,060
Series II, 7.35%, 8/1/05 ............................... 495,000 A 551,183
Series A, 7.6%, 8/1/06 ................................. 4,030,000 A 4,447,750
Series A, 7.65%, 8/1/07 ................................ 2,335,000 A 2,570,111
Series A, 7.7%, 8/1/09 ................................. 700,000 A 768,411
Series A, 7.75%, 8/1/16 ................................ 2,440,000 A 2,640,544
Series A, 7.8%, 8/1/23 ................................. 2,635,000 A 2,844,008
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
----------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Pollution Control Revenue, Southern
California Edison, Series A, 6.9%, 9/1/06 ................ 3,750,000 A 4,044,563
California State Public Works Board, Department of
Corrections, Lease Revenue, Madera Prison,
Series A-2, 7.4%, 9/1/10 (c) ............................. 1,000,000 AAA 1,202,150
California Statewide Communities Development
Authority, Certificate of Participation:
Lutheran Homes, Series 1993, 5.6%, 11/15/13 ............ 4,750,000 A 4,569,595
St. Joseph's Health System, 6.2%, 7/1/08 ............... 200,000 AA 208,452
Keiro Nursing Home, California Mortgage Insured,
5.875%, 3/1/19 ....................................... 1,685,000 A 1,604,524
Sisters of Charity-Leavenworth Health
Services Corp., 4.875%, 12/1/10 (c) .................. 2,500,000 AAA 2,282,650
Sisters of Charity-Leavenworth Health
Services Corp., 5%, 12/1/23 (c) ...................... 2,500,000 AAA 2,173,350
Unihealth America, Series A, Zero Coupon,
10/1/05 (c) .......................................... 1,450,000 AAA 878,642
Lutheran Homes, 5.5%, 11/15/08 ......................... 1,500,000 A 1,508,040
Castaic Lake Water Agency, CA, Certificate of
Participation, Series A, 7.25%, 8/1/07 (c) ............... 1,000,000 AAA 1,171,050
Central California Joint Powers Health Financing
Authority, Community Hospitals of Central California,
Certificate of Participation, Series 1993,
5.25%, 2/1/04 ............................................ 1,780,000 A 1,755,169
Chino Basin, CA, Regional Financing Authority,
Municipal Water District, Sewer System,
5.9%, 8/1/11 (c) ......................................... 1,290,000 AAA 1,344,245
Costa Mesa, CA, Public Financing Authority,
Public Facilities Project, Series A, 5.25%, 10/1/18 ...... 4,500,000 A 3,979,980
Duarte, CA, Certificates of Participation, City of Hope
Medical Center:
6%, 4/1/08 ............................................. 3,750,000 BBB 3,721,538
5.75%, 4/1/02 .......................................... 3,525,000 BBB 3,500,325
5.8%, 4/1/03 ........................................... 3,735,000 BBB 3,691,076
Elk Grove, CA, Unified School District #1, Special Tax,
Community Facilities:
6.5%, 12/1/08 (c) ...................................... 1,000,000 AAA 1,119,460
Zero Coupon:
12/1/09 (c) .......................................... 2,465,000 AAA 1,137,080
12/1/10 (c) .......................................... 1,670,000 AAA 722,793
12/1/11 (c) .......................................... 2,425,000 AAA 983,823
12/1/12 (c) .......................................... 2,680,000 AAA 1,018,159
Eureka, CA, Public Finance Authority, Tax Allocation
Revenue, Capital Guaranty Insured, 5%, 11/1/16 ........... 1,380,000 AAA 1,233,002
Fairfield, CA, Public Finance Authority, Redevelopment
Project, Series C, Capital Guaranty Insured,
5.25%, 8/1/13 ............................................ 1,000,000 AAA 942,360
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fontana, CA, Tax Allocation Revenue, North Fontana
Redevelopment Project, Series 1993 A,
5%, 9/1/20 (c) ............................................. 1,200,000 AAA 1,065,384
Fontana, CA, Unified School District, FSA Insured,
5.7%, 9/1/08 ............................................... 700,000 AAA 719,495
Foothill Eastern Transportation Corridor Agency, CA,
Toll Road Revenue, Senior Lien, Series A, Zero
Coupon:
1/1/11 ................................................... 6,000,000 BBB 3,530,400
1/1/13 ................................................... 975,000 BBB 573,398
1/1/14 ................................................... 2,875,000 BBB 1,679,029
Imperial Irrigation District, CA, Certificate of
Participation, 5.2%, 11/1/09 (c) ........................... 2,500,000 AAA 2,457,350
La Canada, CA, Unified School District, Zero Coupon:
8/1/08 (c) ................................................. 1,315,000 AAA 662,024
8/1/09 (c) ................................................. 1,280,000 AAA 601,690
Los Angeles County, CA, Certificate of Participation:
Disney Parking Project, Zero Coupon, 9/1/13 ................ 4,500,000 A 1,422,675
Marina Del Ray, Series A, 6.25%, 7/1/03 .................... 2,500,000 NR 2,517,075
Disney Parking Project, Zero Coupon, 3/1/08 ................ 2,780,000 BBB 1,301,207
Disney Parking Project, Zero Coupon, 9/1/08 ................ 4,865,000 BBB 2,205,791
Disney Parking Project, Zero Coupon, 3/1/14 ................ 2,290,000 A 694,397
Marina Del Rey, Series A, 5.75%, 7/1/98 .................... 5,000,000 NR 5,087,150
Los Angeles, CA, Convention & Exhibition Center
Authority:
Series A, 5.2%, 8/15/09 (c) .............................. 4,000,000 AAA 3,898,960
Certificate of Participation, Zero Coupon, 8/15/04 (c) ... 3,730,000 AAA 2,398,651
Los Angeles County, CA:
Metropolitan Transportation Authority, Sales
Tax Revenue, Series B, 4.8%, 7/1/05 (c) .................. 950,000 AAA 928,967
Wastewater System Revenue, Series D,
4.7%, 11/1/17 (c) ........................................ 1,960,000 AAA 1,664,256
Modesto, CA, Certificate of Participation, Community
Project, Series A, 5.6%, 11/1/14 (c) ....................... 1,370,000 AAA 1,368,671
Oceanside, CA, Certificate of Participation, Oceanside
Building Authority, Series A, 6%, 4/1/17 ................... 3,000,000 A 2,906,130
Orange County, CA:
Local Transportation Authority, Sales Tax Revenue,
5.1%, 2/15/01 (c) ........................................ 5,000,000 AAA 4,889,100
Local Transportation Authority, 5.15%, 2/15/11 (c) ......... 4,975,000 AAA 4,668,490
Recovery Notes, Series A, 5.6%, 6/1/07 (c) ................. 4,430,000 AAA 4,486,172
Palomar Pomerado, CA, Health Systems,
4.75%, 11/1/23 (c) ......................................... 1,000,000 AAA 832,390
Pittsburgh, CA:
Public Finance Authority, Wastewater System
Revenue, Series A, 5.125%, 6/1/15 (c) .................... 1,000,000 AAA 923,510
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Redevelopment Agency, Los Medanos Community
Development Project, 4.625%, 8/1/21 (c) .................. 3,500,000 AAA 2,896,740
Pomona, CA, Unified School District, General
Obligation, 5.6%:
8/1/14 (c) ............................................... 170,000 AAA 169,832
8/1/15 (c) ............................................... 180,000 AAA 178,726
8/1/16 (c) ............................................... 190,000 AAA 188,843
8/1/17 (c) ............................................... 175,000 AAA 173,479
8/1/18 (c) ............................................... 205,000 AAA 202,157
Port of Hueneme, CA, Certificate of Participation,
Capital Improvement, 6%, 4/1/19 (c) ........................ 925,000 AAA 957,902
Rialto, CA, Redevelopment Agency, Tax Allocation
Revenue, Industrial Redevelopment Project,
Series A, 6%, 9/1/23 ....................................... 2,500,000 BBB 2,328,775
Roseville, CA, Joint Union High School District,
Series B, Zero Coupon:
8/1/05 (c) ............................................... 1,130,000 AAA 697,086
8/1/06 (c) ............................................... 1,000,000 AAA 579,930
8/1/07 (c) ............................................... 1,380,000 AAA 746,746
Sacramento, CA:
Power Authority Cogeneration Project, Series 1995,
6.5%, 7/1/04 ............................................. 2,000,000 BBB 2,114,760
City Financing Authority, Lease Revenue Refunding,
Series A, 5.4%, 11/1/20 (c) .............................. 11,785,000 AAA 11,274,827
Municipal Utility District, 5.4%, 11/15/07 (c) ............. 3,475,000 AAA 3,506,449
Municipal Utility District, Series G, 4.75%, 9/1/21 (c) .... 6,450,000 AAA 5,441,865
San Bernadino County, CA, Certificates of
Participation:
Medical Center Financing Project, Series 1996,
5.25%, 8/1/16 (c) ..................................... 2,145,000 AAA 1,988,115
Imbedded Swap Inverse Floaters, Series 1992 A,
7.17%, 7/1/16 (c)** ................................... 4,500,000 AAA 4,360,005
San Francisco, CA, Redevelopment Financing Agency,
Tax Allocation Revenue, Series A, Zero Coupon:
8/1/03 (c) ............................................... 1,080,000 AAA 746,831
8/1/04 (c) ............................................... 1,080,000 AAA 704,473
San Joaquin County, CA, Certificate of Participation,
4.75%, 11/15/19 (c) ........................................ 3,500,000 AAA 2,950,990
San Joaquin Hills, CA, Transportation Corridor
Agency, Toll Road Revenue:
Senior Lien, Zero Coupon, 1/1/07 ......................... 6,000,000 BBB 4,397,100
Junior Lien, Series 1993, Zero Coupon, 1/1/10 ............ 1,500,000 NR 556,485
Senior Lien, Zero Coupon, 1/1/05 ......................... 2,500,000 BBB 1,822,550
San Jose, CA, Financing Revenue, Community
Facilities Project, Zero Coupon:
11/15/03 ................................................. 735,000 A 493,538
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11/15/04 ................................................. 1,605,000 A 1,014,344
11/15/05 ................................................. 1,605,000 A 952,824
11/15/06 ................................................. 1,605,000 A 893,311
San Mateo County, CA, Capital Projects Program:
Correctional Parking Facilities, Series 1991,
Zero Coupon, 7/1/04 (c) .................................. 1,890,000 AAA 1,238,101
Correctional Parking Facilities, Series 1991,
Zero Coupon, 7/1/05 (c) .................................. 1,520,000 AAA 937,490
San Mateo County, CA, Joint Powers Financing
Authority, Capital Projects Program, Zero Coupon:
7/1/01 (c) ............................................... 1,765,000 AAA 1,376,276
7/1/02 (c) ............................................... 1,715,000 AAA 1,259,976
7/1/03 (c) ............................................... 1,725,000 AAA 1,197,857
Santa Anna, CA, Police Administration and Holding
Facility, Lease Revenue, Series A, 5.3%, 7/1/05 (c) ........ 725,000 AAA 731,801
Santa Clara County, CA, Certificate of Participation,
Series A, 4.75%, 2/1/14 (c) ................................ 3,000,000 AAA 2,622,270
Santa Clara County, CA, Finance Authority, Lease
Revenue, YMC Replacement Project,
7.75%, 11/15/08 (c) ........................................ 3,250,000 AAA 4,009,980
Santa Margarita/Dana Point, CA, Improvement
Districts 3, 3A, 4 and 4A, Series B, 7.25%, 8/1/05 (c) ..... 2,895,000 AAA 3,368,998
Santa Monica, CA, Wastewater Revenue, Hyperion
Project, 4.75%, 1/1/12 (c) ................................. 3,000,000 AAA 2,682,990
South Orange County, CA, Public Finance Authority,
Special Tax Revenue, Series A, 7%, 9/1/06 (c) .............. 2,230,000 AAA 2,576,966
Southern California Public Power Authority, Power
Project Revenue:
Mead Phoenix Project, Series A, 4.75%, 7/1/09 (c) ........ 1,220,000 AAA 1,123,779
Palo Verde Project, Series A, 5%, 7/1/15 ................. 1,350,000 AA 1,198,368
Stockton, CA, Health Facilities Revenue, St. Joseph
Medical Center, Series A, 5.625%, 6/1/13 (c) ............... 1,930,000 AAA 1,899,583
Tracy California Area Public Facilities Agency,
Special Tax, Community Facilities District,
Series 1996, 5.2%, 10/1/06 (c) ............................. 1,800,000 AAA 1,778,526
Valley Health System, CA, Revenue Bonds, Refunding
and Improvement Project, Series 1996 A, 6.5%:
5/15/15 .................................................. 385,000 BBB 362,135
5/15/25 .................................................. 2,325,000 BBB 2,171,527
West Covina, CA, Queen of the Valley Hospital,
Certificate of Participation:
5.7%, 8/15/00 ............................................ 380,000 A 385,844
5.8%, 8/15/01 ............................................ 750,000 A 760,365
Westminster, CA, Redevelopment Agency, Tax
Allocation Revenue, Community Development,
Project #1, Series A, 7.3%, 8/1/21 ......................... 2,000,000 BBB 2,088,420
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount($) Rating (b) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Whittier, CA, Health Facilities Revenue, Presbyterian
Inter Community Health, 6.25%, 6/1/10 (c) ..................... 1,250,000 AAA 1,355,475
PUERTO RICO Commonwealth of Puerto Rico, Public Improvement
Refunding, General Obligation, 5.375%, 7/1/06 ................. 1,225,000 A 1,226,801
VIRGIN ISLANDS Virgin Islands, Special Tax Bonds, Hugo Bonds,
7.75%, 10/1/06 ................................................ 1,830,000 NR 1,968,989
Virgin Islands Public Finance Authority, General
Obligation, Mortgage Fund Loan Notes,
Series 1992 A:
6.5%, 10/1/97 ............................................... 2,955,000 BBB 3,037,504
7%, 10/1/02 ................................................. 1,000,000 BBB 1,059,261
-----------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $261,847,909) ........................................... 269,466,583
-----------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $283,187,909) (a) ....................................... 290,806,583
===========
</TABLE>
(a) The cost for federal income tax purposes was $283,207,362. At March 31,
1996, net unrealized appreciation for all securities based on tax cost was
$7,599,221 This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $9,990,424 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$2,391,203.
(b) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings
shown are assigned by either Standard & Poor's Rating Group, Moody's
Investors Service, Inc. or Fitch Investors Service, Inc. Unrated securities
(NR) have been determined to be of comparable quality to rated eligible
securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand notes
are securities whose yields are periodically reset at levels that are
generally comparable to tax-exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit from a major bank. These notes are carried,
for purposes of calculating average weighted maturity, at the longer of the
period remaining until the next rate change or to the extent of the demand
period.
** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of March 31, 1996.
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
March 31, 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $283,187,909)
(Note A) ............................................ $290,806,583
Cash ........................................................ 29,410
Receivables:
Investments sold .................................... 503,125
Interest ............................................ 3,774,851
Fund shares sold .................................... 33,644
Other assets ................................................ 2,574
-----------
Total assets ................................ 295,150,187
LIABILITIES
Payables:
Investments purchased ............................... $1,778,526
Dividends ........................................... 467,862
Fund shares redeemed ................................ 36,661
Accrued management fee (Note C) ..................... 151,421
Other accrued expenses (Note C)
90,873
----------
Total liabilities ........................... 2,525,343
------------
Net assets, at market value ................................. $292,624,844
============
Net Assets
Net assets consist of:
Net unrealized appreciation on investments .......... $ 7,618,674
Accumulated net realized loss ....................... (11,995,644)
Shares of beneficial interest ....................... 282,322
Additional paid-in capital .......................... 296,719,492
------------
Net assets, at market value ................................. $292,624,844
============
NET ASSET VALUE, offering and redemption price per share
($292,624,844 / 28,232,177 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized) ............................... $ 10.36
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31, 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest .............................................. $16,884,377
Expenses:
Management fee (Note C) ............................... $1,842,488
Services to shareholders (Note C) ..................... 204,674
Custodian and accounting fees (Note C) ................ 135,449
Trustees' fees and expenses (Note C) .................. 13,032
Auditing .............................................. 45,605
Reports to shareholders ............................... 33,018
Legal ................................................. 10,975
Other ................................................. 26,844 2,312,085
--------------------------
Net investment income ................................. 14,572,292
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT
TRANSACTIONS
Net realized gain (loss) from:
Investments ................................... 3,031,291
Futures ....................................... (770,683) 2,260,608
----------
Net unrealized appreciation on investments ............ 6,496,809
-----------
Net gain on investment transactions ................... 8,757,417
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $23,329,709
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................ $ 14,572,292 $ 15,647,975
Net realized gain (loss) from investment
transactions ................................... 2,260,608 (9,865,784)
Net unrealized appreciation on investment
transactions during the period ................. 6,496,809 12,444,920
----------- -----------
Net increase in net assets resulting from
operations ..................................... 23,329,709 18,227,111
----------- -----------
Distributions to shareholders:
From net investment income ($.51 and
$.51 per share, respectively) ................ (14,572,292) (15,647,975)
----------- -----------
From net realized gains from investment
transactions ($.09 per share) ................ -- (2,705,552)
----------- -----------
Fund share transactions:
Proceeds from shares sold ........................ 34,646,046 54,322,312
Net asset value of shares issued to
shareholders in reinvestment
of distributions ............................... 8,891,876 12,092,024
Cost of shares redeemed .......................... (53,733,869) (97,589,593)
----------- -----------
Net decrease in net assets from
Fund share transactions ........................ (10,195,947) (31,175,257)
----------- -----------
Increase (decrease) in net assets ................ (1,438,530) (31,301,673)
Net assets at beginning of period ................ 294,063,374 325,365,047
----------- -----------
NET ASSETS AT END OF PERIOD ...................... $292,624,844 $294,063,374
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period ........ 29,207,833 32,478,431
----------- -----------
Shares sold ...................................... 3,337,194 5,531,252
Shares issued to shareholders in
reinvestment of distributions .................. 855,726 1,227,120
Shares redeemed .................................. (5,168,576) (10,028,970)
----------- -----------
Net decrease in Fund shares ...................... (975,656) (3,270,598)
----------- -----------
Shares outstanding at end of period .............. 28,232,177 29,207,833
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
SCUDDER CALIFORNIA TAX FREE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
YEARS ENDED March 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $10.07 $10.02 $11.05 $10.60 $10.41 $10.29 $10.26 $ 9.99 $11.18 $10.95
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ................ .51 .51 .53 .59 .61 .63 .65 .68 .69 .71
Net realized and
unrealized gain
(loss) on investment
transactions .......... .29 .14 (.35) .94 .47 .21 .22 .27 (.93) .53
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................... .80 .65 .18 1.53 1.08 .84 .87 .95 (.24) 1.24
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income ................ (.51) (.51) (.53) (.59) (.61) (.63) (.65) (.68) (.69) (.71)
From net realized
gains on
investments ........... -- (.09) (.63) (.49) (.28) (.09) (.19) -- (.26) (.30)
In excess of net
realized gains ........ -- -- (.05) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ............. (.51) (.60) (1.21) (1.08) (.89) (.72) (.84) (.68) (.95) (1.01)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period ........................ $10.36 $10.07 $10.02 $11.05 $10.60 $10.41 $10.29 $10.26 $ 9.99 $11.18
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ................ 8.01 6.75 1.30 15.13 10.74 8.53 8.62 9.80 (1.70) 12.11
RATIO AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ........... 293 294 325 309 242 208 193 171 153 195
Ratio of operating
expenses, net to
average daily net
assets (%) .................... .77 .80 .78 .79 .81 .84 .83 .89 .88 .84
Ratio of net investment
income to average
daily net assets (%) .......... 4.88 5.18 4.85 5.42 5.79 6.13 6.23 6.71 6.95 6.55
Portfolio turnover rate ......... 49.2 87.3 126.5 208.6 143.0 170.6 70.4 158.9 52.3 68.0
</TABLE>
30
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Scudder California Tax Free Money Fund ("Tax Free Money Fund"), a nondiversified
fund, and California Tax Free Fund ("Tax Free Fund"), a diversified fund, are
each a series of Scudder California Tax Free Trust (the "Trust") which is
organized as a Massachusetts business trust and registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company.
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Funds in the
preparation of their financial statements.
SECURITY VALUATION. Tax Free Money Fund values all portfolio securities
utilizing the amortized cost method permitted in accordance with Rule 2a-7 under
the 1940 Act and pursuant to which Tax Free Money Fund must adhere to certain
conditions. Under this method, which does not take into account unrealized gains
and losses on securities, an instrument is initially valued at its cost and
thereafter assumes a constant accretion/amortization to maturity of any
discount/premium.
Tax Free Fund's portfolio debt securities with remaining maturities greater than
sixty days are valued by pricing agents approved by the Officers of the Fund,
which quotations reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
FUTURES CONTRACTS. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the period, the Tax
Free Fund purchased interest rate futures to manage the duration of the
portfolio. Additionally, during the period the Tax Free Fund sold interest rate
futures to hedge against declines in the value of portfolio securities.
31
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Tax Free Fund is required to deposit
with a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Tax Free Fund each
day, dependent on the daily fluctuations in the value of the underlying
security, and are recorded for financial reporting purposes as unrealized gains
or losses by the Tax Free Fund. When entering into a closing transaction, the
Tax Free Fund will realize a gain or loss equal to the difference between the
value of the futures contract to sell and the futures contract to buy. Futures
contracts are valued at the most recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Tax Free Fund's ability to
close out a futures contract prior to the settlement date and that a change in
the value of a futures contract may not correlate exactly with changes in the
value of the securities or currencies hedged. When utilizing futures contracts
to hedge, the Tax Free Fund gives up the opportunity to profit from favorable
price movements in the hedged positions during the term of the contract.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
FEDERAL INCOME TAXES. The Funds' policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment companies
and to distribute all of their taxable and tax-exempt income to their
shareholders. Accordingly, the Funds paid no federal income taxes and no
provisions for federal income taxes were required.
As of March 31, 1996, the Tax Free Money Fund had a net tax basis capital loss
carryforward of approximately $94,000, which may be applied against any realized
net taxable capital gains of each succeeding year until fully utilized or until
March 31, 2000 ($14,000), March 31, 2002 ($7,000), March 31, 2003 ($55,000) and
March 31, 2004 ($18,000), the respective expiration dates, whichever occurs
first.
As of March 31, 1996, the Tax Free Fund had a net tax basis capital loss
carryforward of approximately $9,355,000, which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until March 31, 2003 ($8,963,000) and March 31, 2004 ($392,000), the
respective expiration dates, whichever occurs first.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Funds
is declared as dividends to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Funds if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
primarily relate to investments in options, futures, and certain securities sold
at a loss for the Tax Free Fund. As a result, net investment income and net
realized gain (loss) on investment transactions for a reporting period may
differ significantly from distributions during such period. Accordingly, the
Funds may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of the Funds.
The Funds use the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
Other. Investment transactions are accounted for on a trade-date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of the call
or maturity date.
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
During the year ended March 31, 1996, purchases and sales of long-term municipal
securities aggregated $139,130,126 and $163,477,889, respectively, for the Tax
Free Fund.
The aggregate face value of futures contracts opened and closed during the year
ended March 31, 1996, for the Tax Free Fund, was $365,168,728.
33
<PAGE>
SCUDDER CALIFORNIA TAX FREE MONEY FUND
SCUDDER CALIFORNIA TAX FREE FUND
- --------------------------------------------------------------------------------
C. RELATED PARTIES
- --------------------------------------------------------------------------------
Each Fund has entered into an Investment Management Agreement (each an
"Agreement" and collectively the "Agreements") with Scudder, Stevens & Clark,
Inc. (the "Adviser"), under which each Fund agrees to pay the Adviser a fee
computed and accrued daily and paid monthly. The management fee payable under
the Agreements is equal to an annual rate of 0.50% of the average daily net
assets of Tax Free Money Fund, and 0.625% of the first $200,000,000 of the
average daily net assets and 0.60% of such net assets in excess of $200,000,000
for Tax Free Fund. As manager of the assets of Tax Free Money Fund and Tax Free
Fund, the Adviser directs the investments of Tax Free Money Fund and Tax Free
Fund in accordance with the investment objectives, policies, and restrictions of
each Fund. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by each
Fund. In addition to portfolio management services, the Adviser provides certain
administrative services in accordance with the Agreements. The Agreements also
provide that if the Funds' expenses, exclusive of taxes, interest and certain
other expenses exceed specified limits, such excess, up to the amount of the
management fee, will be paid by the Adviser. For the year ended March 31, 1996,
the fee for the Tax Free Fund pursuant to the Agreement amounted to $1,842,488,
which was equivalent to an annualized effective rate of .62% of the Fund's
average daily net assets.
With respect to Tax Free Money Fund, the Adviser has agreed not to impose all or
a portion of its management fee until July 31, 1996 and during such period to
maintain the annualized expenses of Tax Free Money Fund at not more than 0.60%
of average daily net assets. For the year ended March 31, 1996, the Adviser did
not impose a portion of its fee amounting to $138,996, and the portion imposed
amounted to $193,014.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Funds. For the
year ended March 31, 1996, $71,043 and $164,689 were charged by SSC to Tax Free
Money Fund and Tax Free Fund, of which $5,628 and $13,172 are unpaid at March
31, 1996, respectively.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records for the Tax Free Money Fund and Tax
Free Fund. For the year ended March 31, 1996, SFAC imposed fees amounting to
$30,000 and $66,107 of which $2,500 and $5,763 are unpaid at March 31, 1996 for
the Tax Free Money Fund and Tax Free Fund, respectively.
The Trust pays each Trustee not affiliated with the Adviser $4,000 annually plus
specified amounts for attended board and committee meetings. For the year ended
March 31, 1996, Trustees' fees and expenses aggregated $13,032 each for both Tax
Free Money Fund and Tax Free Fund.
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER CALIFORNIA TAX FREE TRUST AND THE SHAREHOLDERS OF
SCUDDER CALIFORNIA TAX FREE MONEY FUND AND SCUDDER
CALIFORNIA TAX FREE FUND:
We have audited the accompanying statements of assets and liabilities of Scudder
California Tax Free Money Fund and Scudder California Tax Free Fund, including
the investment portfolios, as of March 31, 1996, and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund as
of March 31, 1996, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and their financial highlights for each of the periods indicated therein in
conformity with generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 16, 1996
36
<PAGE>
TAX INFORMATION
- --------------------------------------------------------------------------------
Of the dividends paid by the California Tax Free Money Fund and California Tax
Free Fund from net investment income for the year ended March 31, 1996, 100%
constituted exempt interest dividends for regular federal income tax and
California State income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
OFFICERS AND TRUSTEES
- --------------------------------------------------------------------------------
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Daniel Pierce*
Trustee
Olin Barrett*
Vice President
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
Vice President
Coleen Downs Dinneen*
Assistant Secretary
* Scudder, Stevens & Clark, Inc.
37
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
The Scudder Family of Funds
- --------------------------------------------------------------------------------
<C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Discovery Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
- --------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
- --------------------------------------------------------------------------------
Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
- --------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,^(TM) an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.
</TABLE>
38
<PAGE>
HOW TO CONTACT SCUDDER
<TABLE>
<CAPTION>
<S> <C>
Account Service and Information
-------------------------------------------------------------------------------------------------------------
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For personalized information about your Scudder accounts;
exchanges and redemptions; or information on any Scudder fund
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
-------------------------------------------------------------------------------------------------------------
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
-------------------------------------------------------------------------------------------------------------
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
-------------------------------------------------------------------------------------------------------------
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
-------------------------------------------------------------------------------------------------------------
For information on Scudder For information on Scudder
Treasurers Trust,(TM)an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
-------------------------------------------------------------------------------------------------------------
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
</TABLE>
39
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 38 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication
to research and fundamental investment disciplines have helped us become one of
the largest and most respected investment managers in the world. Though times
have changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
