Filed with the Securities and Exchange Commission on May 18, 1999.
File No. 2-83498
File No. 811-3729
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
---------
Post-Effective Amendment No. 19
---------
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21
---------
Scudder California Tax Free Trust
-------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (6l7) 295-1000
-------------
Daniel Pierce
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
-----------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (1)
/ / 75 days after filing pursuant to paragraph (a) (2)
/ / On May 1, 1999 pursuant to paragraph (b)
/ X / On August 1, 1999 pursuant to paragraph (a) (1)
/ / On __________________ pursuant to paragraph (a) (2) of Rule 485.
If Appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
- --------------------------------------------------------------------------------
BOND/TAX FREE
- --------------------------------------------------------------------------------
State-Specific Tax Free
Income Funds
Scudder California Tax Free
Money Fund Fund #000
Scudder California Tax Free
Fund Fund #000
Scudder New York Tax Free Money Fund
Fund #000
Scudder New York Tax Free
Fund Fund #000
Scudder Massachusetts
Limited Term Tax Free Fund
Fund #000
Scudder Massachusetts
Tax Free Fund Fund #000
Scudder Ohio Tax Free Fund
Fund #000
Prospectus
August 1, 1999
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder State-Specific
Tax Free Income Funds
How the funds work
2 California Tax Free Money Fund
6 California Tax Free Fund
10 New York Tax Free Money Fund
14 New York Tax Free Fund
18 Massachusetts Limited Term Tax Free Fund
22 Massachusetts Tax Free Fund
26 Ohio Tax Free Fund
30 Other Policies and Risks
31 Who Manages and Oversees the Funds
34 Financial Highlights
How to invest in the funds
42 How to Buy Shares
43 How to Exchange or Sell Shares
44 Policies You Should Know About
49 Understanding Distributions and Taxes
<PAGE>
How the funds work
These funds invest mainly in municipal bonds and other investments whose income
is expected to be free from most taxes. Each fund is designed for investors who
pay income tax in a particular state.
Some of these funds are money funds, meaning they seek to maintain a stable
share price. While the other funds use various strategies to manage risk, their
share prices will fluctuate.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other organization, and you could lose
money by investing in them.
You can access all Scudder fund prospectuses online at: www.scudder.com
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol XXXXX fund number 000
Scudder California
Tax Free Money Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks the highest current income that is exempt from federal and
California state income taxes and is consistent with maintaining a stable $1.00
share price. It does this by investing mainly in securities of California
municipalities and in other securities that are commonly considered to have
similar tax status. These may include many types of municipal securities, but
any security the fund buys has to meet the standards for money market fund
investments (see sidebar).
Working in conjunction with a credit analyst, the portfolio managers screen
potential securities and develop a list of those that the fund may buy. The
managers then decide which securities on this list to buy, looking for
attractive yields and weighing considerations such as credit quality, economic
outlooks, and possible interest rate movements. The managers may adjust the
fund's exposure to interest rate risk, typically seeking to take advantage of
possible rises in interest rates and to preserve yields when interest rates
appear likely to fall.
While they're permitted to use various types of derivatives (contracts whose
value is based on, for example, indices, commodities, or securities), the
managers don't intend to use them as principal investments.
DOCUMENT CONTAINS THE FOLLOWING SIDEBAR NEXT TO THE PRECEDING TWO PARAGRAPHS.
- --------------------------------------------------------------------------------
MONEY FUND RULES
To be called a money market fund, a mutual fund must operate within strict
federal rules. Designed to help maintain a stable share price, these rules limit
money funds to particular types of securities and strategies. Some of the rules:
o individual securities must have remaining maturities of no more than 397
days
o the average maturity of the fund's holdings cannot exceed 90 days
o all securities must be in the top two credit grades for short-term
securities
- --------------------------------------------------------------------------------
2 - Scudder California Tax Free Money Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] This fund may appeal to California taxpayers who are in a moderate to
high tax bracket and who are looking for the income, liquidity, and
stability that a money fund is designed to offer.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's yields or make it
perform less well than other investments. In unusual circumstances, these
factors could cause the fund's share price to fall below $1.00, meaning that you
could lose money.
As with most money market funds, the most important factor is market interest
rates. The fund's yields tend to reflect current interest rates, which means
that when these rates fall, the fund's yield generally falls as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yields or share price.
The fact that the fund invests primarily in securities from a single state
increases this risk, because any factors affecting the state or region, such as
economic or fiscal problems, could affect a large portion of the fund's
securities.
Because the fund may invest up to 20% of assets in securities whose dividends
are subject to the federal Alternative Minimum Tax, some of the fund's income
may be taxable for investors who must pay AMT.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard to value some
investments accurately or to get a fair price for them
o political or legal actions could change the way the fund's dividends are
taxed
3 - Scudder California Tax Free Money Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows the fund's total return for its first complete calendar
year. Below the chart is a table showing how the fund's returns over different
periods average out. All figures on this page assume reinvestment of dividends
and distributions.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 -00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: 0.00%
Best Quarter: 0.00%, Q0 '90 Worst Quarter: -0.00%, Q0 '90
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
0.00 0.00 0.00
- --------------------------------------------------------------------------------
To find out this fund's current yield, call 1-800-225-5163.
4 - Scudder California Tax Free Money Fund
<PAGE>
How Much Investors Pay
Because this is a no-load fund, it doesn't charge you any shareholder fees. The
fund does have annual operating expenses, and as a shareholder you pay them
indirectly.
- --------------------------------------------------------------------------------
Fee Table
- --------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
- --------------------------------------------------------------------------------
Sales Charges/Redemption Fees None
- --------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- --------------------------------------------------------------------------------
Management Fee 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None
- --------------------------------------------------------------------------------
Other Expenses* 0.00%
------
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00%
- --------------------------------------------------------------------------------
Expense Reimbursement 0.00%
------
- --------------------------------------------------------------------------------
Net Annual Operating Expenses** 0.00%
- --------------------------------------------------------------------------------
* Includes costs of legal and accounting services, printing, and similar
expenses, which may vary with fund size and other factors.
** By contract, expenses are capped at 0.00% through 00/00/00.
- --------------------------------------------------------------------------------
Expense Example
- --------------------------------------------------------------------------------
Based on the costs above (including one year of capped expenses), this example
is designed to help you compare this fund's expenses to those of other funds.
The example assumes you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
Remember that this is only an example, and that actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
5 - Scudder California Tax Free Money Fund
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol XXXXX fund number 000
Scudder California Tax Free Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks high current income that is exempt from federal and California
state income taxes. It does this by investing mainly in securities of California
municipalities and in other securities that are commonly considered to have
similar tax status.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes). They may also include municipal lease obligations and
investments representing an interest in these. The fund's securities may pay
dividends at rates that are fixed, variable, or floating)
The portfolio managers look for securities that appear to offer the best total
return potential, and prefer to buy those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's average weighted maturity (the
effective maturity of the fund's portfolio), they generally intend to keep it
similar to that of the Lehman Brothers Municipal Bond Index. Also while they're
permitted to use various types of derivatives (contracts whose value is based
on, for example, indices, commodities, or securities), the managers don't intend
to use them as principal investments.
DOCUMENT CONTAINS THE FOLLOWING SIDEBAR NEXT TO THE PRECEDING TWO PARAGRAPHS.
- --------------------------------------------------------------------------------
Credit Quality Policies
Normally, at least 75% of the fund's intermediate- and long-term municipal
securities (the fund's main type of investment) are in the top four grades of
credit quality, or else are issued or guaranteed by the U.S. government.
The fund could put up to 25% of assets in junk bonds of the fifth and sixth
credit grades (i.e., as low as grade B). Compared to investment-grade bonds,
junk bonds generally pay higher yields and have higher volatility and higher
risk of default on payments of interest or principal.
- --------------------------------------------------------------------------------
6 - Scudder California Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] California taxpayers who are in a moderate to high tax bracket and who
are looking for current income may want to consider this fund.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's average weighted
maturity could make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yields or share price.
The fact that the fund invests primarily in securities from a single state
increases this risk, because any factors affecting the state or region, such as
economic or fiscal problems, could affect a large portion of the fund's
securities.
Because the fund may invest up to 20% of assets in securities whose dividends
are subject to the federal Alternative Minimum Tax, some of the fund's income
may be taxable for investors who must pay AMT.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard to value some
investments accurately or to get a fair price for them
o political or legal actions could change the way the fund's dividends are
taxed
7 - Scudder California Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows the fund's total return for its first complete calendar
year. Below the chart is a table showing how the fund's returns over different
periods average out. For context, the table also includes a broad-based market
index (which, unlike the fund, does not have any fees or expenses). All figures
on this page assume reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 -00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: 0.00%
Best Quarter: 0.00%, Q0 '90 Worst Quarter: -0.00%, Q0 '90
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Fund 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
8 - Scudder California Tax Free Fund
<PAGE>
How Much Investors Pay
Because this is a no-load fund, it doesn't charge you any shareholder fees. The
fund does have annual operating expenses, and as a shareholder you pay them
indirectly.
- --------------------------------------------------------------------------------
Fee Table
- --------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
- --------------------------------------------------------------------------------
Sales Charges/Redemption Fees None
- --------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- --------------------------------------------------------------------------------
Management Fee 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None
- --------------------------------------------------------------------------------
Other Expenses* 0.00%
------
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00%
- --------------------------------------------------------------------------------
Expense Reimbursement 0.00%
------
- --------------------------------------------------------------------------------
Net Annual Operating Expenses** 0.00%
- --------------------------------------------------------------------------------
* Includes costs of legal and accounting services, printing, and similar
expenses, which may vary with fund size and other factors.
** By contract, expenses are capped at 0.00% through 00/00/00.
Expense Example
- --------------------------------------------------------------------------------
Based on the costs above (including one year of capped expenses), this example
is designed to help you compare this fund's expenses to those of other funds.
The example assumes you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
Remember that this is only an example, and that actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
9 - Scudder California Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol XXXXX fund number 000
Scudder New York
Tax Free Money Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks the highest current income that is exempt from federal, New York
state and New York City income taxes and is consistent with maintaining a stable
$1.00 share price. It does this by investing mainly in securities of New York
municipalities and in other securities that are commonly considered to have
similar tax status. These may include many types of municipal securities, but
any security the fund buys has to meet the standards for money market fund
investments (see sidebar).
Working in conjunction with a credit analyst, the portfolio managers screen
potential securities and develop a list of those that the fund may buy. The
managers then decide which securities on this list to buy, looking for
attractive yields and weighing considerations such as credit quality, economic
outlooks, and possible interest rate movements. The managers may adjust the
fund's exposure to interest rate risk, typically seeking to take advantage of
possible rises in interest rates and to preserve yields when interest rates
appear likely to fall.
While they're permitted to use various types of derivatives (contracts whose
value is based on, for example, indices, commodities, or securities), the
managers don't intend to use them as principal investments.
DOCUMENT CONTAINS THE FOLLOWING SIDEBAR NEXT TO THE PRECEDING TWO PARAGRAPHS.
- --------------------------------------------------------------------------------
MONEY FUND RULES
To be called a money market fund, a mutual fund must operate within strict
federal rules. Designed to help maintain a stable share price, these rules limit
money funds to particular types of securities and strategies. Some of the rules:
o individual securities must have remaining maturities of no more than 397
days
o the average maturity of the fund's holdings cannot exceed 90 days
o all securities must be in the top two credit grades for short-term
securities
10 - Scudder New York Tax Free Money Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] This fund may appeal to New York taxpayers who are in a moderate to
high tax bracket and who are looking for the income, liquidity, and
stability that a money fund is designed to offer.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could hurt the fund's yields or make it
perform less well than other investments. In unusual circumstances, these
factors could cause the fund's share price to fall below $1.00, meaning that you
could lose money.
As with most money market funds, the most important factor is market interest
rates. The fund's yields tend to reflect current interest rates, which means
that when these rates fall, the fund's yield generally falls as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yields or share price.
The fact that the fund invests primarily in securities from a single state
increases this risk, because any factors affecting the state or region, such as
economic or fiscal problems, could affect a large portion of the fund's
securities.
Because the fund may invest up to 20% of assets in securities whose dividends
are subject to the federal Alternative Minimum Tax, some of the fund's income
may be taxable for investors who must pay AMT.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard to value some
investments accurately or to get a fair price for them
o political or legal actions could change the way the fund's dividends are
taxed
11 - Scudder New York Tax Free Money Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
- --------------------------------------------------------------------------------
The Fund's Track
Record The bar chart shows the fund's total return for its first complete
calendar year. Below the chart is a table showing how the fund's returns over
different periods average out. All figures on this page assume reinvestment of
dividends and distributions.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 -00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: 0.00%
Best Quarter: 0.00%, Q0 '90 Worst Quarter: -0.00%, Q0 '90
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
0.00 0.00 0.00
- --------------------------------------------------------------------------------
To find out this fund's current yield, call 1-800-225-5163.
12 - Scudder New York Tax Free Money Fund
<PAGE>
How Much Investors Pay
Because this is a no-load fund, it doesn't charge you any shareholder fees. The
fund does have annual operating expenses, and as a shareholder you pay them
indirectly.
- --------------------------------------------------------------------------------
Fee Table
- --------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
- --------------------------------------------------------------------------------
Sales Charges/Redemption Fees None
- --------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- --------------------------------------------------------------------------------
Management Fee 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None
- --------------------------------------------------------------------------------
Other Expenses* 0.00%
------
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00%
- --------------------------------------------------------------------------------
Expense Reimbursement 0.00%
------
- --------------------------------------------------------------------------------
Net Annual Operating Expenses** 0.00%
- --------------------------------------------------------------------------------
* Includes costs of legal and accounting services, printing, and similar
expenses, which may vary with fund size and other factors.
** By contract, expenses are capped at 0.00% through 00/00/00.
- --------------------------------------------------------------------------------
Expense Example
- --------------------------------------------------------------------------------
Based on the costs above (including one year of capped expenses), this example
is designed to help you compare this fund's expenses to those of other funds.
The example assumes you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
Remember that this is only an example, and that actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$000 $0,000 $0,000 $0,000
13 - Scudder New York Tax Free Money Fund
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol XXXXX fund number 000
Scudder New York Tax Free Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks high current income that is exempt from federal, New York state
and New York City income taxes. It does this by investing mainly in securities
of New York municipalities and in other securities that are commonly considered
to have similar tax status.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes). They may also include municipal lease obligations and
investments representing an interest in these. The fund's securities may pay
dividends at rates that are fixed, variable, or floating)
The portfolio managers look for securities that appear to offer the best total
return potential, and prefer to buy those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's average weighted maturity (the
effective maturity of the fund's portfolio), they generally intend to keep it
similar to that of the Lehman Brothers Municipal Bond Index. Also while they're
permitted to use various types of derivatives (contracts whose value is based
on, for example, indices, commodities, or securities), the managers don't intend
to use them as principal investments.
DOCUMENT CONTAINS THE FOLLOWING SIDEBAR NEXT TO THE PRECEDING TWO PARAGRAPHS.
- --------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
Normally, at least 75% of the fund's intermediate- and long-term municipal
securities (the fund's main type of investment) are in the top four grades of
credit quality, or else are issued or guaranteed by the U.S. government.
The fund could put up to 25% of assets in junk bonds of the fifth and sixth
credit grades (i.e., as low as grade B). Compared to investment-grade bonds,
junk bonds generally pay higher yields and have higher volatility and higher
risk of default on payments of interest or principal.
- --------------------------------------------------------------------------------
14 - Scudder New York Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] New York taxpayers who are in a moderate to high tax bracket and who
are looking for current income may want to consider this fund.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's average weighted
maturity could make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yields or share price.
The fact that the fund invests primarily in securities from a single state
increases this risk, because any factors affecting the state or region, such as
economic or fiscal problems, could affect a large portion of the fund's
securities.
Because the fund may invest up to 20% of assets in securities whose dividends
are subject to the federal Alternative Minimum Tax, some of the fund's income
may be taxable for investors who must pay AMT.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard to value some
investments accurately or to get a fair price for them
o political or legal actions could change the way the fund's dividends are
taxed
15 - Scudder New York Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows the fund's total return for its first complete calendar
year. Below the chart is a table showing how the fund's returns over different
periods average out. For context, the table also includes a broad-based market
index (which, unlike the fund, does not have any fees or expenses). All figures
on this page assume reinvestment of dividends and distributions.
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 -00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: 0.00%
Best Quarter: 0.00%, Q0 '90 Worst Quarter: -0.00%, Q0 '90
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Fund 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index 0.00 0.00 0.00
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
16 - Scudder New York Tax Free Fund
<PAGE>
How Much Investors Pay
Because this is a no-load fund, it doesn't charge you any shareholder fees. The
fund does have annual operating expenses, and as a shareholder you pay them
indirectly.
Fee Table
- --------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
- --------------------------------------------------------------------------------
Sales Charges/Redemption Fees None
- --------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- --------------------------------------------------------------------------------
Management Fee 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None
- --------------------------------------------------------------------------------
Other Expenses* 0.00%
------
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00%
- --------------------------------------------------------------------------------
Expense Reimbursement 0.00%
------
- --------------------------------------------------------------------------------
Net Annual Operating Expenses** 0.00%
- --------------------------------------------------------------------------------
* Includes costs of legal and accounting services, printing, and similar
expenses, which may vary with fund size and other factors.
** By contract, expenses are capped at 0.00% through 00/00/00.
- --------------------------------------------------------------------------------
Expense Example
- --------------------------------------------------------------------------------
Based on the costs above (including one year of capped expenses), this example
is designed to help you compare this fund's expenses to those of other funds.
The example assumes you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
Remember that this is only an example, and that actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$000 $0,000 $0,000 $0,000
17 - Scudder New York Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol XXXXX fund number 000
Scudder Massachusetts
Limited Term Tax Free Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks high current income that is exempt from federal and Massachusetts
state income taxes and is consistent with a high degree of stability of
shareholders' capital. It does this by investing mainly in securities of
Massachusetts municipalities and in other securities that are commonly
considered to have similar tax status.
The fund can buy many types of municipal securities with effective maturities of
ten years or less. These may include revenue bonds (which are backed by revenues
from a particular source) and general obligation bonds (which are typically
backed by the issuer's ability to levy taxes). They may also include municipal
lease obligations and investments representing an interest in these. The fund's
securities may pay dividends at rates that are fixed, variable, or floating.
The portfolio managers look for securities that appear to offer the best total
return potential, and prefer to buy those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's average weighted maturity (the
effective maturity of the fund's portfolio), they generally intend to keep it
below three years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities, or securities), the managers don't intend to use them as principal
investments.
DOCUMENT CONTAINS THE FOLLOWING SIDEBAR NEXT TO THE PRECEDING TWO PARAGRAPHS.
- --------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 75% of assets in municipal securities of the
top four grades of credit quality.
The fund could put up to 25% of assets in junk bonds, which are those below the
fourth credit grade (i.e., grade BB/Ba and below). Compared to investment-grade
bonds, junk bonds generally pay higher yields and have higher volatility and
higher risk of default on payments of interest or principal.
- --------------------------------------------------------------------------------
18 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] This fund may make sense for Massachusetts taxpayers in a moderate to
high tax bracket who want higher yield than a money market fund and
can accept some risk to their principal.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. The fund's relatively short average
weighted maturity should reduce the effect of this risk, but will not eliminate
it. Changes in interest rates will also affect the fund's yield: when rates
fall, fund yield tends to fall as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yields or share price.
The fact that the fund invests primarily in securities from a single state
increases this risk, because any factors affecting the state or region, such as
economic or fiscal problems, could affect a large portion of the fund's
securities.
Because the fund may invest up to 20% of assets in securities whose dividends
are subject to the federal Alternative Minimum Tax, some of the fund's income
may be taxable for investors who must pay AMT.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard to value some
investments accurately or to get a fair price for them
o political or legal actions could change the way the fund's dividends are
taxed
19 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
- --------------------------------------------------------------------------------
The Fund's Track
Record The bar chart shows the fund's total return for its first complete
calendar year. Below the chart is a table showing how the fund's returns over
different periods average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not have any fees or
expenses). All figures on this page assume reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 -00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: 0.00%
Best Quarter: 0.00%, Q0 '90 Worst Quarter: -0.00%, Q0 '90
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Fund 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
20 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
How Much Investors Pay
Because this is a no-load fund, it doesn't charge you any shareholder fees. The
fund does have annual operating expenses, and as a shareholder you pay them
indirectly.
- --------------------------------------------------------------------------------
Fee Table
- --------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
- --------------------------------------------------------------------------------
Sales Charges/Redemption Fees None
- --------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- --------------------------------------------------------------------------------
Management Fee 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None
- --------------------------------------------------------------------------------
Other Expenses* 0.00%
------
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00%
- --------------------------------------------------------------------------------
Expense Reimbursement 0.00%
------
- --------------------------------------------------------------------------------
Net Annual Operating Expenses** 0.00%
- --------------------------------------------------------------------------------
* Includes costs of legal and accounting services, printing, and similar
expenses, which may vary with fund size and other factors.
** By contract, expenses are capped at 0.00% through 00/00/00.
- --------------------------------------------------------------------------------
Expense Example
- --------------------------------------------------------------------------------
Based on the costs above (including one year of capped expenses), this example
is designed to help you compare this fund's expenses to those of other funds.
The example assumes you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
Remember that this is only an example, and that actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
21 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol XXXXX fund number 000
Scudder Massachusetts Tax Free Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks high current income that is exempt from federal and Massachusetts
state income taxes. It does this by investing mainly in securities of
Massachusetts municipalities and in other securities that are commonly
considered to have similar tax status.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes). They may also include municipal lease obligations and
investments representing an interest in these. The fund's securities may pay
dividends at rates that are fixed, variable, or floating)
The portfolio managers look for securities that appear to offer the best total
return potential, and prefer to buy those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's average weighted maturity (the
effective maturity of the fund's portfolio), they generally intend to keep it
similar to that of the Lehman Brothers Municipal Bond Index. Also while they're
permitted to use various types of derivatives (contracts whose value is based
on, for example, indices, commodities, or securities), the managers don't intend
to use them as principal investments.
DOCUMENT CONTAINS THE FOLLOWING SIDEBAR NEXT TO THE PRECEDING TWO PARAGRAPHS.
- --------------------------------------------------------------------------------
Credit Quality Policies
Normally, at least 75% of the fund's intermediate- and long-term municipal
securities (the fund's main type of investment) are in the top four grades of
credit quality, or else are issued or guaranteed by the U.S. government.
The fund could put up to 25% of assets in junk bonds of the fifth and sixth
credit grades (i.e., as low as grade B). Compared to investment-grade bonds,
junk bonds generally pay higher yields and have higher volatility and higher
risk of default on payments of interest or principal.
- --------------------------------------------------------------------------------
22 - Scudder Massachusetts Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Massachusetts taxpayers who are in a moderate to high tax bracket
and who are looking for current income may want to consider this
fund.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's average weighted
maturity could make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yields or share price.
The fact that the fund invests primarily in securities from a single state
increases this risk, because any factors affecting the state or region, such as
economic or fiscal problems, could affect a large portion of the fund's
securities.
Because the fund may invest up to 20% of assets in securities whose dividends
are subject to the federal Alternative Minimum Tax, some of the fund's income
may be taxable for investors who must pay AMT.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard to value some
investments accurately or to get a fair price for them
o political or legal actions could change the way the fund's dividends are
taxed
23 - Scudder Massachusetts Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
- --------------------------------------------------------------------------------
The Fund's Track
Record The bar chart shows the fund's total return for its first complete
calendar year. Below the chart is a table showing how the fund's returns over
different periods average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not have any fees or
expenses). All figures on this page assume reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 -00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: 0.00%
Best Quarter: 0.00%, Q0 '90 Worst Quarter: -0.00%, Q0 '90
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Fund 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
24 - Scudder Massachusetts Tax Free Fund
<PAGE>
How Much Investors Pay
Because this is a no-load fund, it doesn't charge you any shareholder fees. The
fund does have annual operating expenses, and as a shareholder you pay them
indirectly.
Fee Table
- --------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
- --------------------------------------------------------------------------------
Sales Charges/Redemption Fees None
- --------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- --------------------------------------------------------------------------------
Management Fee 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None
- --------------------------------------------------------------------------------
Other Expenses* 0.00%
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00%
------
- --------------------------------------------------------------------------------
Expense Reimbursement 0.00%
------
- --------------------------------------------------------------------------------
Net Annual Operating Expenses** 0.00%
- --------------------------------------------------------------------------------
* Includes costs of legal and accounting services, printing, and similar
expenses, which may vary with fund size and other factors.
** By contract, expenses are capped at 0.00% through 00/00/00.
- --------------------------------------------------------------------------------
Expense Example
- --------------------------------------------------------------------------------
Based on the costs above (including one year of capped expenses), this example
is designed to help you compare this fund's expenses to those of other funds.
The example assumes you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
Remember that this is only an example, and that actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
25 - Scudder Massachusetts Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
ticker symbol XXXXX fund number 000
Scudder Ohio Tax Free Fund
- --------------------------------------------------------------------------------
Investment Approach
The fund seeks high current income that is exempt from federal and Ohio state
income taxes. It does this by investing mainly in securities of Ohio
municipalities and in other securities that are commonly considered to have
similar tax status.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes). They may also include municipal lease obligations and
investments representing an interest in these. The fund's securities may pay
dividends at rates that are fixed, variable, or floating)
The portfolio managers look for securities that appear to offer the best total
return potential, and prefer to buy those that cannot be called in before
maturity. In making their buy and sell decisions, the managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the municipal
bond market.
Although the managers may adjust the fund's average weighted maturity (the
effective maturity of the fund's portfolio), they generally intend to keep it
similar to that of the Lehman Brothers Municipal Bond Index. Also while they're
permitted to use various types of derivatives (contracts whose value is based
on, for example, indices, commodities, or securities), the managers don't intend
to use them as principal investments.
DOCUMENT CONTAINS THE FOLLOWING SIDEBAR NEXT TO THE PRECEDING TWO PARAGRAPHS.
- --------------------------------------------------------------------------------
Credit Quality Policies
Normally, at least 75% of the fund's intermediate- and long-term municipal
securities (the fund's main type of investment) are in the top four grades of
credit quality, or else are issued or guaranteed by the U.S. government.
The fund could put up to 25% of assets in junk bonds of the fifth and sixth
credit grades (i.e., as low as grade B). Compared to investment-grade bonds,
junk bonds generally pay higher yields and have higher volatility and higher
risk of default on payments of interest or principal.
- --------------------------------------------------------------------------------
26 - Scudder Ohio Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Ohio taxpayers who are in a moderate to high tax bracket and who
are looking for current income may want to consider this fund.
- --------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money, or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's average weighted
maturity could make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the fund's yields or share price.
The fact that the fund invests primarily in securities from a single state
increases this risk, because any factors affecting the state or region, such as
economic or fiscal problems, could affect a large portion of the fund's
securities.
Because the fund may invest up to 20% of assets in
securities whose dividends are subject to the federal Alternative Minimum Tax,
some of the fund's income may be taxable for investors who must pay AMT.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard to value some
investments accurately or to get a fair price for them
o political or legal actions could change the way the fund's dividends are
taxed
27 - Scudder Ohio Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
[ICON} While a fund's past performance isn't necessarily a sign of how
it will do in the future, it can be valuable for an investor to
know. This page looks at fund performance two different ways:
year by year and over time.
- --------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows the fund's total return for its first complete calendar
year. Below the chart is a table showing how the fund's returns over different
periods average out. For context, the table also includes a broad-based market
index (which, unlike the fund, does not have any fees or expenses). All figures
on this page assume reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 -00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- --------------------------------------------------------------------------------
1999 Total Return as of June 30: 0.00%
Best Quarter: 0.00%, Q0 '90 Worst Quarter: -0.00%, Q0 '90
- --------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Fund 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
28 - Scudder Ohio Tax Free Fund
<PAGE>
How Much Investors Pay
Because this is a no-load fund, it doesn't charge you any shareholder fees. The
fund does have annual operating expenses, and as a shareholder you pay them
indirectly.
- --------------------------------------------------------------------------------
Fee Table
- --------------------------------------------------------------------------------
Shareholder Fees (paid directly from your investment)
- --------------------------------------------------------------------------------
Sales Charges/Redemption Fees None
- --------------------------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
- --------------------------------------------------------------------------------
Management Fee 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None
- --------------------------------------------------------------------------------
Other Expenses* 0.00%
------
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00%
- --------------------------------------------------------------------------------
Expense Reimbursement 0.00%
------
- --------------------------------------------------------------------------------
Net Annual Operating Expenses** 0.00%
- --------------------------------------------------------------------------------
* Includes costs of legal and accounting services, printing, and similar
expenses, which may vary with fund size and other factors.
** By contract, expenses are capped at 0.00% through 00/00/00.
- --------------------------------------------------------------------------------
Expense Example
- --------------------------------------------------------------------------------
Based on the costs above (including one year of capped expenses), this example
is designed to help you compare this fund's expenses to those of other funds.
The example assumes you invested $10,000, earned 5% annual returns, reinvested
all dividends and distributions, and sold your shares at the end of each period.
Remember that this is only an example, and that actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
29 - Scudder Ohio Tax Free Fund
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund could change its
investment goal and certain other policies with the approval of its Board
of Trustees and not shareholders.
o As a temporary measure, any of these funds could shift up to 100% of assets
into cash or into defensive investments such as taxable money market
securities. This could help prevent losses, but would mean that the fund
was not pursuing its goal.
o Scudder Kemper measures credit quality at the time it buys securities,
using independent ratings or, for unrated securities, its own credit
analysis. If a security's credit quality falls, the security will be sold
unless the adviser or the Board of Trustees believes this would not be in
the shareholders' best interests.
Year 2000 readiness
Like all mutual funds, these funds could be affected by the inability of some
computer systems to recognize the year 2000. Scudder Kemper has a year 2000
readiness program designed to address this problem, and is also researching the
readiness of suppliers and business partners as well as issuers of securities
the funds own. Still, there's some risk that the year 2000 problem could
materially affect a fund's operations (such as its ability to calculate net
asset value and process purchases and redemptions), its investments, or
securities markets in general.
DOCUMENT CONTAINS THE FOLLOWING SIDEBAR NEXT TO THE PRECEDING THREE PARAGRAPHS.
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the SAI (the back cover has information on how to do this).
- --------------------------------------------------------------------------------
30 - Other Policies and Risks
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for
in process managing the funds, takes a team approach to asset management.
- --------------------------------------------------------------------------------
Who Manages and Oversees the Funds
The investment adviser
The investment adviser for these funds is Scudder Kemper Investments, Inc.,
located at Two International Place, Boston, MA, 02110-4103. Scudder Kemper has
more than 70 years of experience managing mutual funds, and currently has more
than $xxx billion in assets under management.
Each fund is managed by a team of investment professionals, who individually
represent different areas of expertise and who together develop investment
strategies and make buy and sell decisions. Supporting the fund managers are
Scudder Kemper's many economists, research analysts, traders, and other
investment specialists, located in offices across the United States and around
the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates each fund paid, as a
percentage of its average daily net assets:
Fund Name Fee Paid
- --------------------------------------------------------------------------------
Scudder California Tax Free Money Fund 0.00%
- --------------------------------------------------------------------------------
Scudder California Tax Free Fund 0.00%
- --------------------------------------------------------------------------------
Scudder New York Tax Free Money Fund 0.00%
- --------------------------------------------------------------------------------
Scudder New York Tax Free Fund 0.00%
- --------------------------------------------------------------------------------
Scudder Massachusetts Limited Term Tax Free Fund 0.00%
- --------------------------------------------------------------------------------
Scudder Massachusetts Tax Free Fund 0.00%
- --------------------------------------------------------------------------------
Scudder Ohio Tax Free Fund 0.00%
- --------------------------------------------------------------------------------
31 - Who Manages and Oversees the Funds
<PAGE>
The portfolio managers
Below are the people who handle the day-to-day management of each fund in this
prospectus.
Scudder California Tax Free
Money Fund
Scudder New York Tax Free
Money Fund
Frank J. Rachwalski
Co-lead Portfolio Manager
o Began investment career in 1973
o Joined the adviser in 1973
o Joined the fund team in 1998
Jerri I. Cohen
Co-lead Portfolio Manager
o Began investment career in 1981
o Joined the adviser in 1981
o Joined the fund team in 1998
Elizabeth Meyer
o Began investment career in 1986
o Joined the adviser in 1986
o Joined the fund team in 1999
Scudder New York Tax Free Fund
Ashton P. Goodfield
Lead Portfolio Manager
o Began investment career in [YEAR]
o Joined the adviser in [YEAR]
o Joined the fund team in [YEAR]
Eleanor R. Brennan
o Began career in 1986
o Joined the adviser in 1995
o Joined the fund team in 1999
Scudder Massachusetts Limited Term Tax Free Fund
Scudder Massachusetts Tax Free Fund
Philip G. Condon
Lead Portfolio Manager
o Began investment career in [YEAR]
o Joined the adviser in [YEAR]
o Joined the fund team in [YEAR]
Rebecca L. Wilson
o Began career in [YEAR]
o Joined the adviser in [YEAR]
o Joined the fund team in [YEAR]
Scudder Ohio Tax Free Fund
Eleanor R. Brennan
Lead Portfolio Manager
o Began career in 1986
o Joined the adviser in 1995
o Joined the fund team in 1999
Rebecca L. Wilson
o Began career in [YEAR]
o Joined the adviser in [YEAR]
o Joined the fund team in [YEAR]
32 - Who Manages and Oversees the Funds
<PAGE>
The trustees
A mutual fund's Board of Trustees is responsible for the general oversight of
the fund's business. The individuals below serve concurrently as the trustees
for all funds in this prospectus. The majority of these trustees are not
affiliated with Scudder Kemper. The independent trustees have primary
responsibility for assuring that each fund is managed in the best interests of
its shareholders.
Lynn S. Birdsong
o Managing Director of Scudder Kemper Investments, Inc.
o President of the fund
Henry P. Becton, Jr.
o President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
o Executive Fellow, Center for Business Ethics, Bentley College
o President, Driscoll Associates
(consulting firm)
Peter B. Freeman
o Corporate director and trustee
George M. Lovejoy
o President and Director, Fifty Associates (real estate corporation)
Wesley W. Marple, Jr.
o Professor of Business Administration, Northeastern University,
College of Business Administration
Kathryn L. Quirk
o Managing Director of Scudder Kemper Investments, Inc.
o Vice President and Assistant Secretary of the fund
Jean C. Temple
o Venture Partner, Internet Capital Corp.
33 - Who Manages and Oversees the Funds
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance in recent years. The figures in the first half of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover).
Scudder California Tax Free Money Fund
Years ended March 31, 1998 1997(a)
- --------------------------------------------------------------------------------
Per-share data ($)
- --------------------------------------------------------------------------------
Net asset value, beginning of period 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Income from investment operations
- --------------------------------------------------------------------------------
Net investment income 00.00 00.00
- --------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) (00.00) 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total from investment operations 00.00 00.00
- --------------------------------------------------------------------------------
Less Distributions
- --------------------------------------------------------------------------------
Dividends from net investment income 00.00 (00.00)
- --------------------------------------------------------------------------------
Distributions from capital gains 00.00 00.00
- --------------------------------------------------------------------------------
Returns of capital 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total distributions 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Net asset value, end of period 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total Return (%) 00.00 00.00
- --------------------------------------------------------------------------------
Ratios/supplemental data (%)
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.00 0.00
- --------------------------------------------------------------------------------
Ratio of net income to average net assets 00.00 00.00
- --------------------------------------------------------------------------------
Portfolio turnover rate 000.00 000.00
- --------------------------------------------------------------------------------
Net assets, end of period ($ x 1,000) 000,000 000,000
- --------------------------------------------------------------------------------
34 - Financial Highlights
<PAGE>
Scudder California Tax Free Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Years ended March 31, 1998^1 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
Per-share data ($)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Income from investment operations
- -----------------------------------------------------------------------------------------
Net investment income 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) (00.00) 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total from investment operations 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Less Distributions
- -----------------------------------------------------------------------------------------
Dividends from net investment income 00.00(00.00) 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Distributions from capital gains 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Returns of capital 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total distributions 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Net asset value, end of period 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total Return (%) 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Ratios/supplemental data (%)
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.00 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------
Ratio of net income to average net assets 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 000.00 000.00 000.00 000.00 000.00 000.00
- -----------------------------------------------------------------------------------------
Net assets, end of period ($ x 1,000) 000,000 000,000 000,000 000,000 000,000 000,00
</TABLE>
35 - Financial Highlights
<PAGE>
Financial Highlights (continued)
Scudder New York Tax Free Money Fund
Years ended February 28, 1998 1997(a)
- --------------------------------------------------------------------------------
Per-share data ($)
- --------------------------------------------------------------------------------
Net asset value, beginning of period 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Income from investment operations
- --------------------------------------------------------------------------------
Net investment income 00.00 00.00
- --------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) (00.00) 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total from investment operations 00.00 00.00
- --------------------------------------------------------------------------------
Less Distributions
- --------------------------------------------------------------------------------
Dividends from net investment income 00.00 (00.00)
- --------------------------------------------------------------------------------
Distributions from capital gains 00.00 00.00
- --------------------------------------------------------------------------------
Returns of capital 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total distributions 00.00 00.00
- --------------------------------------------------------------------------------
Net asset value, end of period 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total Return (%) 00.00 00.00
- --------------------------------------------------------------------------------
Ratios/supplemental data (%)
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.00 0.00
- --------------------------------------------------------------------------------
Ratio of net income to average net assets 00.00 00.00
- --------------------------------------------------------------------------------
Portfolio turnover rate 000.00 000.00
- --------------------------------------------------------------------------------
Net assets, end of period ($ x 1,000) 000,000 000,000
- --------------------------------------------------------------------------------
36 - Financial Highlights
<PAGE>
Scudder New York Tax Free Fund
<TABLE>
<CAPTION>
Years ended December 31, 1998^1 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
Per-share data ($)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Income from investment operations
- -----------------------------------------------------------------------------------------
Net investment income 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) (00.00) 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total from investment operations 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Less Distributions
- -----------------------------------------------------------------------------------------
Dividends from net investment income 00.00(00.00) 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Distributions from capital gains 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Returns of capital 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total distributions 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Net asset value, end of period 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total Return (%) 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Ratios/supplemental data (%)
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.00 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------
Ratio of net income to average net assets 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 000.00 000.00 000.00 000.00 000.00 000.00
- -----------------------------------------------------------------------------------------
Net assets, end of period ($ x 1,000) 000,000 000,000 000,000 000,000 000,000 000,00
- -----------------------------------------------------------------------------------------
</TABLE>
37 - Financial Highlights
<PAGE>
Financial Highlights (continued)
Scudder Massachusetts Limited Term Tax Free Fund
Years ended February 28, 1998 1997(a)
- --------------------------------------------------------------------------------
Per-share data ($)
- --------------------------------------------------------------------------------
Net asset value, beginning of period 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Income from investment operations
- --------------------------------------------------------------------------------
Net investment income 00.00 00.00
- --------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) (00.00) 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total from investment operations 00.00 00.00
- --------------------------------------------------------------------------------
Less Distributions
- --------------------------------------------------------------------------------
Dividends from net investment income 00.00 (00.00)
- --------------------------------------------------------------------------------
Distributions from capital gains 00.00 00.00
- --------------------------------------------------------------------------------
Returns of capital 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total distributions 00.00 00.00
- --------------------------------------------------------------------------------
Net asset value, end of period 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total Return (%) 00.00 00.00
- --------------------------------------------------------------------------------
Ratios/supplemental data (%)
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.00 0.00
- --------------------------------------------------------------------------------
Ratio of net income to average net assets 00.00 00.00
- --------------------------------------------------------------------------------
Portfolio turnover rate 000.00 000.00
- --------------------------------------------------------------------------------
Net assets, end of period ($ x 1,000) 000,000 000,000
- --------------------------------------------------------------------------------
38 - Financial Highlights
<PAGE>
Scudder Massachusetts Tax Free Fund
<TABLE>
<CAPTION>
Years ended December 31, 1998^1 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
Per-share data ($)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Income from investment operations
- -----------------------------------------------------------------------------------------
Net investment income 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) (00.00) 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total from investment operations 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Less Distributions
- -----------------------------------------------------------------------------------------
Dividends from net investment income 00.00(00.00) 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Distributions from capital gains 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Returns of capital 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total distributions 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Net asset value, end of period 00.00 00.00 00.00 00.00 00.00 00.00
---------------------------------------------------
- -----------------------------------------------------------------------------------------
Total Return (%) 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Ratios/supplemental data (%)
- -----------------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.00 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------
Ratio of net income to average net assets 00.00 00.00 00.00 00.00 00.00 00.00
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 000.00 000.00 000.00 000.00 000.00 000.00
- -----------------------------------------------------------------------------------------
Net assets, end of period ($ x 1,000) 000,000 000,000 000,000 000,000 000,000 000,00
</TABLE>
39 - Financial Highlights
<PAGE>
Financial Highlights (continued)
Scudder Ohio Tax Free Fund
Years ended March 31, 1998 1997(a)
- --------------------------------------------------------------------------------
Per-share data ($)
- --------------------------------------------------------------------------------
Net asset value, beginning of period 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Income from investment operations
- --------------------------------------------------------------------------------
Net investment income 00.00 00.00
- --------------------------------------------------------------------------------
Net gains or losses on securities
(both realized and unrealized) (00.00) 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total from investment operations 00.00 00.00
- --------------------------------------------------------------------------------
Less Distributions
- --------------------------------------------------------------------------------
Dividends from net investment income 00.00 (00.00)
- --------------------------------------------------------------------------------
Distributions from capital gains 00.00 00.00
- --------------------------------------------------------------------------------
Returns of capital 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total distributions 00.00 00.00
- --------------------------------------------------------------------------------
Net asset value, end of period 00.00 00.00
-----------------------------------
- --------------------------------------------------------------------------------
Total Return (%) 00.00 00.00
- --------------------------------------------------------------------------------
Ratios/supplemental data (%)
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 0.00 0.00
- --------------------------------------------------------------------------------
Ratio of net income to average net assets 00.00 00.00
- --------------------------------------------------------------------------------
Portfolio turnover rate 000.00 000.00
- --------------------------------------------------------------------------------
Net assets, end of period ($ x 1,000) 000,000 000,000
- --------------------------------------------------------------------------------
40 - Financial Highlights
<PAGE>
How to invest in the funds
The following pages tell you how to invest with us and what to expect as a
shareholder. If you're investing directly with Scudder, this information applies
to you as it is given here.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket, or financial advisor -- your provider
may have its own policies or instructions, and you should follow those.
<PAGE>
How to Buy Shares
Use these instructions to invest directly with Scudder. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
First investment Additional investments
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an
Automatic Investment Plan
- ---------------------------------------------------------------------------------------------
By mail o Fill out and sign an o Send a check and a Scudder
or express application investment slip to us at the
(see below) appropriate address below
o Send it to us at the
appropriate address, o If you don't have an investment
along with An investment slip, simply include a letter
check with your name, account number,
the full name of the fund, and
your investment instructions
- ----------------------------------------------------------------------------------------------
By wire o Call 1-800-225-5163 for o Call 1-800-225-5163 for
instructions instructions
- ----------------------------------------------------------------------------------------------
In person o Visit one of our Scudder o Drop off your check and
(see below) Investor Centers, where a investment information
representative can help at any Scudder Investor Center
you fill out an application
- ----------------------------------------------------------------------------------------------
By phone -- o Call 1-800-225-5163 for
instructions
- ----------------------------------------------------------------------------------------------
With an -- o To set up regular investments
automatic from a bank checking account,
investment call 1-800-225-5163
plan
- ----------------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-225-5163
- ----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Scudder Investor Centers: Boca Raton, FL o Boston, MA o
Chicago, IL o New York, NY o San Francisco, CA
Fax number: 1-800-821-6234 (for exchanging and selling only)
- --------------------------------------------------------------------------------
42 - How to Buy Shares
<PAGE>
How to Exchange or Sell Shares
Use these instructions to sell or exchange shares in an account opened directly
with Scudder.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exchanging into another fund Selling shares
$2,500 or more to open a Some transactions, including
new account ($1,000 for IRAs) most for over $100,000, can
only be ordered in writing;
$100 or more for exchanges if you're in doubt, see page 46
between existing accounts
- -------------------------------------------------------------------------------------------------------
By phone o Call 1-800-225-5163 for o Call 1-800-225-5163 for
or wire instructions instructions
- -------------------------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
- -------------------------------------------------------------------------------------------------------
By mail, express, or fax Write a letter that includes: Write a letter that includes:
(see previous page)
o the fund, class, and account o the fund, class, and account
number you're exchanging number from which you want
out of to sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name and class of the fund o your name(s), signature(s),
you want to exchange into and address, as they appear
on your account
o your name(s), signature(s), o a daytime telephone number
and address, as they appear
on your account
o a daytime telephone number
- -------------------------------------------------------------------------------------------------------
With an -- o To set up regular cash
automatic payments from a Scudder fund
withdrawal account, call 1-800-225-5163
plan
- -------------------------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-225-5163
- -------------------------------------------------------------------------------------------------------
Using Checkwriting -- o On limited term and
money funds only; call
1-800-225-5163
- -------------------------------------------------------------------------------------------------------
</TABLE>
43 - How to Exchange or Sell Shares
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8
a.m. and 8 p.m. eastern time on any fund business day by calling
1-800-225-5163.
- --------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
Policies about transactions
The funds are open for business whenever the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading). Each money fund also calculates its share price as of 12:00 noon on
business days.
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers or at a Scudder Investor
Center must be forwarded to Scudder Service Corporation before they can be
processed, you'll need to allow extra time. A representative of your investment
provider or the Investor Center should be able to tell you when your order will
be processed.
44 - Policies You Should Know About
<PAGE>
- --------------------------------------------------------------------------------
[ICON] The Scudder web site can be a valuable resource for shareholders
with Internet access. Go to www.scudder.com to get up-to-date
information, review balances or even place orders for exchanges.
- --------------------------------------------------------------------------------
Ordinarily, your investment will start to accrue dividends the next business day
after your purchase is processed. However, wire transactions that arrive by
12:00 noon eastern time will receive that day's dividend.
When selling shares, you'll generally receive the dividend for the day on which
your shares were sold. If you ask us to, we can sell shares in a money market
fund and wire you the proceeds on the same day, as long as we receive your
request before 12:00 noon. However, you won't receive that day's dividend.
SAIL(TM), the Scudder Automated Information Line, is available 24 hours a day by
calling 1-800-343-2890. You can use SAIL to get information on Scudder funds
generally and on accounts held directly at Scudder. You can also use it to make
exchanges and sell shares.
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-225-5163.
Checkwriting, available on the two money funds and on Scudder Massachusetts
Limited Term Tax Free Fund, lets you sell fund shares by writing a check. Your
investment keeps earning dividends until your check clears. Please note that you
should not write checks for less than $100, and that we can't honor any check
larger than your balance at the time the check is presented to us. It's not a
good idea to close out an account using a check because the account balance
could change between the time you write the check and the time it is processed.
45 - Policies You Should Know About
<PAGE>
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. It's also possible that your bank may have its own fees for
handling wires. The fund can only accept wires of $100 or more.
Exchanges among Scudder funds are an option for shareholders who bought their
shares directly from Scudder and for many other investors as well. Exchanges are
a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these
reasons or any other.
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers and
most banks, savings institutions, and credit unions. Note that you can't get a
signature guarantee from a notary public.
46 - Policies You Should Know About
<PAGE>
- --------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you
can always send us your order in writing.
- --------------------------------------------------------------------------------
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
How the funds calculate share price
For each fund in this prospectus, the price at which you buy and sell shares is
the net asset value per share, or NAV. To calculate NAV, the funds use the
following equation:
TOTAL ASSETS - TOTAL LIABILITIES
--------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For the non-money funds, we typically use market prices to value securities.
However, when a market price isn't available, or when we have reason to believe
it doesn't represent market realities, we may value securities instead by using
methods approved by the fund's Board of Trustees. In such a case, the fund's
value for a security is likely to be different from quoted market values. In
valuing securities for the money market funds, we typically use the amortized
cost method (the method used by most money market funds).
47 - Policies You Should Know About
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o charge you $10 a year if your account balance falls below $2,500, and close
your account and send you the proceeds if your balance falls below $1,000;
in either case, we will give you 60 days' notice so you can either increase
your balance or close your account (these policies don't apply to
retirement accounts, to investors with $100,000 or more in Scudder fund
shares, or in any case where a fall in share price created the low balance)
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; a redemption in kind may be for an entire
order or only part of an order, but in any case is unlikely except with
orders involving more than $250,000 or 1% of the fund's assets
o change, add, or withdraw various services, fees, and account policies (for
example, we may change or terminate the exchange privilege at any time)
48 - Policies You Should Know About
<PAGE>
- --------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a
good idea to ask your tax professional about the tax consequences
of your investments, including any state and local tax
consequences.
- --------------------------------------------------------------------------------
Understanding Distributions and Taxes
You're entitled to receive your share of the net earnings of any fund you are
invested in. A fund can earn money in two ways: by receiving interest, dividends
or other income from securities it holds, and by selling securities for more
than it paid for them. (A fund's earnings are separate from any gains or losses
stemming from your own purchase of shares.) A fund may not always pay a
distribution for a given period.
The funds have a regular schedule for paying out any earnings to shareholders:
o Income and short-term capital gains: declared daily and paid monthly
o Long-term capital gains: November or December, or otherwise as needed (the
money funds don't expect to make any long-term capital gains distributions)
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account, or in the case of money
market funds). Your sales of shares may result in a capital gain or loss for
you; whether long-term or short-term depends on how long you owned the shares.
For tax purposes, an exchange is the same as a sale.
49 - Understanding Distributions and Taxes
<PAGE>
Dividends from these funds are generally tax free for most shareholders, meaning
that investors can receive them without incurring federal, state or local income
tax liability. However, there are a few exceptions:
o a portion of each fund's dividends may be taxable as ordinary income if it
came from investments in taxable securities or as the result of short-term
capital gains
o because each fund can invest up to 20% of assets in securities whose income
is subject to the federal alternative minimum tax (AMT), you may owe taxes
on a portion of your dividends if you are among those people who must pay
AMT
The following tables show the usual tax status of transactions in fund shares as
well as that of any taxable distributions from the funds:
Generally taxed at ordinary income rates
- --------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o taxable income dividends you receive from a fund
- --------------------------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
- --------------------------------------------------------------------------------
Generally taxed at capital gains rates
- --------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
- --------------------------------------------------------------------------------
As noted earlier, the money funds don't expect to make short- or long-term
capital gains distributions.
50 - Understanding Distributions and Taxes
<PAGE>
Each fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
51 - Understanding Distributions and Taxes
<PAGE>
Notes
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. These reports
are mailed automatically to fund shareholders.
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Scudder or the SEC (see below). Materials you
get from Scudder are free; those from the SEC involve a duplicating fee. If you
like, you can look over these materials in person at the SEC's Public Reference
Room in Washington, DC.
Fund Name SEC File #
- --------------------------------------------------------------------------------
Scudder California Tax Free Money Fund 811-3729
- --------------------------------------------------------------------------------
Scudder California Tax Free Fund 811-3729
- --------------------------------------------------------------------------------
Scudder New York Tax Free Money Fund 811-3749
- --------------------------------------------------------------------------------
Scudder New York Tax Free Fund 811-3749
- --------------------------------------------------------------------------------
Scudder Massachusetts Limited Term Tax Free Fund 811-3749
- --------------------------------------------------------------------------------
Scudder Massachusetts Tax Free Fund 811-3749
- --------------------------------------------------------------------------------
Scudder Ohio Tax Free Fund 811-3749
- --------------------------------------------------------------------------------
Scudder Funds SEC
PO Box 2291 450 Fifth Street, N.W.
Boston, MA 02107-2291 Washington, DC 20549-6009
1-800-225-5163 1-800-SEC-0330
www.scudder.com www.sec.gov
<PAGE>
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
SCUDDER MASSACHUSETTS TAX FREE FUND
Each a series of Scudder State Tax Free Trust
Two No-Load (No Sales Charges) Non-Diversified Mutual Funds
Specializing in the Management of Massachusetts Municipal Security Portfolios
SCUDDER NEW YORK TAX FREE MONEY FUND
SCUDDER NEW YORK TAX FREE FUND
Each a series of Scudder State Tax Free Trust
Two No-Load (No Sales Charges) Mutual Funds
Specializing in the Management of New York State Municipal Security Portfolios
SCUDDER OHIO TAX FREE FUND
A series of Scudder State Tax Free Trust
A No-Load (No Sales Charges) Mutual Fund Specializing in the
Management of an Ohio Municipal Securities Portfolio
SCUDDER PENNSYLVANIA TAX FREE FUND
A series of Scudder State Tax Free Trust
A No-Load (No Sales Charges) Mutual Fund Specializing in the Management
of a Pennsylvania Municipal Securities Portfolio
SCUDDER CALIFORNIA TAX FREE MONEY FUND
SCUDDER CALIFORNIA TAX FREE FUND
A series of Scudder California Tax Free Trust
Two No-Load (No Sales Charges) Mutual Funds Specializing
in the Management of California Municipal Security Portfolios
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1999
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus. The
prospectuses of the Funds dated August 1, 1999, as amended from time to time,
may be obtained without charge by writing to Scudder Investor Services, Inc.,
Two International Place, Boston, Massachusetts 02110-4103.
Annual Reports to Shareholders of Scudder Massachusetts Limited Term Tax
Free Fund, Scudder Massachusetts Tax Free Fund, Scudder New York Tax Free Fund,
Scudder New York Tax Free Money Fund, Scudder Ohio Tax Free Fund, Scudder
Pennsylvania Tax Free Fund, Scudder California Tax Free Fund and Scudder
California Tax Free Money Fund dated March 31, 1999 are incorporated by
reference and are hereby deemed to be part of this Statement of Additional
Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUNDS'INVESTMENT OBJECTIVES AND POLICIES..................................................................1
General Investment Objective and Policies of Scudder Massachusetts Limited Term Tax Free Fund........1
General Investment Objective and Policies of Scudder Massachusetts Tax Free Fund.....................2
General Investment Objectives and Policies of Scudder New York Tax Free Money Fund...................4
General Investment Objective and Policies of Scudder New York Tax Free Fund..........................6
General Investment Objective and Policies of Scudder Ohio Tax Free Fund..............................8
General Investment Objective and Policies of Scudder Pennsylvania Tax Free Fund......................9
General Investment Objectives and Policies of Scudder California Tax Free Money Fund................11
General Investment Objective and Policies of Scudder California Tax Free Fund.......................13
Investments.........................................................................................14
Master/feeder Fund Structure........................................................................15
Municipal Obligations...............................................................................15
Management Strategies...............................................................................18
Special Considerations..............................................................................19
Investing in Massachusetts..........................................................................19
Investing in New York...............................................................................25
Investing in Ohio...................................................................................33
Investing in Pennsylvania...........................................................................37
Investing in California.............................................................................41
Constitutional, Legislative and Other Factors.......................................................45
Trustees'Power to Change Objective and Policies.....................................................59
Investment Restrictions.............................................................................60
PURCHASES....................................................................................................62
Additional Information About Opening an Account.....................................................62
Minimum Balances....................................................................................62
Additional Information About Making Subsequent Investments..........................................63
Additional Information About Making Subsequent Investments by QuickBuy..............................63
Checks..............................................................................................63
Wire Transfer of Federal Funds......................................................................64
Share Price.........................................................................................64
Share Certificates..................................................................................64
Other Information...................................................................................64
EXCHANGES AND REDEMPTIONS....................................................................................65
Exchanges...........................................................................................65
Redemption by Telephone.............................................................................65
Redemption By QuickSell.............................................................................66
Redemption by Mail or Fax...........................................................................67
Redemption by Checkwriting..........................................................................67
Redemption-in-Kind..................................................................................67
Other Information...................................................................................67
FEATURES AND SERVICES OFFERED BY THE FUNDS...................................................................68
The No-Load Concept.................................................................................68
Internet access.....................................................................................68
Dividends and Capital Gains Distribution Options....................................................69
Scudder Investor Centers............................................................................70
Reports to Shareholders.............................................................................70
Transaction Summaries...............................................................................70
THE SCUDDER FAMILY OF FUNDS..................................................................................70
SPECIAL PLAN ACCOUNTS........................................................................................75
Automatic Withdrawal Plan...........................................................................75
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
Cash Management System -- Group Sub-Accounting Plan for Trust Accounts, Nominees
and Corporations....................................................................................76
Automatic Investment Plan...........................................................................76
Uniform Transfers/Gifts to Minors Act...............................................................76
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS....................................................................76
PERFORMANCE INFORMATION......................................................................................77
Average Annual Total Return.........................................................................77
Cumulative Total Return.............................................................................77
Total Return........................................................................................78
SEC Yield...........................................................................................78
Effective Yield.....................................................................................79
Tax-equivalent Yield for SNYTFMF and SCTFMF.........................................................79
Tax-equivalent Yield for All Other Funds............................................................79
Massachusetts Tax-free Yields.......................................................................80
New York Tax-free Yields............................................................................82
Ohio Tax-free Yields................................................................................83
Pennsylvania Tax-free Yields........................................................................84
California Tax-free Yields..........................................................................85
Comparison of Fund Performance......................................................................85
ORGANIZATION OF THE FUNDS....................................................................................89
INVESTMENT ADVISER...........................................................................................89
Personal Investments by Employees of the Adviser....................................................93
TRUSTEES AND OFFICERS........................................................................................94
REMUNERATION.................................................................................................96
Responsibilities of the Board -- Board and Committee Meetings.......................................96
Compensation of Officers and Trustees...............................................................97
DISTRIBUTOR..................................................................................................98
TAXES........................................................................................................98
Federal Taxation....................................................................................99
State Taxation.....................................................................................102
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax Free Fund...........102
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund............................102
Scudder Ohio Tax Free Fund.........................................................................102
Scudder Pennsylvania Tax Free Fund.................................................................103
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund........................103
PORTFOLIO TRANSACTIONS......................................................................................105
Brokerage Commissions..............................................................................105
Portfolio Turnover.................................................................................105
NET ASSET VALUE.............................................................................................106
ADDITIONAL INFORMATION......................................................................................107
Experts............................................................................................107
Shareholder Indemnification........................................................................107
Ratings of Municipal Obligations...................................................................107
Commercial Paper Ratings...........................................................................108
ii
<PAGE>
TABLE OF CONTENTS (continued)
Page
Glossary...........................................................................................108
Other Information..................................................................................109
FINANCIAL STATEMENTS........................................................................................111
Scudder Massachusetts Limited Term Tax Free Fund...................................................111
Scudder Massachusetts Tax Free Fund................................................................111
Scudder New York Tax Free Fund.....................................................................111
Scudder New York Tax Free Money Fund...............................................................111
Scudder Ohio Tax Free Fund.........................................................................111
Scudder Pennsylvania Tax Free Fund.................................................................111
Scudder California Tax Free Money Fund.............................................................111
Scudder California Tax Free Fund...................................................................111
</TABLE>
iii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Scudder Massachusetts Limited Term Tax Free Fund ("SMLTTFF"), Scudder
Massachusetts Tax Free Fund ("SMTFF"), Scudder New York Tax Free Fund
("SNYTFF"), Scudder New York Tax Free Money Fund ("SNYTFMF"), Scudder Ohio Tax
Free Fund ("SOTFF") and Scudder Pennsylvania Tax Free Fund ("SPTFF") are each a
non-diversified series of Scudder State Tax Free Trust. Scudder California Tax
Free Fund ("SCTFF") is a diversified series, and Scudder California Tax Free
Money Fund ("SCTFMF") is a non-diversified series, of Scudder California Tax
Free Trust. Collectively, the foregoing are referred to as the "Funds" and the
"Trusts," individually a "Fund" and a "Trust." Each Trust is a no-load open-end
management investment company. Scudder State Tax Free Trust consists of six
series and Scudder California Tax Free Trust consists of two series.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Funds may engage (such
as short selling, hedging, etc.) or a financial instrument in which the Funds
may purchase (such as options, forward foreign currency contracts, etc.) are
meant to describe the spectrum of investments that Scudder Kemper Investments,
Inc. (the "Adviser"), in its discretion, might, but is not required to, use in
managing a Fund's portfolio assets. The Adviser may, in its discretion, at any
time employ such practice, technique or instrument for one or more funds but not
for all fund advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of a Fund but, to the extent employed, could from time
to time have a material impact on that Fund's performance.
General Investment Objective and Policies of Scudder Massachusetts Limited Term
Tax Free Fund
SMLTTFF seeks to provide Massachusetts taxpayers with as high a level
of income exempt from Massachusetts personal income tax and regular federal
income tax, as is consistent with a high degree of price stability through a
professionally managed portfolio consisting primarily of investment grade
municipal securities. In pursuit of its objective, the Fund expects to invest at
least 75% of its assets in Massachusetts municipal securities that are rated Baa
or better by Moody's Investors Service, Inc. ("Moody's"), BBB or better by
Standard and Poor's Corporation Ratings Services ("S&P"), or Fitch Investors
Service, Inc. ("Fitch"), or in securities considered to be of equivalent
quality. There can be no assurance that the objective of the Fund will be
achieved or that all income to shareholders which is exempt from regular federal
income taxes will be exempt from state income or local taxes or that income
exempt from regular federal income tax will be exempt from the federal
alternative minimum tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the Commonwealth of Massachusetts and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Massachusetts residents, would be exempt, in the
opinion of bond counsel rendered on the date of issuance, from Massachusetts
personal income as well as regular federal income taxes. Because the Fund is
intended for investors subject to Massachusetts personal income tax and federal
income tax it may not be appropriate for all investors and is not available in
all states. As described below in "Scudder Massachusetts Limited Term Tax Free
Fund's Investments," the Fund may also invest in taxable obligations.
Scudder Massachusetts Limited Term Tax Free 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 below under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be normally
invested in municipal obligations the income from which is, in the opinion of
bond counsel rendered on the date of issuance, exempt from regular federal and
Massachusetts personal income taxes ("Massachusetts municipal securities")
except that the Fund may temporarily invest more than 20% of its net assets in
securities the income from which may be subject to regular federal and
Massachusetts personal income taxes during periods which, in the opinion of the
Adviser, require a temporary defensive position for the protection of
shareholders. The Fund may also invest in when-issued or forward delivery
securities and strategic transactions (as defined below). Investors should be
aware that shares of the Fund do not represent a complete investment program.
Normally, at least 80% of the Fund's net assets will be invested in
securities whose interest income is not treated as a tax preference item under
the individual alternative minimum tax. Furthermore, all of the Fund's portfolio
obligations, including short-term obligations, will be (a) rated at the time of
purchase within the six highest quality
<PAGE>
ratings categories 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 quality 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 Massachusetts municipal securities 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 banker's acceptances.
General Investment Objective and Policies of Scudder Massachusetts Tax Free Fund
SMTFF seeks to provide Massachusetts taxpayers with income exempt from
Massachusetts personal income tax and regular federal income tax through a
professionally managed portfolio consisting primarily of investment grade
municipal securities. In pursuit of its objective, the Fund expects to invest
principally in Massachusetts municipal securities that are rated A or better by
Moody's, S&P or Fitch. There can be no assurance that the objective of the Fund
will be achieved or that all income to shareholders which is exempt from regular
federal income taxes will be exempt from state income or local taxes or that
income exempt from regular federal income tax will be exempt from the federal
alternative minimum tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the Commonwealth of Massachusetts and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Massachusetts residents, would be exempt, in the
opinion of bond counsel rendered on the date of issuance, from Massachusetts
state personal income as well as regular federal income taxes. Because the Fund
is intended for investors subject to Massachusetts personal income tax and
federal income tax it may not be appropriate for all investors and is not
available in all states. As described below in "Massachusetts Tax Free Fund's
Investments," the Fund may also invest in taxable obligations.
Scudder Massachusetts Tax Free Fund's Investments. Normally, at least 75% of the
municipal securities purchased by the Fund will be investment-grade quality
which are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P
or Fitch, or if unrated, judged by the Adviser, to be of equivalent quality.
The Fund may 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 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.
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 in the past than investment-grade bonds, 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 that Fund to retain or dispose of the security.
It is a fundamental policy, which may not be changed without a vote of
shareholders, that each Fund normally invests at least 80% of its net assets in
municipal securities of issuers located in Massachusetts 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 Massachusetts personal income tax and
regular federal income tax ("Massachusetts municipal securities"). These
securities include municipal bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued. Municipal bonds
include
2
<PAGE>
general obligation bonds, which are secured by the issuer's pledge of its faith,
credit and taxing power for payment of principal and interest, and revenue
bonds, which may be issued to finance projects owned or used by either private
or public entities and which include bonds issued to finance industrial
enterprises and pollution control facilities.
The Fund may invest in other municipal securities such as variable rate
demand instruments, as well as municipal notes of issuers located in
Massachusetts and other qualifying issuers, 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. For federal income tax purposes,
the income earned from municipal securities may be entirely tax-free, taxable or
subject to only the alternative minimum tax.
Under normal market conditions, the Fund expects 100% of its portfolio
securities to consist of Massachusetts municipal securities. However, if
defensive considerations or an unusual disparity between after-tax income on
taxable and municipal securities makes it advisable, up to 20% of the Fund's
assets may be held in cash or invested in short-term taxable investments,
including U.S. Government obligations and money market instruments and, in the
case of Scudder Massachusetts Tax Free Fund, repurchase agreements.
The Fund may temporarily invest more than 20% of its net assets in
taxable securities during periods which, in the Adviser's opinion, require a
defensive position. It is impossible to accurately predict how long such
alternative strategies may be utilized.
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.
The Fund may invest in third party puts, and when-issued or forward
delivery securities, which may involve certain expenses and risks, including
credit risks. The Funds may also enter into repurchase agreements, reverse
repurchase agreements and stand-by commitments which may involve certain
expenses and risks, including credit risks. None of these securities and
techniques is expected to comprise a major portion of the Funds' investments. In
addition, each Fund may purchase indexed securities and may engage in strategic
transactions.
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
obligation 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 issues, the Adviser, subject to the Trustees' supervision,
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.
Normally, at least 80% of the Fund's net assets will be invested in
securities whose interest income is not treated as a tax preference item under
the individual alternative minimum tax. Furthermore, all of the Fund's portfolio
obligations, 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 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.
During the fiscal year ended March 31, 1999, based upon the dollar-weighted
average ratings of the portfolio holdings at the end of each month during that
period, the Fund had the following percentage of its net assets invested in debt
securities rated below investment-grade (or if unrated, considered by the
Adviser to be equivalent to rated securities): _%.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Massachusetts municipal securities 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 banker's acceptances. It is
impossible to accurately predict how long such alternative strategies may be
utilized.
3
<PAGE>
General Investment Objectives and Policies of Scudder New York Tax Free Money
Fund
The investment objectives of SNYTFMF are stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while providing
New York taxpayers income exempt from New York State and New York City personal
income taxes and regular federal income tax. 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 below under
"Investments and Investment Techniques -- Municipal Obligations") having
remaining maturities of 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 New York tax-exempt investments, the Scudder New York
Tax Free Money Fund will have a more limited number of investment options
available to it than a fund that does not focus on investments from a single
state. Consequently, the Fund may need to invest a significant percentage of its
assets in single issuer. Changes in the financial condition or market assessment
of such an issuer could have a significant adverse impact on the Fund. Therefore
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.
SNYTFMF'S portfolio consists primarily of obligations issued by
municipalities located in New York State and other qualifying issuers (including
Puerto Rico, the U.S. Virgin Islands and Guam) whose interest payments, if
distributed to New York residents, would be exempt, in the opinion of bond
counsel rendered on the date of issuance, from New York State and New York City
personal income taxes as well as regular federal income tax. Because the Fund is
intended for investors subject to New York personal income taxes and federal
income tax, 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. It is impossible to accurately predict how long such
alternative strategies will be utilized.
Scudder New York Tax Free Money Fund's Investments. The Fund seeks to provide
New York taxpayers with income exempt from New York State and New York City
personal income taxes 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 below 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 regular federal income tax, and New York State and New
York City personal income taxes ("New York municipal securities") except that
when the Adviser determines that market conditions warrant, the Fund may, for
temporary defensive purposes, invest more than 20% of its net assets in
securities the income from which may be subject to regular federal income tax
and New York State and New York City personal income taxes. Scudder New York Tax
Free Money Fund is concentrated in securities issued by New York 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 will
consist of New York 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 of two or more of the following
rating agencies: Moody's (Aaa and Aa, MIG-1 and MIG-2, and P1 and P2), S&P (AAA
and AA, SP1+ and SP1, A1+ and A1 and A2) and Fitch Investors Service, Inc.
("Fitch") (AAA and AA, F1+, F1 and F2). The Fund may invest its assets in these
securities to the extent permitted by Rule 2a-7 of the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund may invest up to 20% of its assets
in securities subject to the alternative minimum tax ("AMT bonds"). The Fund's
distributions from interest on AMT bonds may be taxable depending upon an
investor's particular situation. 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.
4
<PAGE>
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 Trust determines that such disposal would
not be 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 will attempt to use comparable
ratings as standards for its investment in municipal obligations 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 taxable investments which mature in 397 calendar days 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 (see below) with respect to any of the obligations which
the Fund is permitted to purchase. The Fund will 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 will be 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. It is impossible to accurately predict how long such
alternative strategies may be utilized.
Amortized Cost Valuation of Portfolio Securities. Pursuant to Rule 2a-7 of the
Securities and Exchange Commission (the "SEC"), SNYTFMF 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, or as directed by the Trustees.
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
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.
5
<PAGE>
General Investment Objective and Policies of Scudder New York Tax Free Fund
The investment objective of SNYTFF is to provide income that is exempt
from New York State and New York City personal income taxes and regular federal
income tax when distributed to New York residents through the professional and
efficient management of a portfolio consisting principally of New York municipal
securities. In pursuit of its objective, the Fund will invest principally in New
York municipal securities that are rated Aa or A by Moody's or AA or A by S&P or
by 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 city taxes, or from the federal alternative minimum tax.
SNYTFFund's portfolio consists primarily of obligations issued by
municipalities located in New York State and other qualifying issuers (including
Puerto Rico, the U.S. Virgin Islands and Guam) whose interest payments, if
distributed to New York residents, would be exempt, in the opinion of bond
counsel rendered on the date of issuance, from New York State and New York City
as well as regular federal income taxes. The Fund may also invest in taxable
obligations for temporary or defensive purposes. It is impossible to accurately
predict how long such alternative strategies will be utilized.
Scudder New York Tax Free Fund's Investments. 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 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 fiscal year ended March 31, 1998, based upon the
dollar-weighted average ratings of the Fund portfolio holdings at the end of
each month during that period, the Fund had the following percentage of its net
assets invested in debt securities rated below investment-grade (or if unrated,
considered by the Adviser to be equivalent to rated securities) in the category
indicated: 1.94% unrated.
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 in the past than investment-grade bonds, 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.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in New York state 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 regular federal, as well as New York state and New York City
personal income tax ("New York 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 and notes of issuers located in New York and of
other qualifying issuers. 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 or a
specific excise tax or other revenue source.
6
<PAGE>
Under normal market conditions, the Fund expects to invest principally
in New York municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in New York municipal
securities with short- and medium-term maturities as well.
The Fund may also invest up to 20% of its total assets in 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 state and local tax laws.
Ordinarily, the Fund expects that 100% of its portfolio securities will
be New York municipal securities. The Fund may also, for temporary defensive
purposes, hold cash or invest its assets in short-term taxable securities. It is
impossible to accurately predict how long such alternative strategies may be
utilized.
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. 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.
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 banker's acceptances. Notwithstanding the
foregoing, the Fund may invest more than 20% of its net assets in securities the
income from which may be subject to regular federal tax and New York State and
City personal income taxes 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.
Junk bonds 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 Fund 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 Fund 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.
7
<PAGE>
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.
General Investment Objective and Policies of Scudder Ohio Tax Free Fund
SOTFF seeks to provide Ohio taxpayers with income exempt from Ohio
personal income tax and regular federal income tax through a professionally
managed portfolio consisting primarily of investment-grade municipal securities.
In pursuit of its objective, the Fund expects to invest principally in Ohio
municipal securities that are rated A or better by Moody's, S&P or Fitch. There
can be no assurance that the objective of the Fund will be achieved or that all
income to shareholders which is exempt from regular federal income taxes will be
exempt from state income or local taxes or that income exempt from regular
federal income tax will be exempt from the federal alternative minimum tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the State of Ohio and other qualifying issuers
(including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Ohio residents, would be exempt, in the opinion of
bond counsel rendered on the date of issuance thereof, from Ohio personal income
tax as well as regular federal income tax. Because the Fund is intended for
investors subject to Ohio and federal income taxes, it may not be appropriate
for all investors and is not available in all states. As described below in the
"Scudder Ohio Tax Free Fund's Investments," the Fund may also invest in taxable
obligations.
Scudder Ohio Tax Free 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 below 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 regular federal and
Ohio personal income taxes ("Ohio municipal securities") except that the Fund
may temporarily invest more than 20% of its net assets in securities the income
from which may be subject to regular federal and Ohio personal income taxes
during periods which, in the opinion of the Adviser, require a temporary
defensive position for the protection of the shareholders. It is impossible to
accurately predict how long such alternative strategies will be utilized.
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 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 fiscal year ended March 31, 1999, based upon the
dollar-weighted average ratings of the Fund's portfolio holdings at the end of
each month during that period, the Fund had the following percentage of its net
assets invested in debt securities rated below investment-grade (or if unrated,
considered by the Adviser to be equivalent to rated securities) in the category
indicated: _% BBB-.
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 in the past than investment-grade bonds, they are
considered to be predominantly speculative and, therefore, carry greater risk.
8
<PAGE>
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.
The Fund invests in municipal securities of issuers located in Ohio 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
interest on these obligations is exempt from both Ohio personal income tax and
regular federal income tax ("Ohio municipal securities"). These securities
include municipal bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued. Municipal bonds include general
obligation bonds, which are secured by the issuer's pledge of its faith, credit
and taxing power for payment of principal and interest, and revenue bonds, which
may be issued to finance projects owned or used by either private or public
entities and which include bonds issued to finance industrial enterprises and
pollution control facilities. The Fund may invest in other municipal securities
such as variable rate demand instruments. The Fund may also invest in municipal
notes of issuers located in Ohio and other qualifying issuers. They are
generally used to provide capital needs and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes and
bond anticipation notes. For federal income tax purposes, the income earned from
municipal securities may be entirely tax-free, taxable or subject to only the
alternative minimum tax.
Under normal market conditions, the Fund expects to invest principally
in Ohio municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in Ohio municipal
securities with short- and medium-term maturities as well.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Ohio municipal securities 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 banker's acceptances. The Fund may also invest
in when-issued or forward delivery securities and enter into repurchase
agreements, reverse repurchase agreements, and strategic transactions (as
defined below). Investors should be aware that shares of the Fund do not
represent a complete investment program.
General Investment Objective and Policies of Scudder Pennsylvania Tax Free Fund
SPTFF seeks to provide Pennsylvania taxpayers with income exempt from
Pennsylvania personal income tax and regular federal income tax through a
portfolio consisting primarily of investment-grade municipal securities. In
pursuit of its objective, the Fund expects to invest principally in Pennsylvania
municipal securities that are rated A or better by Moody's, S&P or Fitch. There
can be no assurance that the objective of the Fund will be achieved or that all
income to shareholders which is exempt from regular federal income taxes will be
exempt from state income or local taxes or that income exempt from regular
federal income tax will be exempt from the federal alternative minimum tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the Commonwealth of Pennsylvania and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Pennsylvania residents, would be exempt, in the
opinion of bond counsel rendered on the date of issuance, from Pennsylvania
personal income tax as well as regular federal income tax. Because the Fund is
intended for investors subject to Pennsylvania and federal income taxes, it may
not be appropriate for all investors and is not available in all states. As
described below in "Scudder Pennsylvania Tax Free Fund's Investments," the Fund
may also invest in taxable obligations.
Scudder Pennsylvania Tax Free 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 below 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 regular federal and
Pennsylvania state income taxes ("Pennsylvania municipal securities") except
that the Fund may temporarily invest more than 20% of its net assets in
securities the income from which may be subject to federal and Pennsylvania
state income taxes during periods which, in the opinion of the Adviser, require
a temporary defensive position for the protection of shareholders. It is
impossible to accurately predict how long such alternative strategies will be
utilized.
9
<PAGE>
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 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. During the fiscal year ended March
31, 1999, based upon the dollar-weighted average ratings of the Fund's portfolio
holdings at the end of each month during that period, the Fund had the following
percentage of its net assets invested in debt securities rated below
investment-grade (or if unrated, considered by the Adviser to be equivalent to
rated securities) in the category indicated: ____% unrated.
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.
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 in the past than investment-grade bonds, 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.
The Fund invests in municipal securities of issuers located in
Pennsylvania 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
Pennsylvania personal income tax and regular federal income tax ("Pennsylvania
municipal securities"). These securities include municipal bonds, which meet
longer-term capital needs and generally have maturities of more than one year
when issued. Municipal bonds include general obligation bonds, which are secured
by the issuer's pledge of its faith, credit and taxing power for payment of
principal and interest, and revenue bonds, which may be issued to finance
projects owned or used by either private or public entities and which include
bonds issued to finance industrial enterprises and pollution control facilities.
The Fund may invest in other municipal securities such as variable rate demand
instruments. The Fund may also invest in municipal notes of issuers located in
Pennsylvania and other qualifying issuers. They 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. For federal income
tax purposes, the income earned from municipal securities may be entirely
tax-free, taxable or subject to only the alternative minimum tax.
Under normal market conditions, the Fund expects to invest principally
in Pennsylvania municipal securities with long-term maturities (i.e., more than
10 years). The Fund has the flexibility, however, to invest in Pennsylvania
municipal securities with short- and medium-term maturities as well.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Pennsylvania municipal securities 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 banker's acceptances. The Fund may
also invest in when-issued or forward delivery securities and enter into
repurchase agreements and reverse repurchase agreements. Investors should be
aware that shares of the Fund do not represent a complete investment program.
10
<PAGE>
General Investment Objectives and Policies of Scudder California Tax Free Money
Fund
The investment objectives of SCTFMF 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 tax. 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. Changes in the financial condition
or market assessment of the financial condition of these entities could have a
significant adverse impact on the Fund. 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. 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.
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 (Aaa and Aa, MIG-1 and MIG-2, and P1 and P2),
S&P (AAA and AA, SP1+ and SP1, A1+ and A1 and A2), and 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.
Scudder California Tax Free Money Fund's Investments. SCTFMF 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. 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 Adviser, require a temporary
defensive position for the protection of shareholders. It is impossible to
accurately predict how long such alternative strategies may be utilized.
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 397 calendar days 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)
11
<PAGE>
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
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
SCTFMF 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.
12
<PAGE>
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
SCTFF 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.
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's Investments. 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.
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.
13
<PAGE>
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.
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.
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.
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. 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. 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 below. The Fund may also, for temporary defensive purposes, hold cash or
invest its assets in taxable securities. It is impossible to accurately predict
how long these alternative strategies may be utilized.
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,
14
<PAGE>
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 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 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.
During the fiscal year ended March 31, 1999, based upon the
dollar-weighted average ratings of the Fund's portfolio holdings at the end of
each month during that period, the Fund had the following percentages of its net
assets invested in debt securities rated (or if unrated, considered by the
Adviser to be equivalent to rated securities) in the categories indicated: ___%
BB-, ____% B+ and ___% B.
A portion of the Fund's income may be subject to federal, state and
local income taxes.
Master/feeder Fund Structure
Each Trust's Board of Trustees has the discretion to retain the current
distribution arrangement for a Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
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. Interest on municipal
obligations issued by Massachusetts issuers is generally exempt from
Massachusetts personal income 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. Tax anticipation notes and revenue anticipation
notes are generally issued in anticipation of various seasonal revenues such as
income, sales, use, and business taxes. 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. 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
15
<PAGE>
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 and generally have maturities of more than one
year when issued, have two principal classifications: "general
obligation" bonds and "revenue" bonds.
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 each Fund's 20% limitation on
investing in municipal securities the interest income from which is subject to
the alternative minimum tax ("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.
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 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. Each Fund intends to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to a Fund, or (3) to maintain an
investment grade investment portfolio. 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.
16
<PAGE>
The variable rate demand instruments that a Fund 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. A Fund will determine the variable rate demand
instruments that it will 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 a Fund. Thus, either the credit of the issuer of the
municipal obligation or the guarantor bank or both will meet the quality
standards of a Fund. The Adviser will reevaluate each unrated variable rate
demand instrument held by a Fund on a quarterly basis to determine whether it
continues to meet a 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 minimize 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. A Fund 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 instrument held by a Fund will
ordinarily be deemed to be the longer of (1) the notice period required before a
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.
4. General Considerations. An entire issue of municipal
obligations may be purchased by one or a small number of
institutional investors such as either Fund. Thus, the issue
may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933 (the
"1933 Act") 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 a Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in a 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. In addition,
Stand-by Commitments and demand obligations also enhance marketability.
For the purpose of a 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.
Each Fund expects that it 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 particular issues
of municipal obligations, rather than factors affecting all, or broad classes
of, municipal obligations.
17
<PAGE>
Each Fund may invest up to 25% of its total assets in fixed-income
securities rated below investment grade, that is, below Baa by Moody's, or below
BBB by S&P or Fitch, or in unrated securities considered to be of equivalent
quality. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. Each Fund may not invest in
fixed-income securities rated below B by Moody's, S&P or Fitch, or their
equivalent. 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
a Fund will be purchased upon issuance, which may involve special risks because
the securities so acquired are new issues. In such instances a 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 a
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 a Fund's net asset
value. In addition, a 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 fiscal year ended March 31, 1999 for Scudder Massachusetts
Limited Term Tax Free Fund, the average monthly dollar-weighted market value of
the bonds in the Fund's portfolio rated lower than BBB by Moody's, S&P or Fitch,
or their equivalent was _%.
Management Strategies
In pursuit of its investment objective, each 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 obligation 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 issues, the
Adviser, subject to the Trustees' review, performs credit analysis and manages
each 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 each Fund's portfolio are:
Emphasis on Credit Analysis. As indicated above, each Fund's portfolio will be
invested in municipal obligations rated within, or judged by the Funds' Adviser
to be of a quality comparable to, the six highest quality ratings categories of
Moody's, S&P or Fitch, or in U.S. Government obligations. The ratings assigned
by Moody's, S&P or 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 obligation market, relative credit
standing and market perceptions thereof may shift. Therefore, the Adviser
believes that it should review continuously the quality of municipal
obligations.
18
<PAGE>
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 ratings of the
published services and to anticipate changes in credit ratings.
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 each 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 a 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 a Fund will be able to take advantage of them.
Each 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
Income Level and Credit Risk. Yield on municipal obligations depends 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. Because each Fund holds primarily investment grade
municipal obligations, the income earned on shares of a Fund will tend to be
less than it might be on a portfolio emphasizing lower quality securities;
investment grade securities, however, may include securities with some
speculative characteristics. 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. Each 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 reduce the credit risk of
investing in a Fund, that risk cannot be entirely eliminated. Shares of a Fund
are not insured by any agency of Massachusetts or of the U.S. Government.
Investing in Massachusetts
The following information as to certain Massachusetts risk factors is
given to investors in view of SMLTTFF's and SMTFF's policy of concentrating its
investments in Massachusetts issuers. Such information constitutes only a brief
summary, does not purport to be a complete description and is based on
information from official statements relating to securities offerings of
Massachusetts issuers and other sources believed to be reliable. No independent
verification has been made of the following information.
Each Fund is more susceptible to factors adversely affecting issuers of
Massachusetts municipal securities than is a comparable municipal bond fund that
does not focus on investments of Massachusetts issuers. In 1989, Massachusetts
experienced growth rates significantly below the national average an an economic
recession in 1990 and 1991 caused negative growth rates in Massachusetts. All
sectors of the economy experienced job losses, including high technology,
construction and financial industries. In addition, the economy experiences
shifts in employment from labor-intensive manufacturing industries to technology
and service-based industries. After declining since 1989,
19
<PAGE>
however, total Massachusetts employment showed positive annual growth in 1993
and 1994. Employment in 1993 and 1994 increased in all sectors, except
manufacturing which had experienced declines in each year since 1985. In 1995,
total non-agricultural employment in Massachusetts grew at a rate of 2.4% with
the most rapid growth coming in the construction sector and the services sector,
which grew at rates of 4.7% and 4.9%, respectively. The unemployment rate for
the Commonwealth for 1996 and 1997 was 4.1% and 4.0%, respectively, compared to
the national rate of 5.2% for the same periods. In addition, in 1997 employment
in manufacturing increased by almost 2%, the largest annual increase in
manufacturing in over twelve years. Real income levels in Massachusetts declined
between 1989 and 1991. Since 1994, however, real per capita income levels in
Massachusetts continue to increase faster than the national average, showing
growth rates of 6.2% and 6.0% in 1996 and 1997, respectively. Massachusetts had
the third highest level of personal income in the United States in 1995.
State Economy. Throughout much of the 1980s, the Commonwealth had a strong
economy which was evidenced by low unemployment and high personal income growth
as compared to national trends. Economic growth in the Commonwealth slowed in
the late 1980s and early 1990s but outpaced that of the nation as a whole in
1997 and 1998. Current economic indicators such as retail sales, housing
permits, construction, and employment levels suggest a strong and continued
economic recovery. The unemployment rate for the Commonwealth as of November
1998 was 2.9% compared to a national average of 4.4%. The unemployment rate is
expected to remain steady through Calendar Year 2000. In addition, in 1997
employment in manufacturing increased by almost 2%, the largest annual increase
in manufacturing in over twelve years. Although the rate of growth for per
capita personal income has outpaced the national average since 1991 and still
remains among the highest in the nation, it is expected to fall from
approximately 5.1% in Fiscal Year 1998 to 4.5% in Fiscal Year 1999 and remain at
that level for a few years.
Major infrastructure projects are anticipated in the Commonwealth over
the next decade. It is currently anticipated that the federal government will
assume responsibility for approximately 67% of the estimated $10.8 billion cost
of projects which consist of the depression of the central artery which
traverses the City of Boston and the construction of a third harbor tunnel
linking downtown Boston to Logan Airport. The current estimated date of
completion of the project is 2004. In 1997, a law was passed authorizing the
Commonwealth to spend up to $609 million for the design and construction of a
new convention facility in South Boston. At the same time, $49.5 million was
authorized for the expansion and renovation of the Springfield Civic Center, and
$19 million was reimbursed to the City of Worcester for construction of a new
convention center. Revenue bonds used to finance these three facilities will be
paid from various parking receipts, car rental surcharges, hotel taxes and sales
taxes in business located in and around the facilities.
The fiscal viability of the Commonwealth's authorities and
municipalities is inextricably linked to that of the Commonwealth. The
Commonwealth guarantees the debt of several authorities, most notably the
Massachusetts Bay Transportation Authority and the University of Massachusetts
Building Authority. Their ratings are based on this guarantee and can be
expected to move in tandem. Several other authorities are funded in part or in
whole by the Commonwealth and their debt ratings may be adversely affected by a
negative change in those of the Commonwealth.
Commonwealth spending exceeded revenues in each of the five fiscal
years commencing fiscal 1987. In particular, from 1987 to 1990, spending in five
major expenditure categories (Medicaid, debt service, public assistance, group
health insurance and transit subsidies) grew at rates in excess of the rate of
inflation for the comparable period. In addition, the Commonwealth's tax
revenues during this period repeatedly failed to meet official forecasts. For
the budgeted funds, operating losses in fiscal 1987 and 1988, of $349 million
and $370 million, respectively, were covered by surpluses carried forward from
prior years. The operating losses in fiscal 1989 and 1990, which totaled $672
million and $1.251 billion, respectively, were covered primarily through deficit
borrowings. During that period, operating fund balances declined from a budget
surplus of $1.072 billion in fiscal 1987 to a deficit of $1.104 billion for the
fiscal year ending 1990.
For the fiscal year ending June 30, 1991, total operating revenues of
the Commonwealth increased by 13.5% over the prior year, to $13.878 billion.
This increase was due chiefly to state tax increases enacted in July, 1990 and
to a substantial federal reimbursement for uncompensated patient care under the
Medicaid program. 1991 expenditures also increased over the prior year to
$13.899 billion resulting in an operating loss in the amount of $21.2 million.
However, after applying the opening fund balances created from proceeds of the
borrowing that financed the fiscal 1990 deficit, no deficit borrowing was
required to close-out fiscal 1991.
20
<PAGE>
For the fiscal year ended June 30, 1992, the budgeted operating funds
ended with an excess of revenues and other sources over expenditures and other
uses of $312.3 million and with a surplus of $549.4 million, when such excess is
added to the fund balances carried forward from fiscal 1991.
The budgeted operating funds of the Commonwealth ended fiscal 1993 with
a surplus of revenues and other sources over expenditures and other uses of
$13.1 million and aggregate ending fund balances in the budgeted operating funds
of the Commonwealth of approximately $562.5 million. Budgeted revenues and other
sources for fiscal 1993 totaled approximately $14.710 billion, including tax
revenues of $9.930 billion. Total revenues and other sources increased by
approximately 6.9% from fiscal 1992 to 1993, while tax revenues increased by
4.7% for the same period. In July 1992, tax revenues had been estimated to be
approximately $9.685 billion for fiscal 1993. This amount was subsequently
revised during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other uses in fiscal 1993
totaled approximately $14.696 billion, which is $1.280 billion or approximately
9.6% higher than fiscal 1992 expenditures and other uses. Fiscal 1993 budgeted
expenditures were $23 million lower than the initial July 1992 estimates of
fiscal 1993 budgeted expenditures.
As of June 30, 1993, after payment of all Local Aid and retirement of
short-term debt, the Commonwealth showed a year-end cash position of
approximately $622.2 million, as compared to a projected position of $485.1
million.
The budgeted operating funds of the Commonwealth ended fiscal 1994 with
a surplus of revenues and other sources over expenditures and other uses of
$26.8 million and aggregate ending fund balances in the budgeted operating funds
of the Commonwealth of approximately $589.3 million. Budgeted revenues and other
sources for fiscal 1994 totaled approximately $15.550 billion, including tax
revenues of $10.607 billion, $87 million below the Department of Revenue's
fiscal 1994 tax revenue estimate of $10.694 billion. Total revenues and other
sources increased by approximately 5.7% from fiscal 1993 to fiscal 1994 while
tax revenues increased by 6.8% for the same period.
Commonwealth budgeted expenditures and other uses in fiscal 1994
totaled $15.523 billion, which is $826.5 million or approximately 5.6% higher
than fiscal 1993 budgeted expenditures and other uses.
As of June 30, 1994, the Commonwealth showed a year-end cash position
of approximately $757 million, as compared to a projected position of $599
million.
Fiscal 1995 tax revenue collections totaled $11.163 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $11.151 billion, and approximately $556 million, or
5.2%, above fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and
other sources, including non-tax revenues collected in fiscal 1995 totaled
$16.387 billion, approximately $837 million, or 5.4%, above fiscal 1994 budgeted
revenues of $15.550 billion. Budgeted expenditures and other uses of funds in
fiscal 1995 were approximately $16.251 billion, approximately $728 million, or
4.7%, above fiscal 1994 budgeted expenditures and uses of $15.523 billion. The
Commonwealth ended fiscal 1995 with an operating gain of $137 million and an
ending fund balance of $726 million.
The Commonwealth ended fiscal 1996 with a surplus of revenues and other
sources over expenditures and other uses of $446.4 million resulting in
aggregate ending fund balances in the budgeted operating funds of the
Commonwealth of approximately $1.173 billion. Budgeted revenues and other
sources for fiscal 1996 totaled approximately $17.327 billion, including tax
revenues of approximately $12.049 billion, approximately $365 million higher
than prior official estimate in May, 1996. Budgeted revenues and other sources
increased by approximately 5.7% from fiscal 1995 to fiscal 1996, while tax
revenues increased by approximately 7.9% for the same period. Income tax
withholding payments increased by approximately 8.0% from fiscal 1995, and total
income tax collections by approximately 12.3%. Budgeted expenditures and other
uses in fiscal 1996 totaled approximately $16.896 billion, an increase of
approximately $645.7 million, or 4.0%, over fiscal 1995.
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $179.4 million, bringing the Stabilization Fund balance to
approximately $627.1 million, which exceeded the amount that can remain in the
Stabilization Fund by law, $543.3 million. In fiscal 1997, the statutory ceiling
on the Stabilization Fund was raised from 5% of total tax revenues to 5% of
total budgetary revenues. At the end of fiscal 1997, the Stabilization Fund's
balance was $799.3 million. Under state finance law, year-end surplus amounts
(as defined in the law) in excess of the amount
21
<PAGE>
that can remain in the Stabilization Fund are transferred to the Tax Reduction
Fund, to be applied, subject to legislative appropriation, to the reduction of
personal income taxes.
The budgeted operating funds of the Commonwealth ended fiscal 1997 with
a surplus of revenues and other sources over expenditures and other uses of
$221.0 million and aggregate ending fund balances in the budgeted operating
funds of the Commonwealth of approximately $1.394 billion. Budgeted revenues and
other sources for fiscal 1997 totaled approximately $18.170 billion, including
tax revenues of $12.864 billion, an increase of approximately 6.8% over fiscal
1996. Commonwealth budgeted expenditures and other uses in fiscal 1997 totaled
$19.949 billion. At the end of fiscal 1997, the Commonwealth showed a year-end
cash position of approximately $902.0 million, which did not include the
aforementioned Stabilization Fund ending balance of $799.3 million.
Beginning in 1989, S&P and Moody's lowered their ratings of the
Commonwealth's general obligation bonds from AA+ and Aa, respectively, to BBB
and Baa, respectively. In March 1992, S&P placed the Commonwealth's general
obligation and related guaranteed bond ratings on CreditWatch with positive
implications, citing such factors as continued progress towards balanced
financial operations and reduced short-term borrowing as the basis for the
positive forecast. As of the date hereof, the Commonwealth's general obligation
bonds are rated AA- by S&P and A1 by Moody's. From time to time, the rating
agencies may further change their ratings.
State Budget. The budget for the 1998 fiscal year marked the eighth consecutive
year in which the Commonwealth's budget was balanced without new taxes or
deficit borrowing. As a result, the fiscal 1998 budget contained three tax cuts
with an aggregate fiscal cost of approximately $60.9 million. A total of
twenty-eight tax cuts initiated in the previous and current administrations
translate to a total of $2 billion in annual tax savings to taxpayers. Further,
the current administration proposes cutting the tax rate on earned and unearned
income from 5.95% to 5.00% over three years. Budgeted revenues and other sources
to be collected in fiscal 1998 totalled $19.799 billion. This amount includes
fiscal 1998 tax revenues of $14.026 billion. Collections through December, 1998
totaled $6.706 billion, up 8.9% or $548 million, from the same period in Fiscal
Year 1998.
Fiscal 1998 non-tax revenues totaled $5.773 billion, approximately
$276.5 million more than fiscal 1997 non-tax revenues after adjusting for the
shifts to and from certain non-budgeted items. Federal reimbursements increased
by more than $300 million, from $3.019 billion in fiscal 1997 to $3.361 billion
in fiscal 1998.
On January 27, 1998 the Governor submitted the proposed budget for the
1999 fiscal year. The fiscal 1999 budget contains five tax cuts with an
aggregate fiscal cost of approximately $244.8 million. Budgeted revenues and
other sources to be collected in fiscal 1999 are estimated by the Executive
Office for Administration and Finance to be approximately $19.725 billion. This
amount includes estimated fiscal 1999 tax revenues of $14 billion. Total Fiscal
Year 1999 tax revenue collections are estimated to decrease by a net 0.2% over
Fiscal Year 1998 levels.
Fiscal 1999 non-tax revenues are projected to total approximately
$5.725 billion, approximately $48 million less than fiscal 1998 non-tax revenues
after adjusting for the shifts to and from certain non-budgeted items. Federal
reimbursements increase by approximately $80 million, from approximately $3.361
billion in fiscal 1998 to $3.441 billion in fiscal 1999. The fiscal 1999 budget
is based on numerous spending and revenue estimates, the achievement of which
cannot be assured.
Debt Limits and Outstanding Debt. Growth of tax revenues in the Commonwealth is
limited by law. Tax revenues in each of fiscal years 1988 to 1992 were lower
than the limits set by law. In addition, during each of the fiscal years 1989
through 1991, the official tax revenue forecasts made at the beginning of the
year proved to be substantially more optimistic than the actual results. The
fiscal 1992 budget initially was based on the joint revenue estimate of $8.292
billion, a 7% decrease from 1991, while actual tax revenues were $9.484 billion,
a 5.4% increase over fiscal 1991. The fiscal 1993 budget initially was based on
the joint revenue estimate of $9.685 billion, an increase of 2.1% over 1992. The
actual 1993 tax revenues were $9.930 billion, a 4.7% increase over 1992. On May
13, 1993, the tax revenue forecast of the Chairpersons of the House and Senate
Ways and Means Committees and the Secretary for Administration and Finance for
fiscal 1994 was $10.540 billion, an increase of 6.1% over 1993. Actual fiscal
1994 tax revenues were $10.607 billion, a 6.8% increase over fiscal 1993.
In May 1994, the Chairpersons of the House and Senate Ways and Means
Committees and the Secretary for Administration and Finance jointly endorsed an
estimate of tax revenues for fiscal 1994 of $11.328 billion, an increase
22
<PAGE>
of $634 million, or 5.9%, from then expected tax revenues for fiscal 1994 of
$10.694 billion. The fiscal 1995 budget was based upon this tax revenue
estimate, less $19.3 million of tax cuts signed by the Governor in the fiscal
1995 budget. Fiscal 1995 tax revenue collections were approximately $11.163
billion. Fiscal 1996 tax revenue collections were $12.049 billion. Fiscal 1997
tax revenue collections were $12.864 billion. Fiscal 1998 tax revenue
collections were $14.026 billion. For Fiscal Year 1999, tax revenue collections
were $6.706 billion through December 31, 1998 and are expected to total $14
billion. Tax collections for Fiscal Year 2000 are projected to increase by 3.3%.
Effective July 1, 1990, limitations were placed on the amount of direct
bonds the Commonwealth may have outstanding in a fiscal year, and the amount of
the total appropriation in any fiscal year that may be expended for payment of
principal of and interest on general obligation debt of the Commonwealth was
limited to 10 percent of such appropriation. Bonds in the aggregate principal
amount of $1.399 billion issued in October and December, 1990, under Chapter 151
of the Acts of 1990 to meet the fiscal 1990 deficit are excluded from the
computation of these limitations, and principal of and interest on such bonds
are to be repaid from up to 15% of the Commonwealth's income receipts and tax
receipts in each year that such principal or interest is payable.
Furthermore, certain of the Commonwealth's cities and towns have at
times experienced serious financial difficulties which have adversely affected
their credit standing. For example, due in large part to prior year cutbacks,
the City of Chelsea was forced into receivership in September 1991. The
recurrence of such financial difficulties, or financial difficulties of the
Commonwealth, could adversely affect the market values and marketability, or
result in default in payment on, outstanding obligations issued by the
Commonwealth or its public authorities or municipalities. In addition, recent
developments regarding the Massachusetts statutes which limit the taxing
authority of the Commonwealth or certain Massachusetts governmental entities may
impair the ability of issuers of some Massachusetts obligations to maintain debt
service on their obligations.
The Commonwealth currently has two types of bonds and notes
outstanding: general obligation debt and special obligation debt. Special
obligation revenue debt consists of special obligation revenue bonds ("Special
Obligation Bonds") issued under Section 20 of Chapter 29 of the Massachusetts
General Laws (the "Special Obligation Act") which may be secured by all or a
portion of the revenues credited to the Commonwealth's Highway Fund. The
Commonwealth has issued Special Obligation Bonds secured by a pledge of 6.86
cents of the Commonwealth's 21-cent gasoline tax. Certain independent
authorities and agencies within the Commonwealth are statutorily authorized to
issue debt for which the Commonwealth is either directly, in whole or in part,
or indirectly liable. The Commonwealth's liabilities with respect to these bonds
and notes are classified as either (a) Commonwealth-supported debt; (b)
Commonwealth-guaranteed debt; or (c) indirect obligations. Indirect obligations
consist of (i) obligations of the Commonwealth to fund capital reserve funds
pledged to certain Massachusetts Housing Finance Agency bonds, (ii) the
obligation of the Commonwealth, acting through the Higher Education Coordinating
Council ("HECC"), to fund debt service, solely from moneys otherwise
appropriated to HECC, on certain community college program bonds issued by the
Massachusetts Health and Educational Facilities Authority, (iii) the obligation
of the Commonwealth, acting through the Executive Office of Public Safety
("EOPS"), to fund debt service from amounts appropriated by the Legislature to
EOPS, on certificates of participation issued to finance the new Plymouth County
Correctional Facility, and (iv) the obligation of the Commonwealth to make lease
payments from amounts appropriated by the Legislature with respect to the
Massachusetts Information Technology Center in the city of Chelsea,
Massachusetts. In addition, the Commonwealth has liabilities under certain
tax-exempt capital leases. Commonwealth-guaranteed debt consists of certain
liabilities arising out of the Commonwealth's guarantees of the bonds of the two
higher education building authorities and certain bond anticipation notes of the
Massachusetts Turnpike Authority. Commonwealth-supported debt arises from
statutory requirements from payments by the Commonwealth with respect to debt
service of the Massachusetts Bay Transportation Authority (including the Boston
Metropolitan District), the Massachusetts Convention Center Authority, the
Massachusetts Government Land Bank, the Steamship Authority and certain regional
transit authorities. Hence, the Commonwealth's fiscal condition could adversely
affect the market values and marketability of, or result in default in payment
on, obligations of certain authorities and agencies.
Local Governments. Proposition 2 1/2, an initiative petition adopted by the
voters of the Commonwealth of Massachusetts on November 4, 1980, constrains
levels of property taxation and limits the charges and fees imposed on cities
and towns by certain governmental entities, including county governments. At the
time Proposition 2 1/2 was enacted, many cities and towns had property tax
levels in excess of the limit and were therefore required to roll back property
taxes with a concurrent loss of revenues. While many communities have responded
to the limits of Proposition 2 1/2 through statutorily permitted overrides and
exclusions (such as exclusion of debt service on specific bonds and
23
<PAGE>
notes), Proposition 2 1/2 has and will continue to restrain significantly the
ability of cities and towns to pay for local services, including certain debt
service. To mitigate the impact of Proposition 2 1/2 on local programs and
services since 1980, the Commonwealth has increased payments to its cities,
towns and regional school districts.
A statute adopted by voter initiative petition in November, 1990,
regulates the distribution of Local Aid to cities and towns. Direct Local Aid
decreased from $2.937 billion in fiscal 1990 to $2.360 billion in fiscal 1992;
increased to $2.547 billion in fiscal 1993 and increased to $2.727 billion in
fiscal 1994. Fiscal 1995 expenditures for direct Local Aid were $2.976 billion.
Fiscal 1996 expenditures for direct Local Aid were $3.246 billion. Fiscal 1997
expenditures for direct Local Aid were $3.534 billion, which is approximately
8.87% above fiscal 1996 level. Fiscal 1998 expenditures for direct Local Aid
were $3.904 billion. The estimated local aid spending for fiscal 1999 is $4.217
billion. It is estimated that fiscal 2000 expenditures will total $4.456
billion. Under the November, 1990 law, new Local Aid distribution formulas would
have called for a substantial increase in direct Local Aid in fiscal 1992, and
would call for such an increase in fiscal 1993 and in subsequent years. Local
Aid payments explicitly remain subject to annual appropriation, and fiscal 1992,
1993, 1994, 1995, 1996 and 1997 appropriations for Local Aid did not meet the
levels set forth in the initiative law. Reductions in, failure to fund or delays
in the payment of Local Aid may create financial difficulties for certain
municipalities or other local government entities.
Medicaid. The Medicaid program provides health care to low-income children and
families, the disabled and the elderly. The program, which is administered by
the Division of Medical Assistance (an agency within the Executive Office of
Health and Human Services), is 50% funded by federal reimbursements.
During fiscal years 1993, 1994, 1995, 1996, 1997 and 1998 Medicaid
expenditures were $3.151 billion, $3.313 billion, $3.398 billion, $3.416
billion, $3.482 and $3.821 billion, respectively. The average annual growth rate
from fiscal 1992 to fiscal 1996 was 3.9%, compared to an average annual growth
of approximately 17% between fiscal 1987 and fiscal 1991. There was virtually no
growth from fiscal 1995 to fiscal 1996 and fiscal 1996 to fiscal 1997. There was
a 9.11% increase from fiscal 1997 to fiscal 1998. The Executive Office for
Administration and Finance estimates that fiscal 1999 Medicaid expenditures will
be approximately $4.036 billion, while the projection for fiscal 2000 is
approximately $4.184 billion. The decrease in the rate of growth after 1991 is
due to a number of savings and cost control initiatives that the Division of
Medical Assistance continues to implement and refine, including managed care,
utilization review and the identification of third party liabilities.
Fiscal 1999 is projected by the Executive Office for Administration and
Finance to be the sixth year with no need for supplemental Medicaid
appropriations for current year expenses. Decreased reliance on supplemental
appropriations reflects an effective management of Medicaid expenditures by the
Commonwealth. Prior to fiscal 1994, substantial Medicaid expenditures were
provided through supplemental appropriations because program requirements
consistently exceeded initial appropriations. In addition, substantial amounts
have been required to cover retroactive settlement of provider payments.
Medicaid expenditures for fiscal 1992 of $2.818 billion included $50.0 million
for prior year provider settlements. Fiscal 1994 and fiscal 1995 Medicaid
expenditures included a total of approximately $123.0 million in retroactive
rate settlements funded through the final fiscal 1994 supplemental budget to pay
pre-1992 liabilities to hospitals and nursing homes. Fiscal 1996 expenditures
included $9.4 million for final settlement of these hospital and nursing home
liabilities. The Executive Office for Administration and Finance estimates that
all current Medicaid costs as well as all remaining prior year bills will be
covered within the current appropriation for fiscal 1999.
Pensions. The Commonwealth is responsible for the payment of pension benefits
for state employees and school teachers throughout the state and for the
cost-of-living increases payable to local government retirees. In 1988, the
Commonwealth adopted a funding schedule under which it is required to fund
future pension liabilities currently and to amortize the accumulated unfunded
liabilities over 40 years. Since the adoption of this schedule, the amount of
the unfunded liability has been reduced significantly. Total pension
expenditures have increased at an average annual rate of 8% per year, rising
from $751.5 million in fiscal 1992 to $1.005 billion in fiscal 1996. Total
pension expenses include the costs associated with an early retirement program
for elementary and secondary school teachers mandated by the 1993 education
reform legislation. In fiscal 1998, the anticipated pension expenditure is
$1.064 billion, a decrease of 4.0% over fiscal 1997 costs of $1.069 billion and
a further decrease of $93.88 million is expected in fiscal 1999. In fiscal 1996,
a number of reform measures affecting pensions were enacted into law. Among the
most notable were a measure consolidating the assets of the state employees' and
teachers' retirement systems into a single investment fund and another that will
reform the disability pension system.
24
<PAGE>
Investing in New York
Some of the significant financial considerations relating to SNYTFMF's
and SNYTFF's investments in New York Municipal Obligations are summarized below.
This summary information is not intended to be a complete description and is
principally derived from official statements relating to issues of New York
Municipal Obligations that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
State Economy. New York is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially. Because New York City (the
"City") is a regional employment center for a multi-state region, State personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
The forecast of the State's economy shows continued expansion during
the 1998 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to continue
to do well, while employment in the manufacturing and government sectors will
post only small, if any, declines. On an average annual basis, the employment
growth rate in the State is expected to be higher than in 1997 and the
unemployment rate is expected to drop further to 6.1 percent. Personal income is
expected to record moderate gains in 1998. Wage growth in 1998 is expected to be
slower than in the previous year as the recent robust growth in bonus payments
moderates.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each year.
In recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1990-00
25
<PAGE>
Financial Plan will achieve savings from initiatives by State agencies to
deliver services more efficiently, workforce management efforts, maximization of
federal and non-General Fund spending offsets, and other actions necessary to
bring projected disbursements and receipts into balance.
Other actions taken in the 1997-98 adopted budget add further pressure
to future budget balance in the State. For example, the fiscal effects of tax
reductions adopted in the 1997-98 budget are projected to grow more
substantially beyond the 1998-99 fiscal year, with incremental costs averaging
in excess of $1.3 billion annually over the last three years of the tax
reduction program. These incremental costs reflect the phase-in of State-funded
school property tax and local income tax relief, the phase-out of the
assessments on medical providers, and reductions in estate and gift levies,
utility gross receipts taxes, and the State sales tax on clothing. The full
annual cost of the enacted tax reduction package is estimated at approximately
$4.8 billion when fully effective in State fiscal year 2001-02. In addition, the
1997-98 budget included multi-year commitments for school aid and
pre-kindergarten early learning programs which could add as much as $1.4 billion
in costs when fully annualized in fiscal year 2001-02. These spending
commitments are subject to annual appropriation.
On September 11, 1997, the New York State Comptroller issued a report
which noted that the ability to deal with future budget gaps could become a
significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The State's current fiscal year began on April 1, 1998 and ends on
March 31, 1999 and is referred to herein as the State's 1998-99 fiscal year. The
Legislature adopted the debt service component of the State budget for the
1998-99 fiscal year on March 30, 1998 and the remainder of the budget on April
18, 1998. In the period prior to adoption of the budget for the current fiscal
year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house).
General Fund disbursements in 1998-99 are now projected to grow by
$2.43 billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax
reduction initiatives, including acceleration of State-funded property and local
income tax relief for senior citizens under the School Tax Relief Program
("STAR"), expansion of the child care income-tax credit for middle-income
families, a phased-in reduction of the general business tax, and reduction of
several other taxes and fees, including an accelerated phase-out of assessments
on medical providers. The enacted budget also provides for significant increases
in spending for public schools, special education programs, and for the State
and City university systems. It also allocates $50 million for a new Debt
Reduction Reserve Fund ("DRRF") that may eventually be used to pay debt service
costs on or to prepay outstanding State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the
General Fund of $1.42 billion that is comprised of a reserve of $761 million
available for future needs, a balance of $400 million in the Tax Stabilization
Reserve Fund ("TSRF"), a balance of $158 million in the Community Projects Fund
("CPF"), and a balance of $100 million in the Contingency Reserve Fund ("CRF").
The TSRF can be used in the event of an unanticipated General Fund cash
operating deficit, as provided under the State Constitution and State Finance
Law. The CPF is used to finance various legislative and executive initiatives.
The CRF provides resource to help finance any extraordinary litigation costs
during the fiscal year.
26
<PAGE>
The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for senior
citizens under STAR, which is projected to reduce General Fund receipts by $537
million in 1998-99. The proposed reduction supplements STAR tax reductions
already scheduled in law, which are projected at $187 million in 1998-99. The
Budget also proposes several new tax-cut initiatives and other funding changes
that are projected to further reduce receipts available to the General Fund by
over $200 million. These initiatives include reducing the fee to register
passenger motor vehicles and earmarking a larger portion of such fees to
dedicated funds and other purposes; extending the number of weeks in which
certain clothing purchases are exempt from sales taxes; more fully conforming
State law to reflect recent Federal changes in estate taxes; continuing lower
pari-mutuel tax rates; and accelerating scheduled property tax relief for
farmers from 1999 to 1998. In addition to the specific tax and fee reductions
discussed above, the Executive Budget also proposes establishing a reserve of
$100 million to permit the acceleration into 1998-99 of other tax reductions
that are otherwise scheduled in law for implementation in future fiscal years.
The Division of the Budget ("DOB") estimates that the 1998-99 Financial
Plan includes approximately $62 million in non-recurring resources, comprising
less than two-tenths of one percent of General Fund disbursements. The
non-recurring resources projected for use in 1998-99 consist of $27 million in
retroactive federal welfare reimbursements for family assistance recipients with
HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are estimated at
$4.82 billion, or $1.07 billion higher than 1997-98. The proposed spending plan
includes: $2.51 billion in disbursements for transportation purposes, including
the State and local highway and bridge program; $815 million for environmental
activities; $379 million for correctional services; $228 million for the State
University of New York ("SUNY") and the City University of New York ("CUNY");
$290 million for mental hygiene projects; and $375 million for CEFAP.
Approximately 28 percent of capital projects are proposed to be financed by
"pay-as-you-go" resources. State-supported bond issuances finance 46 percent of
capital projects, with federal grants financing the remaining 26 percent.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the financial plan is based
upon forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Actual results, however, could differ
materially and adversely from the projections set forth in a financial plan, and
those projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address potential State financial plan shortfalls, and the
Division of Budget believes it could take similar actions should variances occur
in its projections for the current fiscal year.
Recent Financial Results. The General Fund is the principal operating
fund of the State and is used to account for all financial transactions, except
those required to be accounted for in another fund. It is the State's largest
fund and receives almost all State taxes and other resources not dedicated to
particular purposes.
The State ended its 1997-98 fiscal year in balance on a cash basis,
with a General Fund cash surplus as reported by DOB of approximately $2.04
billion. The cash surplus was derived primarily from higher-than-anticipated
receipts and lower spending on welfare, Medicaid, and other entitlement
programs.
The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The balance is held in three accounts
within the General Fund: the Tax Stabilization Reserve Fund, the Contingency
Reserve Fund and the Community Projects Fund. The TSRF closing balance was $400
million, following a required deposit of $15 million (repaying a transfer made
in 1991-92) and an extraordinary deposit of $68 million made from the 1997-98
surplus. The CRF closing balance was $68 million, following a $27 million
deposit from the surplus. The CPF, which finances legislative initiatives,
closed the fiscal year with a balance of $170 million, an increase of $95
27
<PAGE>
million. The General Fund closing balance did not include $2.39 billion in the
tax refund reserve account, of which $521 million was made available as a result
of the Local Government Assistance Corporation ("LGAC") financing program and
was required to be on deposit on March 31, 1998.
General Fund receipts and transfers from other funds for the 1997-98
fiscal year (including net tax refund reserve account activity) totaled $34.55
billion, an annual increase of $1.51 billion, or 4.57 percent over 1996-97.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent.
Debt Limits and Outstanding Debt. There are a number of methods by
which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. The State does not anticipate that it will be
called upon to make any payments pursuant to the State guarantee in the 1997-98
fiscal year. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
On January 13, 1992, Standard & Poor's Ratings Services ("Standard &
Poor's") reduced its ratings on the State's general obligation bonds from A to
A- and, in addition, reduced its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On August 28, 1997,
Standard & Poor's revised its ratings on the State's general obligation bonds
from A- to A and revised its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On March 2, 1998, Standard
& Poor's affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's Investors Service, Inc. ("Moody's") reduced
its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness. On March 20, 1998, Moody's assigned the highest
28
<PAGE>
commercial paper rating of P-1 to the short-term notes of the State. On July 6,
1998, Moody's assigned an A2 rating with a stable outlook to the State's general
obligations.
The State anticipates that its capital programs will be financed, in
part, through borrowings by the State and its public authorities in the 1998-99
fiscal year. Information on the State's five-year Capital Program and Financing
Plan for the 1998-99 through 2002-03 fiscal years, updated to reflect actions
taken in the 1998-99 State budget, will be released on or before July 30, 1998.
The projection of State borrowings for the 1998-99 fiscal year is subject to
change as market conditions, interest rates and other factors vary throughout
the fiscal year.
The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.
The proposed 1997-98 through 2002-03 Capital Program and Financing Plan
was released with the 1998-99 Executive Budget on January 20, 1998. As a part of
that Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) alleged responsibility of New York State officials
to assist in remedying racial segregation in the City of Yonkers; (5) challenges
to regulations promulgated by the Superintendent of Insurance establishing
certain excess medical malpractice premium rates; (6) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (7) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; (8) a challenge to the
constitutionality of Clean Water/Clean Air Bond Act; and (9) a challenge to the
Governor's application of his constitutional line item veto authority.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
29
<PAGE>
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the 1997-98 fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds. New
York City and Other Localities. The fiscal health of the State may also be
impacted by the fiscal health of its localities, particularly the City, which
has required and continues to require significant financial assistance from the
State. The City depends on State aid both to enable the City to balance its
budget and to meet its cash requirements. There can be no assurance that there
will not be reductions in State aid to the City from amounts currently projected
or that State budgets will be adopted by the April 1 statutory deadline or that
any such reductions or delays will not have adverse effects on the City's cash
flow or expenditures. In addition, the Federal budget negotiation process could
result in a reduction in or a delay in the receipt of Federal grants which could
have additional adverse effects on the City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979. In 1975, Standard & Poor's
suspended its A rating of City bonds. This suspension remained in effect until
March 1981, at which time the City received an investment grade rating of BBB
from Standard & Poor's.
On July 2, 1985, Standard & Poor's revised its rating of City bonds
upward to BBB+ and on November 19, 1987, to A-. On February 3, 1998 and again on
May 27, 1998, Standard & Poor's assigned a BBB+ rating to the City's general
obligation debt and placed the ratings on CreditWatch with positive
implications.
Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On
30
<PAGE>
February 25, 1998, Moody's upgraded nearly $28 billion of the City's general
obligations from Baa1 to A3. On June 9, 1998, Moody's again assigned on A3
rating to the City's general obligations and stated that its outlook was stable.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do not
constitute an enforceable obligation or debt of either the State or the City. As
of June 30, 1997, MAC had outstanding an aggregate of approximately $4.267
billion of its bonds. MAC is authorized to issue bonds and notes to refund its
outstanding bonds and notes and to fund certain reserves, without limitation as
to principal amount, and to finance certain capital commitments to the Transit
Authority and the New York City School Construction Authority through the 1997
fiscal year in the event the City fails to provide such financing.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the Financial
Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and CUNY and reflected the
City's expense and capital budgets for the 1998 fiscal year, which were adopted
on June 6, 1997. The 1998-2001 Financial Plan projected revenues and
expenditures for the 1998 fiscal year balanced in accordance with GAAP. The
1998-99 Financial Plan projects General Fund receipts (including transfers from
other funds) of $36.22 billion, an increase of $1.02 billion over the estimated
1997-987 level. Recurring growth in the State General Fund tax base is projected
to be approximately six percent during 1998-99, after adjusting for tax law and
administrative changes. This growth rate is lower than the rates for 1996-97 or
currently estimated for 1997-98, but roughly equivalent to the rate for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the impact
of scheduled tax reductions that will lower receipts by $38 million, as well as
the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 million to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99 in the
General Fund, primarily as a result of the use of the 1997-98 cash surplus. In
31
<PAGE>
1998-99, the General Fund GAAP Financial Plan shows total revenues of $34.68
billion, total expenditures of $35.94 billion, and net other financing sources
and uses of $42 million.
Although the City has maintained balanced budgets in each of its last
seventeen fiscal years and is projected to achieve balanced operating results
for the 1998 fiscal year, there can be no assurance that the gap-closing actions
proposed in the 1998-2001 Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax increases
and reductions in essential City services could adversely affect the City's
economic base.
The projections set forth in the 1998-2001 Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon
the City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. Indebtedness subject to the
constitutional debt limit includes liability on capital contracts that are
expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation were voided, projected
contracts for the City capital projects would exceed the City's debt limit
during fiscal year 1997-98. Future developments concerning the City or entities
issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's current financial plan projects
$2.4 billion of seasonal financing for the 1998 fiscal year, the City expects to
undertake only approximately $1.4 billion of seasonal financing. The City issued
$2.4 billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Certain localities, in addition to the City, have experienced financial
problems and have requested and received additional New York State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the State's projections of its receipts and disbursements for the 1997-98 fiscal
year.
32
<PAGE>
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken by
the State to assist Yonkers could result in increased State expenditures for
extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, and that was largely continued in 1997. Twenty-eight
municipalities are scheduled to share in more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million will
be dispersed among all cities, towns and villages, a 3.97% increase in General
Purpose State Aid.
The 1998-99 budget includes an additional $29.4 million in unrestricted
aid targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1996, the total indebtedness of all
localities in the State other than New York City was approximately $20.0
billion. A small portion (approximately $77.2 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing the State assistance in
the future.
Year 2000 Compliance. The State is currently addressing "Year 2000"
data processing compliance issues. The Year 2000 compliance issue ("Y2K") arises
because most computer software programs allocate two digits to the data field
for "year" on the assumption that the first two digits will be "19". Such
programs will thus interpret the year 2000 as the year 1900 absent
reprogramming. Y2K could impact both the ability to enter data into computer
programs and the ability of such programs to correctly process data.
The Office for Technology is monitoring compliance on a quarterly basis
and is providing assistance and assigning resources to accelerate compliance for
mission critical systems, with most compliance testing expected to be completed
by mid-1999. There can be no guarantee, however, that all of the State's
mission-critical and high-priority computer systems will be Year 2000 compliant
and that there will not be an adverse impact upon State operations or State
finances as a result.
Investing in Ohio
SOTFF, except to the extent investments are in temporary investments,
will invest most of its net assets in securities issued by or on behalf of (or
in certificates of participation in lease-purchase obligations of) the State of
Ohio, political subdivisions of the State, or agencies or instrumentalities of
the State or its political subdivisions ("Ohio Obligations"). The Fund is
therefore susceptible to general or particular economic, political or regulatory
factors that may
33
<PAGE>
affect issuers of Ohio Obligations. The following information constitutes only a
brief summary of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements of certain Ohio issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of the
following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1996 is 11,173,000.
State Economy. While diversifying more into the service and other
non-manufacturing areas, the Ohio economy continues to rely in part on durable
goods manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the economy, with over half the State's area devoted to
farming and approximately 16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, for
the last seven years the State rates were below the national rates (4.6% versus
4.9% in 1996). The unemployment rate and its effects vary among geographic areas
of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
State Budget. The State operates on the basis of a fiscal biennium for
its appropriations and expenditures, and is precluded by law from ending its
July 1 to June 30 fiscal year (FY) or fiscal biennium in a deficit position.
Most State operations are financed through the General Revenue Fund (GRF), for
which the personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
The 1992-93 biennium presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences an interim appropriations act was enacted effective July 1, 1991; it
included GRF debt service and lease rental appropriations for the entire
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium, passed on July 11, 1991,
$200 million was transferred from the Budget Stabilization Fund ("BSF," a cash
and budgeting management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both
in light of a continuing uncertain nationwide economic situation, there was
projected and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF; and adjustments were
made in the timing of certain tax payments.
34
<PAGE>
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed
for debt service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million was transferred into the BSF. The significant
GRF fund balance, after leaving in the GRF an unreserved and undesignated
balance of $70 million, was transferred to the BSF and other funds including
school assistance funds and, in anticipation of possible federal program
changes, a human services stabilization fund.
Financial Results. From a higher than forecast 1996-97 mid-biennium GRF
fund balance, $100 million was transferred for elementary and secondary school
computer network purposes and $30 million to a new State transportation
infrastructure fund. Approximately $400.8 million served as a basis for
temporary 1996 personal income tax reductions aggregating that amount. The
1996-97 biennium-ending GRF fund balance was $834.9 million. Of that, $250
million went to school building construction and renovation, $94 million to the
school computer network, $44.2 million for school textbooks and instructional
materials and a distance learning program, $34 million to the BSF (which has a
May 9, 1998 balance of $862.7 million), and the $263 million balance to a State
income tax reduction fund.
The GRF appropriations act for the 1997-98 biennium was passed on June
25, 1997 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. Subsequent
legislation increased the fiscal year 1999 GRF appropriation level for
elementary and secondary education, with the increase to be funded in part by
mandated small percentage reductions in State appropriations for various State
agencies and institutions. Expressly exempt from those reductions are all
appropriations for debt service, including lease rental payments.
Debt Limits and Outstanding Debt. The State's incurrence or assumption
of debt without a vote of the people is, with limited exceptions, prohibited by
current State constitutional provisions. The State may incur debt, limited in
amount to $750,000, to cover casual deficits or failures in revenues or to meet
expenses not otherwise provided for. The Constitution expressly precludes the
State from assuming the debts of any local government or corporation. (An
exception is made in both cases for any debt incurred to repel invasion,
suppress insurrection or defend the State in war.)
By 14 constitutional amendments approved from 1921 to date (the latest
adopted in 1995) Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At June 26, 1998, $1.06 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding. The only such State debt at that date still
authorized to be incurred were portions of the highway bonds, and the following:
(a) up to $100 million of obligations for coal research and development may be
outstanding at any one time ($28.2 million outstanding); (b) $240 million of
obligations previously authorized for local infrastructure improvements, no more
than $120 million of which may be issued in any calendar year ($945.5 million
outstanding); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any one
time ($88.6 million outstanding, with no more than $50 million to be issued in
any one year).
The electors in 1995 approved a constitutional amendment extending the
local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), and authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million outstanding authorization, and authorizes not more than $1.2 billion to
be outstanding at any time and not more than $220 million to be issued in a
fiscal year.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5 billion of which
were outstanding at June 26, 1998.
35
<PAGE>
The State estimates aggregate FY 1998 rental payments under various
capital lease and lease purchase agreements (as of June 26, 1998) to be
approximately $9.1 million. In recent years, State agencies have also
participated in transportation and office building projects that may have some
local as well as State use and benefit, in connection with which the State
enters into lease purchase agreements with terms ranging from 7 to 20 years.
Certificates of participation, or special obligation bonds of the State or a
local agency, are issued that represent fractionalized interests in or are
payable from the State's anticipated payments. The State estimates highest
future FY payments under those agreements (as of June 26, 1998) to be
approximately $30.7 million (of which $27.2 million is payable from sources
other than the GRF, such as federal highway money distributions). State payments
under all those agreements are subject to biennial appropriations, with the
lease terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local Governments. Local school districts in Ohio receive a major
portion (state-wide aggregate approximately 44% in recent years) of their
operating moneys from State subsidies, but are dependent on local property
taxes, and in 119 districts (as of June 26, 1998) from voter-authorized income
taxes, for significant portions of their budgets. Litigation, similar to that in
other states, has been pending questioning the constitutionality of Ohio's
system of school funding. The Ohio Supreme Court has concluded that aspects of
the system (including basic operating assistance and the loan program referred
to below) are unconstitutional, and ordered the State to provide for and fund a
system complying with the Ohio Constitution, staying its order for a year (to
March 24, 1998) to permit time for responsive corrective actions. A small number
of the State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A program has provided for school
district cash need borrowing directly from commercial lenders, with diversion of
State subsidy distributions to repayment if needed. Recent borrowings under this
program totaled $41.1 million for 28 districts in FY 1994, $71.1 million for 29
districts in FY 1995 (including $29.5 million for one), $87.2 million for 20
districts in FY 1996 (including $42.1 million for one), and $113.2 million for
12 districts in 1997 (including $90 million to one for restructuring its prior
loans).
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys distributed
by the State.
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
24 cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated (one village and two cities are in preliminary "fiscal
watch" status). As of June 26, 1998, the 1996 school district "fiscal emergency"
provision was applied to six districts, and 10 were on preliminary "fiscal
watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value
36
<PAGE>
in money the amount of the aggregate levy (including a levy for unvoted general
obligations) of property taxes by all overlapping subdivisions, without a vote
of the electors or a municipal charter provision, and statutes limit the amount
of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to amount or
rate.
Investing in Pennsylvania
SPTFF concentrates its investments in the securities of issuers located
in the Commonwealth of Pennsylvania. Therefore, there are risks associated with
the Fund that would not be present if its portfolio were diversified nationally.
These risks include possible tax changes, and economic conditions and differing
levels of supply and demand for long-term municipal obligations particular to
the Commonwealth of Pennsylvania.
As of June 30, 1998, outstanding general obligation bonds of the
Commonwealth of Pennsylvania are rated AA by S&P and A1 by Moody's.
The portfolio of the Fund may contain different issues of long-term
debt obligations issued by or on behalf of the Commonwealth of Pennsylvania and
counties, municipalities and political subdivisions or public authorities.
Some of the debt obligations acquired by the Fund may be General
Obligation Bonds of the issuer. Others may be Industrial Revenue Bonds or
Revenue Bonds of municipal utilities, housing authorities, hospital authorities,
parking authorities, school districts or educational institutions which are
dependent upon the revenues from the facility.
Prospective investors should consider the financial difficulties and
pressures which the Commonwealth of Pennsylvania and certain of its municipal
subdivisions have undergone. Without intending to be complete, the following
briefly summarizes some of these difficulties and the current financial
situation, as well as some of the complex factors affecting the financial
situation in the Commonwealth. It is derived from sources that are generally
available to investors and is based in part on information obtained from various
state and local agencies in Pennsylvania. No independent verification has been
made of the following information. Both the Commonwealth and the City of
Philadelphia have historically experienced significant revenue shortfalls. There
can be no assurance that the Commonwealth will not experience further declines
in economic conditions or that portions of the municipal obligations purchased
by the Fund will not be affected by such declines.
State Economy. The Commonwealth of Pennsylvania is one of the most
populous states, ranking fifth behind California, New York, Texas and Florida.
Pennsylvania is an established yet growing state with a diversified economy. It
is the headquarters for 58 major corporations. Pennsylvania has been
historically identified as a heavy-industry state although that reputation has
changed recently as the industrial composition of the Commonwealth diversified
when the coal, steel and railroad industries began to decline. The major new
sources of growth in Pennsylvania are in the service sector, including trade,
medical and the health services, education and financial institutions.
Pennsylvania's agricultural industries are also an important component of the
Commonwealth's economic structure, accounting for more than $3.6 billion in crop
and livestock products annually while agribusiness and food related industries
support $39 billion in economic activity annually.
Non-manufacturing employment within the Commonwealth has increased
steadily from 1980 to its December 1997 level of 82.9 percent of total
employment. The growth in employment experienced in Pennsylvania during such
periods is comparable to the growth in employment in the Middle Atlantic region
of the United States. In 1997, manufacturing employment represented 17.3 percent
of all nonagricultural employment in Pennsylvania while the services sector
accounted for 31.6 percent and the trade sector accounted for 22.5 percent.
Pennsylvania's annual average unemployment rate was below the national
average from 1986 until 1990. Slower economic growth caused the unemployment
rate in the Commonwealth to rise to 6.9 percent in 1991 and 7.5 percent in 1992.
The resumption of faster economic growth resulted in a decrease in the
Commonwealth's unemployment rate to 7.1 percent in 1993. In 1994 and 1995,
Pennsylvania's annual average unemployment rate was below the Middle Atlantic
Region's average, but slightly higher than that of the United States. During
1996, the average unemployment rate in the Commonwealth was 5.3 percent compared
to 5.6 percent for the United States. During 1997, the average unemployment rate
in the Commonwealth was 5.2 percent compared to 4.9 percent for the United
States. For May 1998 the unadjusted
37
<PAGE>
unemployment rate was 4.5 percent in the Commonwealth and 4.2 percent in the
United States, while the seasonally adjusted unemployment rate for both the
Commonwealth and the United States was 4.3 percent.
State Budget. The Commonwealth operates under an annual budget which is
formulated and submitted for legislative approval by the Governor each February.
The Pennsylvania Constitution requires that the Governor's budget proposal
consist of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
All funds received by the Commonwealth are subject to appropriation in
specific amounts by the General Assembly or by executive authorization by the
Governor. Total appropriations enacted by the General Assembly may not exceed
the ensuing year's estimated revenues, plus (less) the unappropriated fund
balance (deficit) of the preceding year, except for constitutionally authorized
debt service payments. Appropriations from the principal operating funds of the
Commonwealth (the General Fund, the Motor License Fund and the State Lottery
Fund) are generally made for one fiscal year and are returned to the
unappropriated surplus of the fund if not spent or encumbered by the end of the
fiscal year. The Constitution specifies that a surplus of operating funds at the
end of a fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an independent
fiscal and accounting entity with a self-balancing set of accounts, recording
cash and/or other resources together with all related liabilities and equities.
In the Commonwealth, over 120 funds have been established by legislative
enactment or in certain cases by administrative action for the purpose of
recording the receipt and disbursement of monies received by the Commonwealth.
Annual budgets are adopted each fiscal year for the principal operating funds of
the Commonwealth and several other special revenue funds. Expenditures and
encumbrances against these funds may only be made pursuant to appropriation
measures enacted by the General Assembly and approved by the Governor. The
General Fund, the Commonwealth's largest fund, receives all tax revenues,
non-tax revenues and federal grants and entitlements that are not specified by
law to be deposited elsewhere. The majority of the Commonwealth's operating and
administrative expenses are payable from the General Fund. Debt service on all
bond indebtedness of the Commonwealth, except that issued for highway purposes
or for the benefit of other special revenue funds, is payable from the General
Fund.
Financial information for the principal operating funds of the
Commonwealth are maintained on a budgetary basis of accounting, which is used
for the purpose of insuring compliance with the enacted operating budget. The
Commonwealth also prepares annual financial statements in accordance with
generally accepted accounting principles ("GAAP"). Budgetary basis financial
reports are based on a modified cash basis of accounting as opposed to a
modified accrual basis of accounting prescribed by GAAP. Financial information
is adjusted at fiscal year-end to reflect appropriate accruals for financial
reporting in conformity with GAAP.
Financial Condition and Results of Operations. The fiscal years 1992
through 1997 were years of recovery for Pennsylvania from the recession in 1990
and 1991. The recovery fiscal years were characterized by modest economic growth
and low inflation rates in the Commonwealth. These economic conditions, combined
with several years of tax reductions following the various tax rate increases
and tax base expansions enacted in fiscal 1991 for the General Fund, produced
modest increases in Pennsylvania's tax revenues during the period. Tax revenues
from fiscal 1993 through fiscal 1997 rose at an annual average rate of 4.1
percent. Total revenues and other income sources increased during this period by
an average annual rate of 4.7 percent. Expenditures and other uses during the
fiscal 1993 through fiscal 1997 period rose at 4.9 percent annual rate, led by
annual average increases of 13.8 percent for protection of persons and property
program costs and 5.7 percent for public health and welfare program costs. At
the close of fiscal 1997, the fund balance for the governmental fund types
totaled $1,364.9 million, an increase of $729.7 million over fiscal 1996. The
fiscal year-end unreserved-undesignated balance of $187.3 million is the largest
balance recorded since fiscal 1987.
38
<PAGE>
Financial Results for Recent Fiscal Years (GAAP Basis). The five-year
period from fiscal 1993 through fiscal 1997 recorded a 4.6 percent average
annual increase in revenues and other sources, led by an average annual increase
of 8.5 percent for intergovernmental revenues. The increase for
intergovernmental revenues in fiscal 1996 is partly due to an accounting change.
Tax revenues during the five-year period increased an average of 2.5 percent as
modest economic growth, low inflation rates and several tax rate reductions and
other tax reduction measures constrained the growth of tax revenues. The tax
reduction measures followed a $2.7 billion tax increase measure adopted for the
1992 fiscal year.
Expenditures and other uses during the fiscal 1993 through fiscal 1997
period rose at an average annual rate of 4.9 percent led by increases of 13.8
percent for protection of persons and property program costs. The costs of a
prison expansion program and other correctional program expenses are responsible
for the large percentage increase. Efforts to control costs for various social
welfare programs and the presence of favorable economic conditions have led to a
modest 5.7 percent increase for public health and welfare costs for the five
year period.
The fund balance at June 30, 1997 totaled $1,364.9 million, a $729.7
million increase from fiscal 1996 and a $1,277.4 million increase from a balance
of $87.5 million at June 30, 1992.
Fiscal 1994 Financial Results (Budgeting Basis). Commonwealth revenues
during the 1994 fiscal year totaled $15,210.7 million, $38.6 million above the
fiscal year estimate, and 3.9 percent over commonwealth revenues during the 1993
fiscal year. The sales tax was an important contributor to the higher than
estimated revenues. The strength of collections from the sales tax offset the
lower than budgeted performance of the personal income tax that ended the 1994
fiscal year $74.4 million below estimate. The shortfall in the personal income
tax was largely due to shortfalls in income not subject to withholding such as
interest, dividends and other income. Expenditures, excluding pooled financing
expenditures and net of all fiscal 1994 appropriation lapses, totaled $14,934.4
million representing a 7.2 percent increase over fiscal 1993 expenditures.
Medical assistance and prisons spending contributed to the rate of spending
growth for the 1994 fiscal year. The Commonwealth maintained an operating
balance on a budgetary basis for fiscal 1994 producing a fiscal year ending
unappropriated surplus of $335.8 million.
Fiscal 1995 Financial Results (Budgetary Basis). Commonwealth revenues
for the 1995 fiscal year were above estimate and exceeded fiscal year
expenditures and encumbrances. Fiscal 1995 was the fourth consecutive fiscal
year the Commonwealth reported an increase in the fiscal year-end unappropriated
balance. Prior to reserves for transfer to the Tax Stabilization Reserve Fund,
the fiscal 1995 closing unappropriated surplus was $540.0 million, an increase
of $204.2 million over the fiscal 1994 closing unappropriated surplus prior to
transfers.
Commonwealth revenues during the 1995 fiscal year were $459.4 million,
2.9 percent, above the estimate of revenues used at the time the 1995 fiscal
year budget was enacted. Corporation taxes contributed $329.4 million of the
additional receipts largely due to higher receipts from the corporate net income
tax. Fiscal 1995 revenues from the corporate net income tax were 22.6 percent
over collections in fiscal 1994 and include the effects of the reduction of the
tax rate from 12.25 percent to 11.99 percent that became effective with tax
years beginning on and after January 1, 1994. The sales and use tax and
miscellaneous revenues also showed strong year-over-year growth that produced
above-estimate revenue collections. Sales and use tax revenues were $5,526.9
million, $128.8 million above the enacted budget estimate and 7.9 percent over
fiscal 1994 collections. Tax receipts from both motor vehicle and non-motor
vehicle sales contributed to the higher collections. Miscellaneous revenue
collections for fiscal 1995 were $183.5 million, $44.9 million above estimate
and were largely due to additional investment earnings, escheat revenues and
other miscellaneous revenues.
Fiscal 1996 Financial Results (Budgetary Basis). Commonwealth revenues
(prior to tax refunds) for the 1996 fiscal year increased by $113.9 million over
the prior fiscal year to $16,338.5 million representing a growth rate of 0.7
percent. Tax rate reductions and other tax law changes substantially reduced the
amount and rate of revenue growth for the fiscal year. The Commonwealth has
estimated that tax changes enacted for the 1996 fiscal year reduced Commonwealth
revenues by $283.4 million representing 1.7 percentage points of fiscal 1996
growth in Commonwealth revenues. The most significant tax changes enacted for
the 1996 fiscal year were (i) the reduction of the corporate net income tax rate
to 9.99 percent; (ii) double weighing of the sales factor of the corporate net
income apportionment calculation; (iii) an increase in the maximum annual
allowance for a net operating loss deduction from $0.5 million to $ 1.0 million;
(iv) an increase in the basic exemption amount for the capital stock and
franchise tax; (v) the repeal of the tax on annuities; and (vi) the elimination
of inheritance tax on transfers of certain property to surviving spouses.
39
<PAGE>
Among the major sources of Commonwealth revenues for the 1996 fiscal
year, corporate tax receipts declined $338.4 million from receipts in the prior
fiscal year, largely due to the various tax changes enacted for these taxes.
Corporate tax changes were enacted to reduce the cost of doing business in
Pennsylvania for the purpose of encouraging business to remain in Pennsylvania
and to expand employment opportunities within the state. Sales and use tax
receipts for the fiscal year increased $155.5 million, or 2.8 percent, over
receipts during fiscal 1995. All of the increase was produced by the non-motor
vehicle portion of the tax as receipts from the sale of motor vehicles declined
slightly for fiscal 1996. Personal income tax receipts for the fiscal year
increased $291.1 million, or 5.7 percent, over receipts during fiscal 1995.
Personal income tax receipts were aided by a 10.2 percent increase in
non-withholding tax payments which generally are comprised of quarterly
estimated and annual final return tax payments. Non-tax receipts for the fiscal
year increased $23.7 million for the fiscal year. Included in that increase was
$67 million in net receipts from a tax amnesty program that was available for a
portion of the 1996 fiscal year. Some portion of the tax amnesty receipts
represent normal collections of delinquent taxes. The tax amnesty program is not
expected to be repeated.
The unappropriated surplus (prior to transfers to Tax Stabilization
Reserve Fund) at the close of the fiscal year for the General Fund was $183.8
million, $65.5 million above estimate. Transfers to the Tax Stabilization
Reserve Fund from fiscal 1996 operations will be $27.6 million. This amount
represents the fifteen percent of the fiscal year ending unappropriated surplus
transfer provided under current law. With the addition of this transfer and
anticipated interest earnings, the Tax Stabilization Reserve Fund balance will
be $211 million.
Fiscal 1997 Financial Results. The unappropriated balance of
Commonwealth revenues increased during the 1997 fiscal year by $432.9 million.
Higher than estimated revenues and slightly lower expenditures than budgeted
caused the increase. The unappropriated balance rose from an adjusted amount of
$158.5 million at the beginning of fiscal 1997, to $591.4 million (prior to
reserves for transfer to the Tax Stabilization Reserve Fund) at the close of the
fiscal year. Transfers to the Tax Stabilization Reserve Fund for fiscal 1997
operations are expected to be $88.7 million, which represents the normal fifteen
percent of the ending unappropriated balance, plus an additional $100 million
authorized by the General Assembly when it enacted the fiscal 1998 budget.
Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $17,320.6 million, $576.1 (3.4 percent) above the estimate made at the
time the budget was enacted. Revenue from taxes was the largest contributor to
higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1 percent over
tax revenues in fiscal 1996. This rate of increase was not adjusted for
legislated tax reductions that affected receipts during both of those fiscal
years and therefore understates the actual underlying rate of growth of tax
revenue during fiscal 1997. Receipts from the personal income tax produced the
largest single component of higher revenues for the fiscal year. Personal income
collections were $236.3 million over estimate representing a 6.9 percent
increase. Collections of corporate taxes, led by the capital stock and franchise
and the gross receipts taxes, also exceeded their estimates for the fiscal year.
Non-tax revenues were $19.8 million (5.8 percent) over estimate mostly due to
higher than anticipated interest earnings.
Fiscal 1998 Budget. The budget for fiscal 1998 was enacted in May 1997.
Commonwealth revenues for the fiscal year at that time were estimated to be
$17,435.4 million before reserves for tax refunds. That estimate represented an
increase over estimated fiscal 1997 Commonwealth revenues of 1.0 percent.
Although fiscal 1997 revenues exceeded the fiscal 1998 budget revenue estimate,
the adopted fiscal 1998 budget revenue estimate remains unchanged and represents
a 0.7 percent increase over actual fiscal 1997 revenues. Fiscal 1998 estimates
for Commonwealth revenues are based on an economic forecast for national
economic growth to slow throughout the fiscal year.
The rate of anticipated growth of Commonwealth revenues is also
affected by the enactment of tax reductions and tax revenue dedications
effective for the 1998 fiscal year. Excluding these newly enacted changes,
revenues were projected to increase by 2.4 percent during fiscal 1998. Tax
reductions enacted for the 1998 fiscal year budget totaled an estimated $170.6
million, including $16.2 million that is reflected in higher projected tax
refunds.
Fiscal 1999 Budget. On April 22, 1998, the Governor signed a $17.96
billion General Fund budget, an increase of 4.7% from the fiscal 1998 budget.
Areas receiving the largest budgetary increases are education and workforce
development. In addition, approximately $222 million of tax cuts were signed as
part of the budget package, reducing taxes on individuals by approximately $100
million. The remainder of the tax cuts primarily affect businesses.
Debt Limits and Outstanding Debt. The Constitution of Pennsylvania
permits the issuance of the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster, (ii) electorate
approved debt,
40
<PAGE>
(iii) debt for capital projects subject to an aggregate debt limit of 1.75 times
the annual average tax revenues of the preceding five fiscal years; and (iv) tax
anticipation notes payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required
annually to certify to the Governor and the General Assembly certain information
regarding the Commonwealth's indebtedness.
Local Governments. The City of Philadelphia (the "City" or
"Philadelphia") is the largest city in the Commonwealth, with an estimated
population of 1,585,577 according to the 1990 Census. Philadelphia experienced a
series of general fund deficits for fiscal years 1988 through 1992 which
culminated in serious financial difficulties for the City. In its 1992
Comprehensive Annual Financial Report, Philadelphia reported a cumulative
general fund deficit of $71.4 million for fiscal year 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to assist
Philadelphia in remedying fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make factual findings and
recommendations to Philadelphia concerning its budgetary and fiscal affairs. The
legislation empowered PICA to issue notes and bonds on behalf of Philadelphia,
and also authorized Philadelphia to levy a one-percent sales tax the proceeds of
which would be used to pay off the bonds. In return for PICA's fiscal
assistance, Philadelphia is required, among other things, to establish five-year
financial plans that include balanced annual budgets. Under the legislation, if
Philadelphia does not comply with such requirements, PICA may withhold bond
revenues and certain state funding. At this time, the City is operating under a
five-year fiscal plan approved by PICA on April 30, 1996. As of February 28,
1997, PICA has issued approximately $1,761.7 million of its Special Tax Revenue
Bonds. The financial assistance has included the refunding of certain city
general obligation bonds, funding of capital projects and the liquidation of the
City's Cumulative General Fund balance deficit as of June 30, 1992 of $224.9
million.
No further PICA bonds are to be issued by PICA for the purpose of
financing a capital project or deficit as the authority for such bond sales
expired on December 31, 1994. PICA's authority to issue debt for the purpose of
financing a cash flow deficit expired on December 31, 1996. Its ability to
refund existing outstanding debt is unrestricted. PICA had $1,146.2 million in
Special Tax Revenue Bonds outstanding as of June 30, 1996.
The audited General fund balance of the City as of June 30, 1994, 1995
and 1996 showed a surplus of approximately $15.4 million, $80.5 million and
$118.5 million, respectively.
S&P's rating on Philadelphia's general obligation bonds is "BBB."
Moody's rating is currently "Baa."
Litigation. The Commonwealth is a party to numerous lawsuits in which
an adverse final decision could materially affect the Commonwealth's
governmental operations and consequently its ability to pay debt service on its
obligations. The Commonwealth also faces tort claims made possible by the
limited waiver of sovereign immunity effected by Act 152, approved September 28,
1978, as amended. Under the Act, damages for any loss are limited to $250,000
per person and $1 million for each accident.
Investing in California
SCTFMF and SCTFF each invest primarily in California municipal
securities. 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 the prospectus from official statements and prospectuses relating
to securities offerings of the State of California and 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 1995-96. Pressures on the State's budget in the
late 1980's and early 1990's were caused by a combination of external economic
conditions and growth of the largest General Fund Programs -- K-14 education,
health, welfare and corrections -- at rates faster than the revenue base. These
pressures could continue as the State's overall population and school age
population continue to grow, and as the State's corrections program responds to
a "Three Strikes" law enacted in 1994, which requires mandatory life prison
terms for certain third-time felony offenders.
41
<PAGE>
In addition, the State's health and welfare programs are in a transition period
as a result of recent federal and State welfare reform initiatives.
As a result of these factors and others, and especially because a
severe recession between 1990-94 reduced revenues and increased expenditures for
social welfare programs, from the late 1980's until 1992-93, the State had
periods of significant budget imbalance. During this period, expenditures
exceeded revenues in four out of six years, and the State accumulated and
sustained a budget deficit in its budget reserve in the Special Fund for
Economic Uncertainties ("SFEU") -- approaching $2.8 billion at its peak at June
30, 1993. Between the 1991-92 and 1994-95 Fiscal Years, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance, including significant cuts in health and welfare program expenditures;
transfers of program responsibilities and funding from the State to local
governments; transfers of about $3.6 billion in annual local property tax
revenues from other local governments to local school districts, thereby
reducing State funding for schools under Proposition 98; and revenue increases
(particularly in the 1991-92 Fiscal Year budget), most of which were for a short
duration.
Despite these budget actions, as noted, the effects of the recession
led to large, unanticipated deficits in the SFEU, as compared to projected
positive balances. By the 1993-94 Fiscal Year, the accumulated deficit was so
large that it was impractical to budget to retire such deficits in one year, so
a two-year program was implemented, using the issuance of revenue anticipation
warrants to carry a portion of the deficit over to the end of the fiscal year.
When the economy failed to recover sufficiently in 1993-94, a second two-year
plan was implemented in 1994-95, again using cross-fiscal year revenue
anticipation warrants to partly finance the deficit into the 1995-96 fiscal
year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of notes
and revenue anticipation warrants were issued in the period from June 1992 to
July 1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.
1995-96 and 1996-97 Fiscal Years. With the end of the recession, and a
growing economy beginning in 1994, the State's financial condition improved
markedly in the last two fiscal years, with a combination of better than
expected revenues, slowdown in growth of social welfare programs, and continued
spending restraint based on the actions taken in earlier years. The last of the
recession-induced budget deficits was repaid, allowing the SFEU to post a
positive cash balance for only the second time in the 1990's, totaling $281
million as of June 30, 1997. The State's cash position also returned to health,
as cash flow borrowing was limited to $3 billion in 1996-97, and no deficit
borrowing has occurred over the end of these last two fiscal years.
In each of these two fiscal years, the State budget contained the
following major features:
1. Expenditures for K-14 schools grew significantly, as new
revenues were directed to school spending under Proposition
98. This new money allowed several new education initiatives
to be funded, and raised K-12 per-pupil spending to around
$4,900 by Fiscal Year 1996-97.
2. The budgets restrained health and welfare spending levels,
holding to reduced benefit levels enacted in earlier years,
and attempted to reduce General Fund spending by calling for
greater support from the federal government. The State also
attempted to shift to the federal government a larger share of
the cost of incarceration and social services for illegal
aliens. Some of these efforts were successful, and
42
<PAGE>
federal welfare reform also helped, but as a whole the federal
support never reached the levels anticipated when the budgets
were enacted. These funding shortfalls were, however, filled
by the strong revenue collections, which exceeded
expectations.
3. General Fund support for the University of California and the
California State University system grew by an average of 5.2
percent and 3.3 percent per year, respectively, and there were
no increases in student fees.
4. General Fund support for the Department of Corrections grew as
needed to meet increased prison population. No new prisons
were approved for construction, however.
5. There were no tax increases, and starting January 1, l997,
there was a 5 percent cut in corporate taxes. The suspension
of the Renter's Tax Credit, first taken as a cost-saving
measure during the recession, was continued.
As noted, the economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues (about $2.2
billion in 1995-96 and $1.6 billion in 1996-97) than were initially planned when
the budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. As a result, there was no dramatic increase in
budget reserves, although the accumulated budget deficit from the recession
years was finally eliminated in the past fiscal year.
1997-98 Fiscal Year Background. On January 9, 1997, the Governor
released his proposed budget for the 1997-98 Fiscal Year (the "Proposed
Budget"). The Proposed Budget estimated General Fund revenues and transfers of
about $50.7 billion, and proposed expenditures of $50.3 billion, resulting in an
anticipated budget reserve in the SFEU of about $550 million. The Proposed
Budget included provisions for a further l0% cut in Bank and Corporation Taxes,
which ultimately was not enacted by the Legislature.
At the time of the Department of Finance May Revision, released on May
14, 1997, the Department of Finance increased its revenue estimate for the
upcoming fiscal year by $1.3 billion, in response to the continued strong growth
in the State's economy. Budget negotiations continued into the summer, with
major issues to be resolved including final agreement on State welfare reform,
an increase in State employee salaries and consideration of the tax cut proposed
by the Governor.
In May 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, Public Employees' Retirement Systems ("PERS") v. Wilson, which
made final a judgment against the State requiring an immediate payment from the
General Fund to the Public Employees Retirement Fund ("PERF") to make up certain
deferrals in annual retirement fund contributions which had been legislated in
earlier years for budget savings, and which the courts found to be
unconstitutional. On July 30, 1997, following a direction from the Governor, the
Controller transferred $l.235 billion from the General Fund to the PERF in
satisfaction of the judgment, representing the principal amount of the
improperly deferred payments from 1995-96 and 1996-97. In late 1997, the
plaintiffs filed a claim with the State Board of Control for payment of interest
under the Court rulings in an amount of $308 million. The Department of Finance
has recommended approval of this claim. If approved by the Board of Control, the
claim would become part of an annual claims bill in the 1998-99 Budget.
Fiscal Year 1997-98 Budget Act. Following the transfer of funds to the
PERF, final agreement was reached within a few weeks on the welfare package and
the remainder of the budget. The Legislature passed the Budget Bill on August
11, 1997, along with numerous related bills to implement its provisions.
Agreement was not finally reached at that time on one aspect of the budget plan,
concerning the Governor's proposal for a comprehensive educational testing
program.
On August 18, 1997, the Governor signed the Budget Act, but vetoed
about $314 million of specific spending items, primarily in health and welfare
and education areas from both the General Fund and Special Funds. Approximately
$200 million of this amount was restored in subsequent legislation passed before
the end of the Legislative Session.
43
<PAGE>
The Budget Act anticipated General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0 percent increase from the 1996-97 levels). The Budget
Act also included Special Fund expenditures of $14.4 billion (as against
estimated Special Fund revenues of $14.0 billion), and $2.1 billion of
expenditures from various Bond Funds. Subsequent to the Budget Act enactment,
the State undertook its normal cash flow borrowing program by issuing $3.0
billion of Notes which mature June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large
increase in funding for K-14 education under Proposition 98,
reflecting strong revenues which have exceeded initial
budgeted amounts. Part of the nearly $1.75 billion in
increased spending was allocated to prior fiscal years. Funds
were provided to fully pay for the cost-of-living-increase
component of Proposition 98, and to extend the class size
reduction and reading initiatives.
2. The Budget Act reflected the $1.228 billion pension case
judgment payment, and brings funding of the State's pension
contribution back to the quarterly basis which existed prior
to the deferral actions which were invalidated by the courts.
3. Continuing the third year of a four-year "compact" which the
Administration had made with higher education units, funding
from the General Fund for the University of California and the
California State University system was increased by
approximately 6 percent ($121 million and $107 million,
respectively). There was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for
caseload changes.
5. Health and welfare costs were contained, continuing generally
the grant levels from prior years, as part of the initial
implementation of the new CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on
uncertain federal budget actions. About $300 million in
general funds, already included in the federal 1997 and 1998
Fiscal Year budgets, were included in the Budget Act, to
offset incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax
reductions. The Renters Tax Credit was suspended for another
year, saving approximately $500 million. The Legislature has
not made any decision on conformity of State tax laws to the
recent federal tax reduction bill; a comprehensive review of
this subject is expected to take place next year.
At the end of the Legislative Session on September 13, 1997, the
Legislature passed and the Governor later signed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package are a variety of phased-in tax cuts,
conformity with certain provisions of the federal tax reform law passed earlier
in the year, and reform of funding for county trial courts, with the State to
assume greater financial responsibility. The Department of Finance estimates
that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years.
The Department of Finance released updated estimates for the 1997-98
Fiscal Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year
Budget Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53.0 billion. The balance in the budget reserve, the SFEU, is
projected to be $329 million at June 30, 1998, compared to $461 million at June
30, 1997.
Proposed 1998-99 Fiscal Year Budget. On January 9, 1998, the Governor
released his Budget Proposal for the 1998-99 Fiscal Year (the "Governor's
Budget"). The Governor's Budget projects total General Fund revenues and
transfers of $55.4 billion, a $2.5 billion increase (4.7 percent) over revised
1997-98 revenues. This revenue increase takes into account reduced revenues of
approximately $600 million from the 1997 tax cut package, but also assumes
approximately $500 million additional revenues primarily associated with capital
gains realizations. The Governor's
44
<PAGE>
Budget notes, however, that capital gains activity and the resultant revenues
derived from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4
billion, an increase of $2.4 billion (4.5 percent) above the revised 1997-98
level. The Governor's Budget includes funds to pay the interest claim relating
to the court decision on pension fund payments, PERS v. Wilson (see "1997-98
Fiscal Year" above). The Governor's Budget projects that the State will carry
out its normal intra-year cash flow external borrowing in 1998-99, in an
estimated amount of $3.0 billion. The Governor's Budget projects that the budget
reserve, the SFEU, will be $296 million at June 30, 1999, slightly lower than
the projected level at June 30, 1998, due to PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7 billion,
and Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal Year. A
total of $3.2 billion of bond fund expenditures are also proposed.
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. Settlement discussions involving a number of the defendants have
occurred and some agreements in principle have been reached. However, until any
such agreements become final and any remaining litigation is resolved, it is
impossible to determine the ultimate impact of the bankruptcy and its aftermath
on these various agencies and their claims.
In May 1996, a taxpayer action was filed against the City of San Diego
("San Diego") and the San Diego Convention Center expansion Authority (the
"Authority") challenging the validity of a lease revenue financing involving a
lease (the "San Diego Lease") having features similar to the leases commonly
used in California lease-based financings such as certificates of participation
(the "Rider Case"). The Rider Case plaintiffs alleged that voter approval is
required for the San Diego Lease (a) since the lease constituted indebtedness
prohibited by Article XVI, Section 18 of the California Constitution without a
two-thirds vote of the electorate, and (b) since San Diego was prohibited under
its charter from issuing bonds without a two-thirds vote of the electorate, and
the power of the Authority, a joint powers' authority, one of the members of
which is San Diego, to issue bonds is no greater than the power of San Diego. In
response to San Diego's motion for summary judgment, the trial court rejected
the plaintiffs' arguments and ruled that the San Diego Lease was
constitutionally valid and that the Authority's related lease revenue bonds did
not require voter approval. The plaintiffs appealed the matter to the Court of
Appeals for the Fourth District, which affirmed the validity of the San Diego
Lease and of the lease revenue bond financing arrangements. The plaintiffs then
filed a petition for review with the California State Supreme Court, and, on
April 2, 1997, the Court granted the plaintiff's petition for review. A decision
from the Supreme Court is expected to be decided within the 1998 term.
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 that 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.
45
<PAGE>
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.
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
46
<PAGE>
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.
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.
47
<PAGE>
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
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:
48
<PAGE>
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
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.
Proposition 218. On November 5, 1996, the voters of the State approved
Proposition 218, a constitutional initiative, entitled the "Right to Vote on
Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and XIII D
to the California Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect both existing and
future taxes, assessments, fees and charges. Proposition 218 became
49
<PAGE>
effective on November 6, 1996. The Sponsors are unable to predict whether and to
what extent Proposition 218 may be held to be constitutional or how its terms
will be interpreted and applied by the courts. However, if upheld, Proposition
218 could substantially restrict certain local governments' ability to raise
future revenues and could subject certain existing sources of revenue to
reduction or repeal, and increase local government costs to hold elections,
calculate fees and assessments, notify the public and defend local government
fees and assessments in court.
Article XIII C of Proposition 218 requires majority voter approval for
the imposition, extension or increase of general taxes and two-thirds voter
approval for the imposition, extension or increase of special taxes, including
special taxes deposited into a local government's general fund. Proposition 218
also provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the
initiative's power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes, assessments,
fees or charges were imposed. This extension of the initiative's power to some
extent constitutionalizes the March 6, 1995 State Supreme Court decision in
Rossi v. Brown, which upheld an initiative that repealed a local tax and held
that the State constitution does not preclude the repeal, including the
prospective repeal, of a tax ordinance by an initiative, as contrasted with the
State constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of Proposition 218,
by its terms, applies to all local taxes, assessments, fees and charges and is
not limited to local taxes, assessments, fees and charges that are property
related.
Article XIII D of Proposition 218 adds several new requirements making
it generally more difficult for local agencies to levy and maintain
"assessments" for municipal services and programs. "Assessment" is defined to
mean any levy or charge upon real property for a special benefit conferred upon
the real property.
Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an ad
valorem tax, a special tax, or an assessment, imposed by a local government upon
a parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for fees or charges for
sewer, water and refuse collection services, no property related fee or charge
may be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
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. Each Fund 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
50
<PAGE>
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 a Fund are not invested prior to the settlement of a purchase of
securities, a Fund will earn no income; however, it is intended that a Fund 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 a Fund will purchase such securities with the purpose of actually acquiring
them unless a sale appears desirable for investment reasons. At the time a Fund
makes the commitment to purchase a security 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. Each Fund does not believe that a 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 will not enter into such
transactions for leverage purposes.
Stand-by Commitments. Each Fund, except SMLTTFF, subject to the receipt of any
required regulatory authorization, may acquire "stand-by commitments," which
will enable a 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). A Fund may enter into such
transactions subject to the limitations in the rules under the Investment
Company Act of 1940, as amended (the "1940 Act"). A stand-by commitment is a
right acquired by the 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 a 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.
Stand-by commitments acquired by a Fund will have the following
features: (1) they will be in writing and will be physically held by the Funds'
custodian, State Street Bank and Trust Company; (2) a Fund's rights to exercise
them will be unconditional and unqualified; (3) they will be entered into only
with sellers which in the Adviser's opinion present a minimal risk of default;
(4) although stand-by commitments will not be 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 will be (i) a 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 a Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period a Fund owned the securities, plus (ii)
all interest accrued on the securities since the last interest payment date. A
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 below under "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 will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a 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 policy, 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 the 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 a 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 the 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 will be 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
51
<PAGE>
company with respect to such obligations will be 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. The 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 will be 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 the Fund
nor has the Fund assumed that such commitments would continue to be available
under all market conditions.
Third Party Puts. Each Fund 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 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. A 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 or downgrading of a bond to below investment grade or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to a Fund will be that of holding a long-term bond. A Fund may be
assessed "tender fees" for each tender period at a rate equal to the difference
between the bond's fixed coupon rate and the rate, as determined by a
remarketing or similar agent, that would cause the bond coupled with the option
to trade at par on the date of such determination.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. 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 will be 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 a Fund's portfolio in a manner designed to minimize any
adverse impact from these investments.
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 the Funds 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 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
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 a 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.
52
<PAGE>
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a 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 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 a Fund.
Each Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. Each 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
Massachusetts state income tax.
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities" or "not readily
marketable," i.e., securities which cannot be sold to the public without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale.
Generally speaking, illiquid securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. A Fund may be deemed to be an "underwriter" for
purposes of the 1933 Act when selling restricted securities to the public, and
in such event the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading.
Repurchase Agreements. Each Fund, except SMLTTFF, may enter into repurchase
agreements with any member bank of the Federal Reserve System or any
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness has been determined by the Adviser to be at least equal to
that of issuers of commercial paper rated within the two highest quality ratings
categories assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for the 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 the 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 the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the 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, the 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 characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund may be required to
53
<PAGE>
return the Obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt obligation purchased for the 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), the 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 the Fund will be unsuccessful in seeking to enforce the seller's
contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. Each Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
will maintain a segregated account, as described under "Use of Segregated and
Other Special Accounts" in connection with outstanding reverse repurchase
agreements. Reverse repurchase agreements are deemed to be borrowings subject to
the Fund's investment restrictions applicable to that activity. The Fund will
enter into a reverse repurchase agreement only when the Adviser believes that
the interest income to be earned from the investment of the proceeds of the
transaction will be greater than the interest expense of the transaction. There
is no current intention to invest more than 5% of the Fund's net assets in
reverse repurchase agreements.
Indexed Securities. Each Fund, except SNYTFMF and SCTFMF, may each 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
a 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.
Securities Backed by Guarantees. Certain Funds may invest in securities backed
by guarantees from banks, insurance companies and other financial institutions.
SNYTFMF's and SCTFMF'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 a Fund and affect its share price.
Strategic Transactions and Derivatives. Each Fund, except SNYTFMF and SCTFMF,
may, but is not required to, utilize various other investment strategies as
described below for a variety of purposes, such as hedging various market risks,
managing the effective maturity or duration of the Fund's portfolio, or
enhancing 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.
54
<PAGE>
In the course of pursuing these investment strategies, the Funds may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other instruments, purchase and sell
futures contracts and options thereon, and enter into various transactions such
as swaps, caps, floors or collars (collectively, all the above are called
"Strategic Transactions"). Strategic Transactions may be used without limit
(except to the extent that 80% of the Funds' net assets are required to be
invested in tax-exempt municipal securities, and as limited by the Funds' other
investment restrictions) to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Funds' portfolio
resulting from securities markets fluctuations, to protect the Funds' 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 Funds' portfolio, or to establish a position in the derivatives markets
as a substitute for purchasing or selling particular securities. Some Strategic
Transactions may also be used to enhance potential gain although no more than 5%
of each 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 Funds to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Funds will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter the fundamental investment purposes and
characteristics of the Funds and each Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of a Fund.
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 a 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 a Fund can realize on its
investments or cause a 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 a Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of that 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, a 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
below 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, a 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
a 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. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at 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
55
<PAGE>
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.
Each 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. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the Counterparty to sell the option back to a Fund at a formula
price within seven days. A 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 a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a 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. A 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 Securities and Exchange Commission
("SEC") currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a 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 a Fund's limitation on investing.
If a 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 a Fund's income. The sale of put options can also provide income.
56
<PAGE>
Each 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 a Fund must be "covered" (i.e.,
a 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 a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes a 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 a Fund to hold a
security or instrument which it might otherwise have sold.
Each 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. Each Fund will not sell put options if, as a result, more than 50%
of such 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 a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. Each Fund may enter into 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 and for duration
management, and for risk management and return enhancement, 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 a Fund, as seller, to deliver to
the buyer the specific type of 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.
Each Fund's use of 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 for bona fide hedging, risk management (including duration management) or
other portfolio management and return enhancement purposes. Typically,
maintaining a futures contract or selling an option thereon requires a 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 a Fund. If a 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.
Each 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 a 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. Each 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
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
57
<PAGE>
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. Each 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 a 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 a
Fund may enter are interest rate and index and other swaps and the purchase or
sale of related caps, floors and collars. Each 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 a Fund anticipates purchasing at
a later date. Each Fund will not sell interest rate caps or floors where it does
not own securities or other instruments providing the income stream a Fund may
be obligated to pay. Interest rate swaps involve the exchange by a 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.
Each 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 a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as each Fund will
segregate assets (or enter into offsetting positions) to cover its obligations
under swaps, the Adviser and each Fund believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. Each 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, a 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. Each 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 the lending of funds and sellers to obtain a fixed rate for
borrowings. Each 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 a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the
58
<PAGE>
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 cash or liquid
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 a Fund will require that Fund to hold the
securities subject to the call or to segregate cash or liquid securities
sufficient to purchase and deliver the securities if the call is exercised. A
call option sold by a Fund on an index will require that Fund to own portfolio
securities which correlate with the index or to segregate cash or liquid assets
equal to the excess of the index value over the exercise price on a current
basis. A put option written by a Fund requires that Fund to segregate cash or
liquid assets equal to the exercise price.
OTC options entered into by a 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 a 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 a 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 a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that 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 a Fund other than those
above generally settle with physical delivery, and that 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, a 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, a 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 a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each 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, a 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 that Fund. Moreover, instead of segregating assets if a 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
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.
Each 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.")
Trustees' Power to Change Objective and Policies
Except as specifically stated to the contrary, the objective and
policies stated above may be changed by the Trustees without a vote of the
shareholders.
59
<PAGE>
Investment Restrictions
Unless specified to the contrary, the following restrictions may not be
changed without the approval of a majority of the outstanding voting securities
of that 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% of the
shares of a Fund present at a meeting if the holders of more than 50% of the
outstanding shares of a Fund are present in person or by proxy, or (2) more than
50% of the outstanding shares of the 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, SMLTTFF, SMTFF, SNYTFMF, SNYTFF,
SOTFF, SPTFF, SCTFMF and SCTFF each may not:
(1) borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time (except that Scudder New York Tax Free Money Fund
reserves the freedom of action to concentrate its investments
in instruments issued by domestic banks);
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts relating to
physical commodities; or
(7) make loans except as permitted under the 1940 Act, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
As a matter of fundamental policy, each of SMLTTFF and SMTFF will:
(8) have at least 80% of its net assets invested in municipal
securities of issuers located in Massachusetts and other
qualifying issuers (including Puerto Rico, the U.S. Virgin
Islands and Guam) during periods of normal market conditions.
As a matter of fundamental policy, each of SNYTFF and SNYTFMF will:
(9) have at least 80% of its net assets invested in municipal
securities of issuers located in New York and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam) during periods of normal market conditions.
As a matter of fundamental policy, SOTFF will:
(10) have at least 80% of its net assets invested in municipal
securities of issuers located in Ohio and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam) during periods of normal market conditions.
As a matter of fundamental policy, SPTFF will:
60
<PAGE>
(11) have at least 80% of its net assets invested in municipal
securities of issuers located in Pennsylvania and other
qualifying issuers (including Puerto Rico, the U.S. Virgin
Islands and Guam) during periods of normal market conditions.
As a matter of nonfundamental policy, SMLTTFF, SMTFF, SNYTFMF, SNYTFF,
SOTFF, SPTFF, SCTFMF and SCTFF each may not:
(i) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(ii) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(iii) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(iv) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such 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;
(v) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(vi) lend portfolio securities in an amount greater than 5% of its
total assets.
PURCHASES
Additional Information About Opening an Account
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, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
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 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 ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the fee to be paid
to the Fund) for any non-fiduciary/non-custodial account
without an automatic investment plan (AIP) in place and a
balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer out of the account. The Fund will mail the
proceeds of the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
62
<PAGE>
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Fund or the principal underwriter by reason of such cancellation. 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. Net losses on such transactions
which are not recovered from the purchaser will be absorbed by the principal
underwriter. Any net profit on the liquidation of unpaid shares will accrue to
the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
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 QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 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
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. QuickBuy 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
QuickBuy 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. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, 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 QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund 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 Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
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 the Fund are purchased by a check which proves to be
uncollectible, the 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 cancellation. If the purchaser is a
shareholder, the Trust will 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.
63
<PAGE>
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, 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 the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
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 closed on certain holidays although the Exchange may
be open. These holidays include 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 the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed 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 will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trusts' management to afford ease of
redemption, certificates will not be issued to indicate ownership in a Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The Boards of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Fund reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct 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.
64
<PAGE>
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange either may
be 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 will not carry over automatically to the new account. Exchanges
to a new fund account must be for a minimum of $2,500. When an exchange
represents an additional investment into an existing account, the account
receiving the exchange proceeds must have identical registration, 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 to be 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 will be executed at the 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 an 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. Each Fund 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 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. Each Fund 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. The exchange privilege may not be
available for certain Scudder funds. For more information, please call
1-800-225-5163.
Redemption by Telephone
Shareholders currently receive the right automatically, without having
to elect it, to redeem up to $100,000 to their address of record. Shareholders
may also request to have the proceeds mailed or wired to their pre-designated
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.
65
<PAGE>
(a) NEW INVESTORS wishing to establish telephone redemption to a
pre-designated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit Sharing, Scudder 401(k) and Scudder
403(b) Plan holders) who wish to establish telephone
redemption to a pre-designated bank account or who want to
change the bank account previously designated to receive
redemption payments 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) appear on the account. An
original signature and an original signature guarantee are
required for each person in whose name the account is
registered.
Telephone redemption is not available with respect to shares held in
retirement accounts.
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 each wire redemption.
Note: Investors designating that a savings bank 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 banks 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.
Each 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 By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of a Fund by telephone. 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, normally 4 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell 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. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders that wish to add QuickSell to their account may do so by
completing a QuickSell 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.
66
<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, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares 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 will
be sent within five 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 of payment for shares tendered for repurchase or
redemption may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those of
regular accounts. For more information call 1-800-225-5163.
Redemption by Checkwriting
All new investors and existing shareholders of SMLTFF, SNYTFMF and
SCTFMF who apply to State Street Bank and Trust Company 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 will receive 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 a Fund's book for seven business days.
Shareholders who use this service may also use other redemption procedures. Each
Fund pays the bank charges for this service. However, each Fund will review the
cost of operation periodically and reserve the right to determine if direct
charges to the persons who avail themselves of this service would be
appropriate. The Funds, Scudder Service Corporation and State Street Bank and
Trust Company reserve the right at any time to suspend or terminate the
"Checkwriting" procedure.
Redemption-in-Kind
Each Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by a
Fund and valued as they are for purposes of computing a Fund's net asset value
(a redemption-in-kind). If payment is made in securities, a shareholder may
incur transaction expenses in converting these securities into cash.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive, 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 the shareholder's cost
depending on the net asset value at the time of redemption or repurchase. The
Fund does not impose a redemption or repurchase charge although a wire charge
will be charged for redemption proceeds wired to an investor's bank account.
Redemption of shares, including an exchange into another Scudder fund and
redemptions by Checkwriting, 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.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
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 the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) the SEC may
by order permit such a suspension for the
67
<PAGE>
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.
FEATURES AND SERVICES OFFERED BY THE FUNDS
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of 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
National Association of Securities Dealers Conduct Rules, 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.
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.
<TABLE>
<S> <C> <C> <C> <C> <C>
<CAPTION>
====================================================================================================================
Scudder No-Load Fund
YEARS No-Load 8.50% Load Fund Load Fund with with 0.25% 12b-1
Fund 0.75%12b-1 Fee 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>
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links
68
<PAGE>
between summary information in Profiles and details in the Prospectus. Users can
fill out new account forms on-line, order free software, and request literature
on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. is
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties
on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders that have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains 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.
Reinvestment is usually made at the closing net asset value determined
on the business 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 in 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. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
69
<PAGE>
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 Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain 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 "Purchases" or "Exchanges and Redemptions" in the Funds'
prospectus.
Reports to Shareholders
The Trusts issue shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights.
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
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.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
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. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
70
<PAGE>
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
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 State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
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 Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
71
<PAGE>
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income
through investment primarily in investment-grade corporate debt
securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
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 International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. 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 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 by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
72
<PAGE>
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company 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.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
- ------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
73
<PAGE>
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
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 Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
- ------------------------
*** Only the International Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
74
<PAGE>
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. 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; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (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. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plans. The state tax treatment may be different and
may vary from state to state. 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 who currently own or purchase $10,000
or more of shares of a Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. 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 and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the 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 Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. 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.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
75
<PAGE>
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.
In its discretion, a Fund may accept minimum initial investments of
less than $2,500 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 in the group purchase plan will
be $2,500 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 $2,500 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 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. 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 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 Scudder's
Automatic Investment Plan (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
Each Fund will follow the practice of distributing substantially all,
and in no event less than 90%, of its taxable and tax-exempt 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, a Fund may retain all or part of such gain for reinvestment.
Dividends will be declared daily and distributions of net investment
income will be made monthly. Any dividend 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. Distributions of net
short-term and net long-term capital gains realized during each fiscal year, if
any, will be made annually within three months after the end of each Fund's
fiscal year end. An additional distribution may also be made (or treated as
made) in November or December if necessary to avoid the excise tax enacted by
the Tax Reform Act of 1986 (See "TAXES," below). Both types of distributions
will be made in shares of a Fund and confirmations will be mailed to each
shareholder unless a shareholder has elected to receive cash, in which case a
check will be sent.
76
<PAGE>
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 a 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
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 one year, five years and for the life of a Fund, ended on the last
day of a Fund's fiscal year end. Average annual total return quotations reflect
changes in the price of a Fund's 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:
T = Average annual total return
P = a hypothetical initial investment of $1,000
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.
Average Annual Total Return for periods ended March 31, 1999
<TABLE>
<CAPTION>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
<S> <C> <C> <C> <C>
Scudder Massachusetts Limited Term Tax Free Fund+ 4.46% -- -- 4.67%*
Scudder Massachusetts Tax Free Fund++ 5.29 7.21% 8.06% --
Scudder New York Tax Free Money Fund 2.71 2.87 3.18 --
Scudder New York Tax Free Fund 5.46 7.13 7.91 --
Scudder Ohio Tax Free Fund 5.18 7.09 7.66 --
Scudder Pennsylvania Tax Free Fund 4.77 6.92 7.72 --
Scudder California Tax Free Money Fund 2.52 2.87 3.23 --
Scudder California Tax Free Fund 5.78 7.54 8.15 --
</TABLE>
* For the period beginning February 15, 1994 (commencement of
operations).
+ If the Adviser had not maintained SMLTTFF expenses and had imposed a
full management fee, average annual total returns for the one year
period and life of the Fund would have been lower.
++ If the Adviser had not maintained SMTFF expenses and had imposed a full
management fee, average annual total returns for the five year period
and life of the Fund would have been lower.
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 the 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 period,
according to the following formula (cumulative total return is then expressed as
a percentage):
77
<PAGE>
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
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.
Cumulative Total Returns for the period ended March 31, 1999
<TABLE>
<CAPTION>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
<S> <C> <C> <C> <C>
Scudder Massachusetts Limited Term Tax Free Fund+ 4.46% -- -- 26.37%*
Scudder Massachusetts Tax Free Fund++ 5.29 21.85% 117.19% --
Scudder New York Tax Free Money Fund 8.87 15.22 36.82 --
Scudder New York Tax Free Fund 5.46 22.85 114.12 --
Scudder Ohio Tax Free Fund 5.18 22.24 109.09 --
Scudder Pennsylvania Tax Free Fund 4.77 21.45 110.40 --
Scudder California Tax Free Money Fund 2.52 8.60 37.37 --
Scudder California Tax Free Fund 5.78 24.75 118.99 --
</TABLE>
* For the period beginning February 15, 1994 (commencement of
operations).
+ If the Adviser had not maintained SMLTTFF expenses and had imposed a
full management fee, cumulative total returns for the one year period
and life of the Fund would have been lower.
++ If the Adviser had not maintained SMTFF expenses and had imposed a full
management fee, cumulative total returns for the five year period and
life of the Fund would have been lower.
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.
SEC Yield
Yield for SNYTFMF and SCTFMF is the net annualized yield based on a
specified seven calendar days calculated at simple interest rates. Yield,
sometimes referred to as the Fund's "SEC 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 yields of SNYTFMF and SCTFMF
for the seven-day period ended March 31, 1999 were 2.33% and 2.20%,
respectively.
Yield for each Fund, except SNYTFMF and SCTFMF, is the net annualized
SEC yield based on a specified 30-day (or one month) period assuming a
semiannual compounding of income. Yield, sometimes referred to as the Fund's
"SEC 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.
30-day Net-Annualized SEC Yields for the period ended March 31, 1999
78
<PAGE>
Scudder Massachusetts Limited Term Tax Free Fund 2.96%
Scudder Massachusetts Tax Free Fund 3.98
Scudder New York Tax Free Fund 3.84
Scudder Ohio Tax Free Fund 3.87
Scudder Pennsylvania Tax Free Fund 3.93
Scudder California Tax Free Fund 3.92
Effective Yield
Effective yield for SNYTFMF and SCTFMF 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
Effective Yield for period ended March 31, 1999
Fund Effective Yield
---- ---------------
Scudder New York Tax Free Money Fund 2.36%
Scudder California Tax Free Money Fund 2.23%
Tax-equivalent Yield for SNYTFMF and SCTFMF
Tax-equivalent yield for SNYTFMF and SCTFMF is the net annualized
taxable yield needed to produce a specified tax-exempt yield at a given tax rate
based on a specified 7-day period assuming a reinvestment of all dividends paid
during such period. Tax-equivalent yield is calculated by dividing that portion
of a 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.
SNYTFMF. Taxpayers in the highest combined state and federal income tax bracket
would need to earn a taxable yield of 4.24% to receive after-tax income equal to
the 2.36% tax-free effective yield of SNYTFMF for the seven day period ended
March 31, 1999.
SCTFMF. Taxpayers in the highest combined state and federal income tax bracket
would need to earn a taxable yield of 4.02% to receive after-tax income equal to
the 2.23% tax-free effective yield of SCTFMF for the seven day period ended
March 31, 1999.
Tax-equivalent Yield for All Other Funds
Tax-equivalent yield 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.
SMLTTFF. Taxpayers with a federal tax rate of 36% and an effective combined
marginal tax rate of 46.85% would need to earn a taxable yield of 7.49% to
receive after-tax income equal to the 2.96% tax-free yield of SMLTTFF for the
30-day period ended March 31, 1999.
79
<PAGE>
SMTFF. Taxpayers with a federal tax rate of 36% and an effective combined
marginal tax rate of 46.85% would need to earn a taxable yield of 7.49% to
receive after-tax income equal to the 3.98% tax-free yield of SMTFF for the
30-day period ended on March 31, 1999.
SNYTFF. Taxpayers in the highest combined state and federal income tax bracket
would need to earn a taxable yield of 6.99% to receive after-tax income equal to
the 3.84% tax-free yield of Scudder New York Tax Free Fund for the thirty-day
period ended March 31, 1999.
SOTFF. Taxpayers in the highest combined state and federal income tax bracket
would need to earn a taxable yield of 6.90% to receive after-tax income equal to
the 3.87% tax-free yield of Scudder Ohio Tax Free Fund for the 30-day period
ended on March 31, 1999.
SPTFF. Taxpayers in the highest combined state and federal income tax bracket
would need to earn a taxable yield of 6.69% to receive after-tax income equal to
the 3.93% tax-free yield of Scudder Pennsylvania Tax Free Fund for the 30-day
period ended on March 31, 1999.
SCTFF. Taxpayers with an effective combined marginal income tax rate of 45.22%
would have to earn 3.92% to receive the after-tax income equal to the 7.16%
tax-free yield of Scudder California Tax Free Fund for the 30-day period ended
March 31, 1999.
Quotations of each Fund's performance are historical, show the
performance of a hypothetical investment and are not intended to indicate future
performance. Performance of a Fund will vary based on changes in market
conditions and the level of each 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.
Massachusetts Tax-free Yields
The table below shows Massachusetts taxpayers what an investor would
have to earn from a comparable taxable investment to equal SMLTTFF's or SMTFF's
double tax-free yield.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a Taxable
Investment Would Have to Earn*:
- -------------------------------------------------------------------------------------------------------------------------
1998 Taxable Combined Marginal 5% 7% 9%
Income: Tax Rate:
- -------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$25,351-61,400 36.64% 7.89% 11.05% 14.20%
- -------------------------------------------------------------------------------------------------------------------------
61,401-128,100 39.28 8.23 11.53 14.82
- -------------------------------------------------------------------------------------------------------------------------
128,101-278,450 43.68 8.88 12.43 15.98
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 46.85 9.41 13.17 16.93
- -------------------------------------------------------------------------------------------------------------------------
JOINT RETURN
- -------------------------------------------------------------------------------------------------------------------------
$42,351-102,300 36.64% 7.89% 11.05% 14.20%
- -------------------------------------------------------------------------------------------------------------------------
102,301-155,950 39.28 8.23 11.53 14.82
- -------------------------------------------------------------------------------------------------------------------------
155,951-278,450 43.68 8.88 12.43 15.98
- -------------------------------------------------------------------------------------------------------------------------
80
<PAGE>
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 46.85 9.41 13.17 16.93
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* These illustrations assume a marginal federal 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 of the table in order
to achieve an after-tax yield on a comparable tax-exempt security.
81
<PAGE>
New York Tax-free Yields
The table below shows New York City taxpayers what an investor would
have to earn from a comparable taxable investment to equal SNYTFMF's or SNYTFF's
triple tax-free yield.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a Taxable
Investment Would Have to Earn*:
- -------------------------------------------------------------------------------------------------------------------------
1998 Taxable Combined Marginal 5% 7% 9%
Income: Tax Rate:
- -------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$40,001-61,400 34.52% 7.64% 10.69% 13.75%
- -------------------------------------------------------------------------------------------------------------------------
61,404-128,100 37.25 7.97 11.16 14.34
- -------------------------------------------------------------------------------------------------------------------------
128,101-278,450 41.80 8.59 12.03 15.46
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 45.07 9.10 12.74 16.39
- -------------------------------------------------------------------------------------------------------------------------
JOINT RETURN
- -------------------------------------------------------------------------------------------------------------------------
$42,351-102,300 36.64% 7.64% 10.69% 13.75%
- -------------------------------------------------------------------------------------------------------------------------
102,301-155,950 39.28 7.97 11.16 14.34
- -------------------------------------------------------------------------------------------------------------------------
155,951-278,450 43.68 8.59 12.03 15.46
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 46.85 9.10 12.74 16.39
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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. Moreover, upper income taxpayers will also be subject to a tax table
benefit recapture imposed by New York state that will have the effect of
increasing their effective tax rate. Individuals subject to these phase-out
provisions would have to invest in taxable securities with a yield in excess of
those shown of the table in order to achieve an after-tax yield on a comparable
tax-exempt security.
+ Combined marginal tax rates are adjusted for the deductibility of state
and City taxes.
82
<PAGE>
Ohio Tax-free Yields
The table below shows Ohio taxpayers what an investor would have to
earn from a comparable taxable investment to equal SOTFF's double tax-free
yield.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 3%, 4%, 5% and 6%, a
Taxable Investment Would Have to Earn*:
- -------------------------------------------------------------------------------------------------------------------------
1998 Taxable Combined Marginal 3% 5% 7% 9%
Income: Tax Rate:
- -------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$20,000-25,350 18.64% 3.69% 4.92% 6.15% 7.37%
- -------------------------------------------------------------------------------------------------------------------------
25,351-40,000 31.08 4.35 5.80 7.25 8.71
- -------------------------------------------------------------------------------------------------------------------------
40,001-61,400 31.59 4.39 5.85 7.31 8.77
- -------------------------------------------------------------------------------------------------------------------------
61,401-80,000 34.45 4.58 6.10 7.63 9.15
- -------------------------------------------------------------------------------------------------------------------------
80,001-100,000 34.49 4.61 6.15 7.68 9.22
- -------------------------------------------------------------------------------------------------------------------------
100,001-128,100 35.57 4.66 6.21 7.76 9.31
- -------------------------------------------------------------------------------------------------------------------------
128,101-200,000 40.24 5.02 6.69 8.37 10.04
- -------------------------------------------------------------------------------------------------------------------------
200,001-278,450 40.61 5.05 6.73 8.42 10.10
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 43.95 5.35 7.14 8.92 10.70
- -------------------------------------------------------------------------------------------------------------------------
JOINT RETURN
- -------------------------------------------------------------------------------------------------------------------------
$40,001-42,350 19.24% 3.71% 4.95% 6.19% 7.43%
- -------------------------------------------------------------------------------------------------------------------------
42,351-80,000 31.59 4.39 5.85 7.31 8.77
- -------------------------------------------------------------------------------------------------------------------------
80,001-100,000 32.11 4.42 5.89 7.36 8.84
- -------------------------------------------------------------------------------------------------------------------------
100,001-102,300 32.77 4.46 5.95 7.44 8.92
- -------------------------------------------------------------------------------------------------------------------------
102,301-155,950 35.57 4.66 6.21 7.76 9.31
- -------------------------------------------------------------------------------------------------------------------------
155,951-200,000 40.24 5.02 6.69 8.37 10.04
- -------------------------------------------------------------------------------------------------------------------------
200,001-278,450 40.61 5.05 6.73 8.42 10.10
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 46.85 5.35 7.14 8.92 10.70
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* These illustrations assume a marginal federal 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 of the table in order
to achieve an after-tax yield on a comparable tax-exempt security.
83
<PAGE>
Pennsylvania Tax-free Yields
The table below shows Pennsylvania taxpayers what an investor would
have to earn from a comparable taxable investment to equal SPTFF's double
tax-free yield.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a Taxable
Investment Would Have to Earn*:
- -------------------------------------------------------------------------------------------------------------------------
1998 Taxable Combined Marginal 5% 7% 9%
Income: Tax Rate:
- ------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$25,350-61,400 30.02% 7.14% 10.00% 12.86%
- -------------------------------------------------------------------------------------------------------------------------
61,401-128,100 32.93 7.46 10.44 13.42
- -------------------------------------------------------------------------------------------------------------------------
128,101-278,450 37.79 8.04 11.25 14.47
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 41.29 8.52 11.92 15.33
- -------------------------------------------------------------------------------------------------------------------------
JOINT RETURN
- -------------------------------------------------------------------------------------------------------------------------
$42,351-102,300 30.02% 7.14% 10.00% 12.86%
- -------------------------------------------------------------------------------------------------------------------------
102,301-155,950 32.93 7.46 10.44 13.42
- -------------------------------------------------------------------------------------------------------------------------
155,951-278,450 37.79 8.04 11.25 14.47
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 41.29 8.52 11.92 15.33
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* These illustrations assume a marginal federal tax rate of 28% to 39.6%, an
effective Pennsylvania personal income tax rate of 2.80% for 1998 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 of the table in order to achieve an
after-tax yield on a comparable tax-exempt security.
84
<PAGE>
California Tax-free Yields
The table below shows California taxpayers what an investor would have
to earn from a comparable taxable investment to equal SCTFMF's or SCTFF's double
tax-free yield.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a Taxable
Investment Would Have to Earn*:
- -------------------------------------------------------------------------------------------------------------------------
1998 Taxable Combined Marginal 5% 7% 9%
Income: Tax Rate:
- ------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$25,351-26,045 32.32% 7.39% 10.34% 13.30%
- -------------------------------------------------------------------------------------------------------------------------
26,046-32,916 33.76 7.55 10.57 13.59
- -------------------------------------------------------------------------------------------------------------------------
32,917-61,400 34.70 7.66 10.72 13.78
- -------------------------------------------------------------------------------------------------------------------------
61,401-128,100 37.42 7.99 11.19 14.38
- -------------------------------------------------------------------------------------------------------------------------
128,101-278,450 41.95 8.61 12.06 15.50
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 45.22 9.13 12.78 16.43
- -------------------------------------------------------------------------------------------------------------------------
JOINT RETURN
- -------------------------------------------------------------------------------------------------------------------------
$42,351-52,090 32.32% 7.39% 10.34% 13.30%
- -------------------------------------------------------------------------------------------------------------------------
52,091-65,832 33.76 7.55 10.57 13.59
- -------------------------------------------------------------------------------------------------------------------------
65,833-102,300 34.70 7.66 10.72 13.78
- -------------------------------------------------------------------------------------------------------------------------
102,301-155,950 37.42 7.99 11.19 14.38
- -------------------------------------------------------------------------------------------------------------------------
155,951-278,450 41.95 8.61 12.06 15.50
- -------------------------------------------------------------------------------------------------------------------------
OVER 278,450 45.22 9.13 12.78 16.43
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* These illustrations assume a marginal federal 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 of the table in order
to achieve an after-tax yield on a comparable tax-exempt security.
+ Combined marginal tax rates are adjusted for the deductibility of state
taxes.
Comparison of Fund 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
85
<PAGE>
(S&P 500), the Nasdaq OTC Composite Index, the Nasdaq Industrials Index, the
Russell 2000 Index, the Wilshire Real Estate Securities Index and statistics
published by the Small Business Administration.
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.
86
<PAGE>
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
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 Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC'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 Business Daily, a daily newspaper that features financial, economic,
and business news.
87
<PAGE>
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.
SmartMoney, 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.
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 issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
88
<PAGE>
ORGANIZATION OF THE FUNDS
SMLTTFF, SMTFF, SNYTFMF, SNYTFF, SOTFF and SPTFF are each a
non-diversified series of Scudder State Tax Free Trust. The Trust is a
Massachusetts business trust established under a Declaration of Trust dated May
25, 1983, as amended from time to time. 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 $0.01 par value. The shares
are currently divided into six series. The Trustees have the right to issue more
series of shares and to designate the relative rights and preferences as between
the different 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 will be fully paid and non-assessable by the
Trust, and redeemable as described in this Statement of Additional Information
and in the Funds' prospectus.
SCTFMF and SCTFF are each a non-diversified series of Scudder
California Tax Free Trust. The Trust is a Massachusetts business trust
established under a Declaration of Trust dated May 3, 1983, as amended from time
to time. 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 each 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 each 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 each 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 each 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 Trusts 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 Declarations of Trust provides that obligations of the Trusts are
not binding upon the Trustees individually but only upon the property of a
Trust, that the Trustees and officers will not be liable for errors of judgment
or mistakes of fact or law, and that a Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with a 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 a Trust. However, nothing in the Declarations of Trust
protects or 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 their
office.
INVESTMENT ADVISER
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Funds. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. 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, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership
89
<PAGE>
to a corporation on June 28, 1985. On June 26, 1997, Scudder, Stevens & Clark,
Inc. ("Scudder") entered into an agreement with Zurich Insurance Company
("Zurich") pursuant to which Scudder and Zurich agreed to form an alliance. On
December 31, 1997, Zurich acquired a majority interest in Scudder, and Zurich
Kemper Investments, Inc., a Zurich subsidiary, became part of Scudder. Scudder's
name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
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, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc.,
Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway
Series, 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, The Argentina Fund, Inc., The Brazil Fund, Inc.,
The Korea Fund, Inc., The Japan Fund, Inc. and Scudder Spain and Portugal 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 $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
In selecting the securities in which each Fund may invest, the
conclusions and investment decisions of the Adviser with respect to a Fund 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 brokers and 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 a Fund 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 will be 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.
90
<PAGE>
The transaction between Scudder and Zurich resulted in the assignment
of each Funds' investment management agreement with Scudder, the agreements were
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, new investment management agreements
between the Funds and the Adviser were approved by the Funds' Trustees. At the
special meeting of the Funds' shareholders held on October 24, 1997, the
shareholders also approved proposed new investment management agreements. The
new investment management agreements (the "1997 Agreements") became effective as
of December 31, 1997 and were in effect for an initial term ending on September
30, 1998. The Agreements are in all material respects on the same terms as the
previous investment management agreements which they supersede. The Agreements
incorporate conforming changes which promote consistency among all of the funds
advised by the Adviser and which permit ease of administration.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Funds' existing investment
management agreements with Scudder Kemper were deemed to have been assigned and,
therefore, terminated. The Board has approved new investment management
agreements (the "Agreements") with the Adviser, which are substantially
identical to the current investment management agreements, except for the date
of execution and termination. The agreements became effective September 7, 1998,
upon the termination of the then current investment management agreements and
were approved at a shareholder meeting held in December 1998.
The Agreements dated September 7, 1998 were approved by the Trustees on
August 10, 1998. The Agreements will continue in effect until September 30, 1999
and from year to year thereafter only if their continuance is approved annually
by the vote of a majority of those Trustees who are not parties to such
Agreements or interested persons of the Adviser or the Trust, cast in person at
a meeting called for the purpose of voting on such approval, and either by a
vote of the Trust's Trustees or of a majority of the outstanding voting
securities of the Funds. The Agreements may be terminated at any time without
payment of penalty by either party on sixty days' notice and automatically
terminates in the event of its assignment.
Under each Agreement, the Adviser regularly provides a Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the Fund's investment objectives and
policies. The Adviser determines what securities shall be purchased for the
Fund's portfolio, what securities shall be held or sold by the Fund, and what
portion of the Fund's assets shall be held uninvested, subject always to the
provisions of the Trust's Declaration of Trust and By-Laws, the 1940 Act, the
Internal Revenue Code of 1986 and to the Fund's investment objective, 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 each Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Trust and makes available, without
expense to the Trust, the services of such Advisers, Directors, Officers, and
employees as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities and provides investment
advisory, research and statistical facilities and all clerical services relating
to research, statistical and investment work.
SMLTTFF. For these services, SMLTTFF pays the Adviser a monthly fee of 0.60 of
1% of the average daily net assets of the Fund. The Agreements provide that if a
Fund's expenses, exclusive of taxes, interest, and extraordinary expenses,
exceed specified limits, such excess, up to the amount of the management fee,
will be paid by the Adviser. The Adviser retains the ability to be repaid by a
Fund if expenses fall below the specified limit prior to the end of the fiscal
year. These expense limitation arrangements can decrease a Fund's expenses and
improve its performance. For the fiscal years ended October 31, 1997 and 1998,
and March 31, 1999 pursuant to these agreements, the investment management fees
incurred by SMLTTFF were $302,455, $466,504 and $_______, respectively. Had the
Adviser imposed a full
91
<PAGE>
investment management fee for these fiscal years, the investment management fees
would have equaled $424,432, $549,378 and $_______, respectively. The Adviser
had agreed to maintain the annualized expenses of SMLTTFF at not more than 0.75%
of the average daily net assets of the Fund until July 31, 1999.
SMTFF. For these services, SMTFF pays the Adviser a monthly fee of 0.60 of 1% of
the average daily net assets of the Fund. The Agreements provide that if a
Fund's expenses, exclusive of taxes, interest, and extraordinary expenses,
exceed specified limits, such excess, up to the amount of the management fee,
will be paid by the Adviser. The Adviser retains the ability to be repaid by a
Fund if expenses fall below the specified limit prior to the end of the fiscal
year. These expense limitation arrangements can decrease a Fund's expenses and
improve its performance. For the fiscal years ended March 31, 1997, 1998 and
1999, pursuant to these agreements, the investment management fees incurred by
SMTFF were $1,933,810, $2,110,713 and $___________, respectively, of which
$_______ was unpaid at March 31, 1999.
SNYTFF. For these services, SNYTFF pays a fee of 0.625 of 1% on an annual basis
of the first $200 million of average daily net assets of the Fund and 0.60 of 1%
on an annual basis of such net assets in excess of $200 million payable monthly,
provided the 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
the Fund and unpaid. For the fiscal years ended March 31, 1997, 1998 and 1999
the investment management fees incurred by SNYTFF were $1,165,330, $1,184,089
and $__________, respectively.
SNYTFMF. For these services SNYTFMF pays a monthly fee of 1/24 of 1%
(approximately 0.50 of 1% on an annual basis) of the average daily net assets of
the Fund. For the fiscal years ended March 31, 1997, 1998 and 1999, investment
management fees incurred by SNYTFMF were $286,728, $337,692 and $_______,
respectively. The Adviser has agreed to maintain the annualized expenses of the
Fund at not more than 0.60% of average daily net assets of the Fund until July
31, 1999. For the fiscal year ended March 31, 1999, the Adviser did not impose a
portion of its fee amounting to $_______ and the portion imposed amounted to
$_______.
SOTFF. For these services, the Fund pays the Adviser a monthly fee of 1/20 of 1%
(approximately 0.60 of 1% on an annual basis) of the average daily net assets of
the Fund. For the fiscal years ended March 31, 1997, 1998 and 1999, the
investment management fees incurred by the Fund were $190,438, $226,379 and
$_______, respectively. Had the Adviser imposed a full investment management fee
for the fiscal years ended March 31, 1997, 1998 and 1999, the investment
management fees would have equaled $509,970, $532,714 and $_______,
respectively.
SPTFF. For these services, the Fund pays the Adviser a monthly fee of 1/20 of 1%
(approximately 0.60 of 1% percent on an annual basis) of the average daily net
assets of the Fund. For the fiscal year ended March 31, 1997, 1998 and 1999, the
Adviser did not impose a portion of its management fees amounting to $316,193,
$292,000 and $_______, respectively; the portion imposed amounted to $136,180,
$158,978 and $_______, respectively.
SCTFMF. For these services, SCTFMF pays an annual fee of 0.50 of 1% of the
average daily net assets of the Fund. The Adviser had 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, 1999, and during such time to maintain the
annualized expenses at not more than 0.60% of average daily net assets. For the
fiscal years ended March 31, 1997, 1998 and 1999, the investment management fees
incurred by SCTFMF were $210, 030, $218,236 and $_______, respectively. For the
fiscal year ended March 31, 1999, the Adviser did not impose a portion of the
fee which would have amounted to $-------.
SCTFF. For these services, SCTFF 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. For the fiscal years ended March 31, 1997,
1998 and 1999 the investment management fees incurred by SCTFF were $1,800,657,
$1,892,742 and $_______, respectively.
Under the Agreements each Fund is responsible for all of its other
expenses, including organization expenses; clerical salaries; fees and expenses
incurred in connection with membership in investment company organizations;
brokers' commissions; payment for portfolio pricing services to a pricing agent,
if any; legal, auditing or accounting expenses; taxes or governmental fees; the
fees and expenses of the Transfer Agent; the cost of preparing share
certificates and any other expenses, including clerical expense, of issuance,
redemption or repurchase of shares of beneficial interest; the expenses of and
fees for registering or qualifying securities for sale; the fees and expenses of
the
92
<PAGE>
Trustees of the Trust who are not affiliated with the Adviser; the cost of
preparing and distributing reports and notices to shareholders; and the fees or
disbursements of custodians. 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 further provides that as between each Fund and the
Adviser each Fund will be responsible for all expenses, including clerical
expense, of offer, sale, underwriting and distribution of a Fund's shares only
so long as a Fund employs a principal underwriter to act as the distributor of a
Fund's shares pursuant to an underwriting agreement which provides that the
underwriter will assume such expenses. The Trust's underwriting agreement
provides that the principal underwriter shall pay all expenses of offer and sale
of a Fund's shares except the expenses of preparation and filing of registration
statements under the Securities Act of 1933 and under state securities laws,
issue and transfer taxes, if any, and a portion of the prospectuses used by a
Fund. In the event that a Fund ceases to employ a principal underwriter to act
as the distributor of a Fund's shares, the expenses of distributing a Fund's
shares will be borne by the Adviser unless a Fund shall have adopted a plan
pursuant to Rule 12b-1 under the 1940 Act providing that a Fund shall be
responsible for some or all of such distribution expenses.
Each Agreement requires the Adviser to return to a Fund all or a
portion of advances of its management fee to the extent annual expenses of a
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which a Fund's shares are offered for sale. 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 will be returned as promptly as practicable after the end of
each Fund's fiscal year. However, no fee payment will be made to the Adviser
during any fiscal year which will cause 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 Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning the Agreement, Trustees who are not "interested persons" of
the Adviser are represented by independent counsel at that Fund's expense.
Each Agreement provides that the Adviser shall not be 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 bank. 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.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the Trustees or officers of the Trust may have dealings with
either Fund as principals in the purchase or sale of securities, except as
individual subscribers to or holders of shares of such Fund.
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
93
<PAGE>
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.
Unless otherwise indicated, trustees and officers serve for both
Scudder State Tax Free Trust and Scudder California Tax Free Trust.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Lynn S. Birdsong*+@ (52) President and Managing Director of Scudder Vice President,
Trustee Kemper Investments, Inc. Director and Assistant
Treasurer
Henry P. Becton, Jr. (55) Trustee President and General Manager, --
WGBH WGBH Educational Foundation
125 Western Avenue
Allston, MA 02134
Dawn-Marie Driscoll (52) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates (consulting firm)
Peter B. Freeman@ (66) Trustee Trustee, Eastern Utilities --
100 Alumni Avenue Associates; Director, Swan Point
Providence, RI 02906 Cemetery; Director, AMICA Mutual
Insurance Co.; Trustee, various
non-family trusts and charitable
institutions; Director, the A.H.
Belo Company
George M. Lovejoy, Jr. (68) Trustee President and Director, Fifty --
50 Congress Street Associates (real estate
Boston, MA 02110 investment trust)
Wesley W. Marple, Jr.@ (67) Trustee Professor of Business --
413 Hayden Hall Administration, Northeastern
360 Huntington Avenue University College of Business
Boston, MA 02115 Administration
Kathryn L. Quirk#@ (46) Trustee, Vice Managing Director of Scudder Senior Vice President,
President, Kemper Investments, Inc. Director and Clerk
Assistant Secretary
Jean C. Tempel (55) Trustee Venture Partner, Internet --
Internet Capital Group Capital Group
10 Post Office Square
Suite 1325
Boston, MA 02109-4603
94
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
Eleanor R. Brennan***@@ ( ) Vice President Vice President of Scudder Kemper --
Investments, Inc.
Philip G. Condon+## (48) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas W. Joseph+ (59) Vice President Senior Vice President of Scudder Director, Vice
Kemper Investments, Inc. President, Treasurer
and Assistant Clerk
Ann M. McCreary# (42) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Frank J. Rachwalski, Jr.***###(54) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Rebecca Wilson+ (37) Vice President Vice President of Scudder Kemper --
Investments, Inc.
John R. Hebble+ (40) Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
John Millette+ (34) Secretary Assistant Vice President of --
Scudder Kemper Investments, Inc.
Caroline Pearson+ (37) Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm), 1989-1997
</TABLE>
* Mr. Birdsong and Ms. Quirk are considered by the Trust and its counsel
to be Trustees who are "interested persons" of the Adviser or of each
Fund 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.
+ Address: Two International Place, Boston, Massachusetts 02110.
# Address: 345 Park Avenue, New York, New York 10154.
@@ Ms. Brennan serves as Vice President for Scudder State Tax Free Trust
only.
## Mr. Condon serves as Vice President for Scudder State Tax Free Trust
only.
*** Address: 111 E. Wacker Drive - Suite 2200, Chicago, Illinois 60601
### Mr. Rachwalski serves as Vice President for Scudder State Tax Free
Trust only.
@ Messrs. Freeman, Marple, Birdsong and Ms. Quirk are members of the
Executive Committee of the Trust, 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.
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of June 30, 1999, all Trustees and officers of each Trust as a group
owned beneficially (as that term is defined in Section 13(d) under the
Securities Exchange Act of 1934) less than 1% of the outstanding shares of each
Fund on such date.
95
<PAGE>
Certain accounts for which the Adviser acts as investment adviser owned
_______ shares in the aggregate, or ____% of the outstanding shares of Scudder
Massachusetts Limited Term Tax Free Fund on June 30, 1999. 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
_________ shares in the aggregate, or ____% of the outstanding shares of Scudder
Massachusetts Tax Free Fund on June 30, 1999. The Adviser may be deemed to be
the beneficial owner of such shares, but disclaims any beneficial ownership in
such shares.
As of June 30, 1999, _________ shares in the aggregate or ____% of the
outstanding shares of Scudder Massachusetts Tax Free Fund were held in the
nominees of Fiduciary Trust Company. Fiduciary Trust Company may be deemed to be
the beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of June 30, 1999, _______ shares in the aggregate or ____% of the
outstanding shares of Scudder Massachusetts Limited Term Tax Free Fund were held
in the nominees of Fiduciary Trust Company. Fiduciary Trust Company may be
deemed to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership therein.
As of June 30, 1999, __________ shares in the aggregate, _____% of the
outstanding shares of Scudder New York Tax Free Money Fund, were held in the
name of Edmond D. Villani, 345 Park Avenue, 25th Floor, New York, NY 10154-0004.
As of June 30, 1999, Charles Schwab & Co. owned in the aggregate, by or
on behalf of accounts for which it acts as investment adviser, _______ shares of
Scudder Ohio Tax Free Fund, or ____% of the outstanding shares of such Fund.
Charles Schwab & Co. may be deemed to be the beneficial owner of such shares but
disclaims any beneficial ownership in such shares.
As of June 30, 1999, Charles Schwab & Co. owned in the aggregate, by or
on behalf of accounts for which it acts as investment adviser, _______ shares of
Scudder Pennsylvania Tax Free Fund, or ____% of the outstanding shares of such
Fund. Charles Schwab & Co. may be deemed to be the beneficial owner of such
shares but disclaims any beneficial ownership in such shares.
To the knowledge of Scudder California Tax Free Trust, as of June 30,
1999, _________ shares, in the aggregate, or ____% of the outstanding shares of
Scudder California Tax Free Fund were held in the name of Charles Schwab and
Co., Inc., 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
_________ shares in the aggregate, or ____% of the outstanding shares of Scudder
California Tax Free Money Fund on June 30, 1999. The Adviser may be deemed to be
the beneficial owner of such shares but disclaims any beneficial ownership in
such shares.
To the knowledge of the Trusts, as of June 30, 1999, no person owned
beneficially more than 5% of each Fund's outstanding shares except as stated
above.
The Trustees and officers of each Trust also serve in similar
capacities with other Scudder Funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
Each Trust's Board of Trustees is responsible for the general oversight
of each Fund's business. A majority of the Board's members are not affiliated
with Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that each Fund is managed in the best interests of
its shareholders.
Each Board of Trustees meets at least quarterly to review the
investment performance of each Fund and other operational matters, including
policies and procedures designed to ensure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to the Adviser and its affiliates for
96
<PAGE>
investment advisory services and other administrative and shareholder services.
In this regard, they evaluate, among other things, each Fund's investment
performance, the quality and efficiency of the various other services provided,
costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by each Fund's independent public accountants and
by independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from each
Fund: an annual trustee's fee of $1,800 for each of SNYTFMF, SOTFF, SPTFF and
SCTFMF and $3,600 for each of SMLTTFF, SMTFF, SNYTFF and SCTFF; a fee of $75 for
attendance at each board meeting, audit committee meeting, or other meeting held
for the purposes of considering arrangements between the Trust on behalf of each
Fund and the Adviser or any affiliate of the Adviser; $75 for all other
committee meetings and reimbursement of expenses incurred for travel to and from
Board Meetings. No additional compensation is paid to any Independent Trustee
for travel time to meetings, attendance at trustees' educational seminars or
conferences, service on industry or association committees, participation as
speakers at trustees' conferences or service on special trustee task forces or
subcommittees. The Independent Trustee who serves as lead or liason Trustee
receives an additional annual retainer fee of $500 from each Fund. Independent
Trustees do not receive any employee benefits such as pension or retirement
benefits or health insurance. Notwithstanding the schedule of fees, the
Independent Trustees have in the past and may in the future waive a portion of
their compensation or other activities.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1998 from the Trust and from all of Scudder funds as a group.
<TABLE>
<CAPTION>
Scudder State Scudder California
Name Tax Free Trust(1) Tax Free Trust(2) All Scudder Funds(3)
---- ----------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Henry P. Becton, $19,039 $6,796 $135,000 (28 funds)
Trustee
Dawn-Marie Driscoll, $21,599 $7,650 $145,000 (28 funds)
Trustee
Peter B. Freeman, $19,324 $6,892 $172,425 (46 funds)
Trustee
George M. Lovejoy, Jr., $19,039 $6,796 $148,600 (29 funds)
Trustee
Wesley W. Marple, Jr., $19,039 $6,796 $135,000 (28 funds)
Trustee
Jean C. Tempel, $19,103 $6,818 $135,000 (29 funds)
Trustee
</TABLE>
(1) Scudder State Tax Free Trust consists of six funds: Scudder
Massachusetts Limited Term Tax Free Fund, Scudder
Massachusetts Tax Free Fund, Scudder New York Tax Free Money
Fund, Scudder New York Tax Free Fund, Scudder Ohio Tax Free
and Scudder Pennsylvania Tax Free Fund.
97
<PAGE>
(2) Scudder California Tax Free Trust consists of two funds:
Scudder California Tax Free Money Fund and Scudder California
Tax Free Fund.
(3) No fees were incurred by the Funds with respect to the
alliance with B.A.T.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
Each 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. Each Trust's underwriting
agreement dated September 7, 1998 will remain in effect until September 30,
1999, 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 agreements were last approved
by the Trustees on August 10, 1998.
Under the underwriting agreements, each Trust is responsible for the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of a Trust's registration statement and prospectus and any
amendments and supplements thereto; the registration and qualification of shares
for sale in the various states, including registering a Trust as a broker or
dealer; 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 Trust; 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 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 Trusts and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of each Fund's
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 will pay all fees and expenses in connection with its
qualification and registration as a broker or 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 a 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 each Fund does not currently have a 12b-1 Plan and
the Trustees have no current intention of adopting one, either
Fund would also pay those fees and expenses permitted to be
paid or assumed by such Fund pursuant to a 12b-1 Plan, if any,
were such a plan adopted by a Fund, 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 a 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 a Fund.
TAXES
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 a Fund.
98
<PAGE>
Federal Taxation
Each Fund within a Trust will be separate for investment and accounting
purposes, and will be treated as a separate taxable entity for federal income
tax purposes. Each Fund has 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 has qualified as such. Each Fund intends to continue to
qualify in each taxable year as required under the Code in order to avoid
payment of federal income tax at the fund level.
In order to qualify as a regulated investment company, each Fund must
meet certain requirements regarding the source of its income and the
diversification of its assets.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90
percent of its taxable net investment income (including net short-term capital
gain in excess of net long-term capital loss) and at least 90 percent 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 his share of federal income taxes paid by a Fund on such gains as
a credit against his own federal income tax liability, and will be entitled to
increase the adjusted tax basis of his Fund shares by the difference between his
pro rata share of such gains and his tax credit.
Each Fund is subject to a 4% non-deductible 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, 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, and all
ordinary income and capital gains for prior years that were not previously
distributed. 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.
Scudder Massachusetts Tax Free Fund and Massachusetts Limited Term Tax Free Fund
intend to offset realized capital gains by using their capital loss
carryforwards before distributing any gains. In addition, Scudder Massachusetts
Tax Free Fund intends to offset realized capital gains by using its post-October
loss before distributing gains. As of March 31, 1998, Scudder Massachusetts Tax
Free Fund had a net capital loss carryforward of approximately $66,000 which may
be applied against realized capital gains of each succeeding year until fully
utilized or until March 31, 2005, the expiration date, whichever occurs first.
At March 31, 1999, SMLTTFF had a net tax basis capital loss carryforward of
approximately $160,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until October 31,
2002, ($21,000), October 31, 2004 ($115,000) and October 31, 2005 ($24,000), the
respective expiration dates, whichever occurs first. As of March 31, 1997,
SNYTFF had a net capital loss carryforward of approximately $6,317,000, which
may be applied against realized capital gains of each succeeding year until
fully utilized or until March 31, 2003, $3,937,000 expires March 31, 2003 and
$2,380,000 expires March 31, 2004. SNYTFMF had a capital loss carryforward of
approximately $53,000, which may be applied against realized capital gains of
each succeeding year until fully utilized or until March 31, 2000 ($1,000),
March 31, 2001 ($2,000), March 31, 2002 ($4,000) and March 31, 2003 ($43,000),
and March 31, 2004 ($3,000), the respective expiration dates, whichever occurs
first. As of March 31, 1998, SCTFMF had a net tax basis capital loss
carryforward of approximately $95,000, 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 ($7,500), March 31, 2003 ($55,000),
March 31, 2004 ($18,000) and March 31, 2005 ($500), the respective expiration
dates, whichever occurs first. As of March 31, 1998, SCTFF had a net tax basis
capital loss carryforward of approximately $5,500,000, which may be applied
against any realized net taxable capital gains of each succeeding year until
fully utilized or until March 31, 2001 ($5,100,000) and March 31, 2002
($400,000), the respective expiration dates, whichever occurs first.
99
<PAGE>
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 a
Fund for the taxable year are therefore not expected to be subject to regular
federal income tax, although they may be subject to the individual and corporate
alternative minimum taxes described below. Discount from certain stripped
tax-exempt obligations or their coupons, however, may be taxable.
Market discount recognized on a tax-exempt bond is taxable as ordinary
income. A market discount bond is a bond acquired in the secondary market at a
price below its redemption value. Gain on the disposition of a tax-exempt
obligation will be treated as ordinary income (instead of capital gain) to the
extent of accrued market discount.
Since no portion of either Fund's income will be comprised of dividends
from domestic corporations, none of the income distributions of a Fund will be
eligible for the dividends-received deduction available for certain taxable
dividends received by corporations.
Any short-term capital loss realized upon the redemption of shares
within six months of the date of their purchase will be 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. All or a
portion of a loss realized upon the redemption of shares may be disallowed to
the extent shares are repurchased (including shares acquired by means of
reinvested dividends) within 30 days before or after such redemption.
Properly designated distributions of the excess of net long-term
capital gain 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 will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain during such
six-month period with respect to such shares.
Distributions derived from interest which is exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the corporate alternative minimum tax. A portion of such
distributions may constitute a tax preference item for individual shareholders
and may subject them to, or increase their liability under the 26% and 28%
individual alternative minimum tax, but normally no more than 20% of a Fund's
net assets will be 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 will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will 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.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the Federal income tax status of all distributions.
All distributions of taxable or tax-exempt net investment income and net
realized capital gain, whether received in shares or in cash, must be reported
by each shareholder on his or her federal income tax return. Dividends or
capital gains distributions declared and payable to shareholders of record on a
specified date in October, November or December, if any, will be 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, 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.
100
<PAGE>
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 will not be 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.
Neither Fund has undertaken any investigation as to the users of the facilities
financed by bonds in such Fund's portfolio.
Distributions by each Fund result in a reduction in the net asset value
of a 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 gain 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 will then receive a partial return of capital upon the
distribution, which, to the extent it is derived from other than tax-exempt
interest, will nevertheless be taxable to them.
All futures contracts entered into by a Fund and all listed nonequity
options written or purchased by a Fund (including options on futures contracts
and options on securities indices) will be 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 generally will be treated as 60%
long-term and 40% short-term, and on the last trading day of a Fund's fiscal
year, all outstanding Section 1256 positions will be 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.
Positions of each 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 a 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. Each Fund will monitor its transactions
in options and futures and may make certain tax elections in order to mitigate
the operation of these rules and prevent disqualification of a Fund as a
regulated investment company for federal income tax purposes.
Under the federal income tax law, each Fund will be required to report
to the IRS all distributions of taxable income and capital gains as well as
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
will not be subject to backup withholding if a Fund reasonably estimates that at
least 95% of all of its distributions will consist of tax-exempt interest.
However, in this case, the proceeds from the redemption or exchange of shares
may be subject to backup withholding. 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, will be 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
101
<PAGE>
each 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
Each Trust is organized as a Massachusetts business trust, and neither
the Trusts nor a Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund qualifies as a regulated
investment company.
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax
Free Fund
Individual shareholders of SMLTTFF or SMTFF resident in Massachusetts
will not be subject to Massachusetts personal income tax on distributions
received from a Fund to the extent such distributions constitute either (1)
exempt-interest dividends under Section 852(b)(5) of the Code which a Fund
properly identifies as consisting of interest on tax-exempt obligations of the
Commonwealth of Massachusetts for its political subdivisions or any agency or
instrumentality of the foregoing, or (2) dividends which a Fund properly
identifies as attributable to interest on tax-exempt obligations of the United
States and instrumentalities or obligations issued by the Governments of Puerto
Rico, The Virgin Islands and Guam.
Other distributions from either Fund, including those derived from
taxable interest income and long-term and short-term capital gains, generally
will not be exempt from Massachusetts personal income taxation except for
distributions which qualify as capital gain dividends under Section 852(b)(3) of
the Code, and are properly identified by a Fund as attributable to the sale of
certain Massachusetts obligations issued pursuant to legislation which
specifically exempts capital gain on the sale of such obligations from
Massachusetts income taxation.
Fund distributions will not be excluded from net income, and shares of
either Fund will not be excluded from the net worth of intangible property
corporations, for purposes of computing the Massachusetts corporate excise tax.
Shares of either Fund will not be subject to Massachusetts local
property taxes.
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund
New York State corporate tax law has special provisions governing
regulated investment companies that are qualified and taxed under Subchapter M
of the Code. To the extent a Fund has no federal income tax liability because it
distributes all of its investment income and the excess of net short-term
capital gain over net long-term capital loss and all of the excess of net
long-term capital gain over net short-term capital loss, it will incur no New
York State income tax, other than a possible nominal minimum tax. New York City
tax consequences are identical except that the amount of the possible minimum
tax differs. Individual shareholders who are residents of New York State will be
able to exclude for state income tax purposes that portion of the distributions
which is derived from interest on obligations of New York State and its
political subdivisions and of Puerto Rico, The Virgin Islands and Guam, because
at least 50% of the value of the assets of a Fund will be invested in state or
municipal obligations the interest on which is exempt for federal income tax
purposes.
Individual shareholders who are residents of New York City will also be
able to exclude such income for New York City income tax purposes. Capital gains
that are retained by each Fund will be taxed to that Fund, and New York State
and New York City residents will receive no New York income tax credit for such
tax. Capital gains that are distributed by a Fund will be treated as capital
gains for New York State and City income tax purposes in the hands of New York
State and New York City residents.
Scudder Ohio Tax Free Fund
In the opinion of Ohio tax counsel, Squire, Sanders & Dempsey, under
Ohio law, provided that the Fund continues to qualify as a regulated investment
company under the Code and that at all times at least 50 percent of the value of
the total assets of the Fund consists of obligations issued by or on behalf of
the State of Ohio, political subdivisions thereof or agencies or
instrumentalities of the State of Ohio or its political subdivisions ("Ohio
Obligations"), or similar obligations of other states or their subdivisions (a
fund satisfying such requirements being
102
<PAGE>
referred to herein as an "Ohio fund"), shareholders of the Fund who are
otherwise subject to the Ohio personal income tax, or school district or
municipal income taxes in Ohio will not be subject to such taxes on
distributions with respect to shares of the Fund to the extent that such
distributions are properly attributable to (1) interest on or gain from the
sale, exchange or other disposition of Ohio Obligations, or (2) interest on
obligations of the United States or its territories or possessions or of any
authority, commission or instrumentality of the United States that is exempt
from state income taxes under the laws of the United States (e.g., obligations
issued by the Governments of Puerto Rico, the Virgin Islands or Guam and their
authorities and municipalities) ("Federal and Possessions Obligations").
Provided the Fund qualifies as an Ohio fund, shareholders who are
otherwise subject to the net income base of the Ohio corporation franchise tax
will not be subject to such tax on distributions with respect to shares of the
Fund to the extent that such distributions are (1) properly attributable to
interest on or gain from the sale, exchange or other disposition of Ohio
Obligations, (2) properly attributable to interest on Federal and Possessions
Obligations, or (3) exempt-interest dividends for Federal income tax purposes.
However, shares of the Fund will be includable in the computation of net worth
for purposes of such tax. Corporate shareholders that are subject to Ohio
municipal income taxes will not be subject to such tax on distributions received
from the Fund to the extent such distributions are properly attributable to
interest on or gain from the sale of Ohio Obligations or are properly
attributable to interest on Federal and Possessions Obligations.
Scudder Pennsylvania Tax Free Fund
Under a ruling of the Pennsylvania Department of Revenue, individual
shareholders of the Fund resident in Pennsylvania will not be subject to
Pennsylvania income tax on distributions received from the Fund to the extent
such distributions are attributable to interest or capital gain from the sale of
tax-exempt obligations of the Governments of Puerto Rico, The Virgin Islands and
Guam. Distributions attributable to capital gain from the sale of tax-exempt
obligations of the Commonwealth and its political subdivisions and authorities
issued before February 1, 1994 will also be exempt from Pennsylvania personal
income tax. Other distributions from the Fund, including capital gain dividends,
will generally not be exempt from Pennsylvania personal income tax.
The Department has also ruled that corporations which are subject to
the Pennsylvania corporate net income tax will not be subject to such tax on
distributions received from the Fund to the extent such distributions are
exempt-interest dividends attributable to interest on tax-exempt obligations of
the Commonwealth and its political subdivisions and authorities. Distributions
attributable to capital gain from the sale of tax-exempt obligations of the
Commonwealth and its political subdivisions and authorities issued before
February 1, 1994 will also be exempt from Pennsylvania corporate net income tax.
Other distributions from the Fund, including capital gain dividends, will
generally not be exempt from the Pennsylvania corporate net income tax.
The Fund believes that shares of the Fund will not be subject to
personal property taxation by Pennsylvania local taxing authorities in
proportion to the extent that the personal property owned by the Fund would not
be subject to such taxation if owned by a resident of Pennsylvania. The Fund has
obtained from several such authorities written confirmation of this view and
expects that the numerous other local taxing authorities administer the personal
property tax in a similar manner. Accordingly, because the Fund will invest
predominantly in obligations of the Commonwealth and its political subdivisions
and authorities, most or all of which obligations are not subject to personal
property taxation in Pennsylvania, only a small fraction, if any, of the value
of the shares of the Fund would be subject to such tax.
Scudder California Tax Free Money Fund and Scudder California Tax Free Fund
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
(including interest income on California municipal securities for franchise tax
purposes). 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 may be subject to California state franchise or income tax at
regular corporate rates.
103
<PAGE>
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
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.
104
<PAGE>
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 brokers and dealers. The
Distributor receives no commissions, fees or other remuneration from either Fund
for this service. Allocation of brokerage is supervised by the Adviser.
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 a 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 each Fund's portfolio is to obtain the most favorable
net results taking into account such factors as price, commission (negotiable in
the case of U.S. national securities exchange transactions), where applicable,
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
brokers and dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes, or who supply research, market and
statistical information to a Fund. 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 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 have charged for
executing the same transaction on account of the receipt of research, market or
statistical information, although it may do so in seeking to obtain the most
favorable net results with respect to a particular transaction. The Adviser will
not place orders with brokers or dealers on the basis that a broker or 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 otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to a Fund and to the Adviser, it is the
opinion of the Adviser that such information will only supplement the Adviser's
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 a Fund and not all such information
is used by the Adviser in connection with a Fund. Conversely, such information
provided to the Adviser by brokers and dealers through whom other clients of the
Adviser effect securities transactions may be useful to the Adviser in providing
services to a Fund.
The Trustees intend to 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 a Fund on portfolio transactions is legally permissible and
advisable.
Portfolio Turnover
Each Fund's average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration date at the time of acquisition of one year or less. A higher rate
involves greater brokerage transaction expenses to a Fund and may result in the
realization of net capital gains, which would be taxable to shareholders when
distributed. Purchases
105
<PAGE>
and sales are made for a Fund's portfolio whenever necessary in management's
opinion, to meet a Fund's objective. Under the above definition, SNYTFMF and
SCTFMF will have no portfolio turnover.
Portfolio Turnover Rates for periods ended March 31,
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Scudder Massachusetts Limited Term Tax Free Fund % 9.8%* 12.4%*
Scudder Massachusetts Tax Free Fund 8.4 11.51
Scudder New York Tax Free Fund 28.8 71.0
Scudder Ohio Tax Free Fund 9.7 4.9
Scudder Pennsylvania Tax Free Fund 11.6 20.4
</TABLE>
* For the periods ended October 31, 1998 and 1997, respectively.
NET ASSET VALUE
The net asset value per share of a 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, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Net asset value per share is
determined by dividing the value of the total assets of the Fund, less all
liabilities, by the total number of shares outstanding.
Debt securities, other than money market instruments, are valued at
prices supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less, maturing at par, shall be
valued at 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 as of the Value Time. 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 the Fund's other
portfolio holdings 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.
106
<PAGE>
ADDITIONAL INFORMATION
Experts
The Financial Highlights of each Fund included in each Fund's
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 PricewaterhouseCoopers LLP, One Post
Office Square, Boston, Massachusetts 02109, independent accountants, and given
on the authority of that firm as experts in accounting and auditing.
PricewaterhouseCoopers LLP is responsible for performing annual audits of the
financial statements and financial highlights of each Fund in accordance with
generally accepted auditing standards and the preparation of federal tax
returns.
Shareholder Indemnification
Each 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 Declarations of Trust contains an express
disclaimer of shareholder liability in connection with a Fund's property or the
acts, obligations or affairs of the Trusts. The Declarations of Trust also
provides for indemnification out of a 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 a Fund itself would be unable to meet its
obligations.
Ratings of Municipal Obligations
The six highest quality ratings categories 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-grade bonds. Together with securities rated A and Baa, they comprise
investment grade securities. 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. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small. 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 MIG-1 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 MIG-2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest quality ratings categories of S&P for municipal bonds
are AAA (Prime), AA (High-grade), A (Good-grade), BBB (Investment-grade) and BB
or 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 interest and to repay principal. Adverse economic conditions or changing
circumstances are more likely 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
107
<PAGE>
giving security to principal and interest inadequate and potentially unreliable
over any period of time. Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. Such securities are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
S&P's top ratings categories for municipal notes 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 quality ratings categories 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 higher 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
relationships which exist 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.
Glossary
1. Bond
108
<PAGE>
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 United States, their political
subdivisions, agencies and instrumentalities and 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 federal income tax.
6. Net Asset Value Per Share
The value of each share of the Fund for purposes of sales and
redemptions.
7. Net Investment Income
The net investment income of a Fund is comprised of its
interest income, including amortizations of original issue
discounts, less amortizations of premiums and expenses paid or
accrued computed under GAAP.
Other Information
The CUSIP number of SMLTTFF is 8111209-10-5.
The CUSIP number of SMTFF is 811184-30-8.
The CUSIP number of SNYTFMF is 811184-20-9.
The CUSIP number of SNYTFF is 811184-10-0.
The CUSIP number of SOTFF is 811184-40-7.
The CUSIP number of SPTFF is 811184-50-6.
The CUSIP number of SCTFMF is 811115-20-3.
The CUSIP number of SCTFF is 811115-10-4.
Each Fund has a fiscal year ending on March 31.
Portfolio securities of the Funds are held separately, pursuant to a
custodian agreement, by the Funds' Custodian, State Street Bank and Trust
Company.
The firm of Willkie Farr & Gallagher of New York is counsel for each
Trust.
109
<PAGE>
The names "Scudder State Tax Free Trust" and "Scudder California Tax
Free Trust" are the designation of the Trustees for the time being under an
Amended and Restated Declarations 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 that Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of a Fund. No Fund of the
Trusts liable for the obligations of any other Fund. Upon the initial purchase
of shares, the shareholder agrees to be bound by each Trust's Declaration of
Trust, as amended from time to time. The Declarations of Trust of each 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
such 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
that Fund.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net
asset value per share for each Fund. Each Fund pays SFAC an annual fee equal to
0.024% of the first $150 million of average daily net assets, 0.0070% of such
assets in excess of $150 million, 0.004% of such assets in excess of $1 billion,
plus holding and transaction charges for this service. The fee incurred by
SMLTTFF to SFAC for the fiscal year ended October 31, 1996 was $36,000, for the
fiscal year ended October 31, 1997 was $36,000 and for the fiscal year ended
March 31, 1999 was $______. For the fiscal years ended March 31, 1997 and 1998,
the amounts charged to SMTFF by SFAC amounted to $59,760 and $______,
respectively. For the fiscal year ended March 31, 1999, the amount charged was
$______, of which $_____ was unpaid at March 31, 1999. The fee incurred by
SNYTFF for the fiscal years ended March 31, 1997, 1998 and 1999, respectively,
amounted to $53,983, $52,711 and $______, respectively. For the fiscal years
ended March 31, 1997, 1998 and 1999, respectively, the amounts charged to SOTFF
by SFAC amounted to $36,000, $36,000 and $______, of which $_____ was unpaid at
March 31, 1999. For the fiscal years ended March 31, 1997, 1998 and 1999,
respectively, the amounts charged to SPTFF by SFAC amounted to $36,000, $36,000
and $______, respectively, of which $_____ was unpaid at March 31, 1999. For the
fiscal years ended March 31, 1997, 1998 and 1999, respectively, the amounts
charged to SCTFMF by SFAC amounted to $30,000, $30,000 and $______, of which
$_____ was unpaid at March 31, 1999. For the fiscal years ended March 31, 1997,
1998 and 1999, respectively, the amounts charged to SCTFF by SFAC amounted to
$66,630, $66,491 and $______, of which $_____ was unpaid at March 31, 1999.
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston,
Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer and
dividend-paying agent. SSC also serves as shareholder service agent. Each Fund
pays Service Corporation an annual fee of $25.00 for each account maintained for
a shareholder. The fees incurred by SMLTTFF to SSC for the fiscal years ended
October 31, 1997 and 1998, and March 31, 1999, respectively, were $41,127,
$43,271 and $______, of which $_____ was unpaid at March 31, 1999. The fees
incurred by SMTFF to SSC for the fiscal years ended March 31, 1997, 1998 and
1999, respectively, were $188,646, $194,865 and $______, of which $_____ was
unpaid at March 31, 1998. The fees incurred by SNYTFMF to SSC for the fiscal
years ended March 31, 1997, 1998 and 1999, respectively, were $58,369, $57,141
and $______, of which $_____ was unpaid at March 31, 1998. The fees incurred by
SNYTFF to SSC for the fiscal years ended March 31, 1997, 1998 and 1999,
respectively, were $119,944, $118,928 and $______, of which $_____ was unpaid at
March 31, 1998. The fees incurred by SOTFF to SSC for the fiscal years ended
March 31, 1997, 1998 and 1999, respectively, were $58,820, $58,657 and $______,
of which $_____ was unpaid at March 31, 1998. The fees incurred by SPTFF to SSC
for the fiscal years ended March 31, 1997, 1998 and 1999, respectively, were
$62,522, $61,715 and $______, of which $_____ was unpaid at March 31, 1998. .
The fees incurred by SCTFMF to SSC for the fiscal years ended March 31, 1997,
1998 and 1999, respectively, were $57,597, $71,043 and $______, of which $_____
was unpaid at March 31, 1998. . The fees incurred by SCTFF to SSC for the fiscal
years ended March 31, 1997, 1998 and 1999, respectively, were $159,122, $164,689
and $______, of which $_____ was unpaid at March 31, 1998.
The Funds, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
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 1933 Act and reference is hereby made to the
Registration Statement for further information with respect to each Fund and the
securities offered hereby. This Registration Statement is available for
inspection by the public at the SEC in Washington, D.C.
110
<PAGE>
FINANCIAL STATEMENTS
Scudder Massachusetts Limited Term Tax Free Fund
The financial statements, including the investment portfolio, of
Scudder Massachusetts Limited Term Tax Free Fund, together with the Report of
Independent Accountants, Financial Highlights and notes to financial statements
in the Annual Report to the Shareholders of the Fund dated March 31, 1999, are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
Scudder Massachusetts Tax Free Fund
The financial statements, including the investment portfolio, of
Scudder Massachusetts Tax Free Fund, together with Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated March 31, 1999, are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
Scudder New York Tax Free Fund
The financial statements, including the Investment Portfolio, of
Scudder New York Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements in the
Annual Report to the shareholders of the Fund dated March 31, 1999, are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
Scudder New York Tax Free Money Fund
The financial statements, including the Investment Portfolio, of
Scudder New York Tax Free Money Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements in the
Annual Report to the shareholders of the Fund dated March 31, 1999, are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
Scudder Ohio Tax Free Fund
The financial statements, including the Investment Portfolio, of
Scudder Ohio Tax Free Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements in the Annual Report to
the shareholders of the Fund dated March 31, 1999, are incorporated herein by
reference and are hereby deemed to be a part of this Statement of Additional
Information.
Scudder Pennsylvania Tax Free Fund
The financial statements, including the Investment Portfolio, of
Scudder Pennsylvania Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements in the
Annual Report to the shareholders of the Fund dated March 31, 1999, are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
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 in the
Annual Report to the Shareholders of the Fund dated March 31, 1999, are
incorporated herein by reference 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 in the
Annual Report to the Shareholders of the Fund dated March 31, 1999, are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
111
<PAGE>
SCUDDER CALIFORNIA TAX FREE TRUST
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
-------- ---------
<S> <C> <C>
(a) (1) Amended and Restated Declaration of Trust dated as of December 8, 1987.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(2) Instrument Establishing and Designating Additional Series of Shares.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(3) Certificate of Amendment dated December 11, 1990.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(b) (1) By-laws of the Registrant dated May 3, 1983.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(2) Amendment to the By-laws dated August 13, 1991.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement.)
(3) Amendment to the By-laws dated December 10, 1991.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement.)
(c) Inapplicable
(d) (1) Investment Management Agreement between the Registrant, on behalf of Scudder
California Tax Free Fund and Scudder Kemper Investments, Inc. dated
September 7, 1998.
Filed herein.
(2) Investment Management Agreement between the Registrant, on behalf of Scudder
California Tax Free Money Fund, and Scudder Kemper Investments, Inc. dated
September 7, 1998.
Filed herein.
(e) (1) Underwriting Agreement between the Registrant and Scudder Investor Services,
Inc. dated September 7, 1998.
Filed herein.
(f) Inapplicable.
(g) (1) Custodian Agreement between the Registrant and State Street Bank and Trust
Company dated June 14, 1983.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
2
<PAGE>
(2) Fee Schedule for Exhibit (8)(a)(1).
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(3) Amendment dated April 16, 1986, to the Custodian Agreement between the
Registrant and State Street Bank and Trust Company.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(4) Amendment dated August 9, 1988 to the Custodian Agreement between the
Registrant and State Street Bank and Trust Company.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(5) Amendment dated December 11, 1990 to the Custodian Contract between the
Registrant and State Street Bank and Trust Company.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement.)
(6) Fee Schedule for the Custodian Agreement dated June 14, 1983, as amended.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement.)
(7) Subcustodian Agreement between State Street Bank and Trust Company and
Morgan Guaranty Trust Company of New York dated November 25, 1985.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(8) Subcustodian Agreement between Irving Trust Company and State Street Bank
and Trust Company dated November 30, 1987.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(9) Subcustodian Agreement between Chemical Bank and State Street Bank and Trust
Company dated October 6, 1988.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(10) Subcustodian Agreement between Security Pacific National Trust Company (New
York) and State Street Bank and Trust Company dated February 18, 1988.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(11) Subcustodian Agreement between Bankers Trust Company and State Street Bank
and Trust Company dated August 15, 1989.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement.)
(h) (1) Transfer Agency and Service Agreement between the Registrant and Scudder
Service Corporation dated October 2, 1989.
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
3
<PAGE>
(2) Fee schedule for Exhibit (h)(1).
(Incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement.)
(3) Fund Accounting Services Agreement between the Registrant (on behalf of
Scudder California Tax Free Money Fund) and Scudder Fund Accounting
Corporation dated September 27, 1994.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement.)
(4) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder California Tax Free Fund, and Scudder Fund Accounting Corporation
dated August 1, 1994.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement.)
(i) Consent of Legal Counsel.
(To be filed by subsequent Amendment.)
(j) Consent of Independent Accountants.
(To be filed by subsequent Amendment.)
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Article 6 Financial Data Schedules.
(To be filed by subsequent Amendment.)
(o) Inapplicable.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
- -------- --------------------------------------------------------
None
Item 25. Indemnification.
- -------- ----------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV, Sections 4.1-4.3 of the Registrant's Declaration
of Trust provide as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
Etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to
4
<PAGE>
any personal liability. The Trust shall indemnify and hold
each Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to
a Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding was brought
that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) resulting in a payment by a
Trustee or officer, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office:
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type inquiry) by
(x) vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust,
shall be severable, shall not affect any other rights
to which any Trustee or officer may now or hereafter
be entitled, shall continue as to a person who has
ceased to be such Trustee or
5
<PAGE>
officer and shall insure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a defense
to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section
4.3 may be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by
or on behalf of the recipient to repay such amount if
it is ultimately determined that he is not entitled
to indemnification under this Section 4.3, provided
that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one
who is not (i) an "Interested Person" of the Trust (including
anyone who has been exempted from being an "Interested Person"
by any rule, regulation or order of the Commission), or (ii)
involved in the claim, action, suit or proceeding.
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
6
<PAGE>
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
</TABLE>
7
<PAGE>
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
8
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Vice President, Assistant
345 Park Avenue Legal Officer and Assistant Clerk Secretary and Trustee
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
<TABLE>
<CAPTION>
(c)
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage
Underwriter Commissions and Repurchases Commissions Other Compensation
----------- ----------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
9
<PAGE>
Item 28. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian are maintained by State Street Bank and Trust
Company, Heritage Drive, North Quincy, Massachusetts. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Boston and the Commonwealth of
Massachusetts, on the 14th of May, 1999.
SCUDDER CALIFORNIA TAX FREE TRUST
By /s/Daniel Pierce
-----------------------------
Daniel Pierce
President and Trustee
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Daniel Pierce
- ---------------------------------------
Daniel Pierce President and Trustee May 14, 1999
/s/Henry P. Becton, Jr
- ---------------------------------------
Henry P. Becton, Jr. Trustee May 14, 1999
- ---------------------------------------
Dawn-Marie Driscoll Trustee May 14, 1999
- ---------------------------------------
Peter B. Freeman Trustee May 14, 1999
/s/George M. Lovejoy, Jr
- ---------------------------------------
George M. Lovejoy, Jr. Trustee May 14, 1999
- ---------------------------------------
Wesley W. Marple, Jr. Trustee May 14, 1999
/s/Kathryn L. Quirk
- ---------------------------------------
Kathryn L. Quirk Trustee,Vice President, and Assistant May 14, 1999
Secretary
/s/Jean C. Tempel
- ---------------------------------------
Jean C. Tempel Trustee May 14, 1999
/s/John R. Hebble
- ---------------------------------------
John R. Hebble Treasurer May 14, 1999
</TABLE>
<PAGE>
File No. 2-83498
File No. 811-3729
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 19
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 21
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER CALIFORNIA TAX FREE TRUST
11
<PAGE>
SCUDDER CALIFORNIA TAX FREE TRUST
EXHIBIT INDEX
Exhibit (d)(1)
Exhibit (d)(2)
Exhibit (e)(1)
12
Exhibit (d)(1)
Scudder California Tax Free Trust
Two International Place
Boston, Massachusetts 02110
September 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Scudder California Tax Free Fund
Ladies and Gentlemen:
Scudder California Tax Free Trust (the "Trust") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Trust's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Trust's
shares of beneficial interest, par value $0.01 per share, (the "Shares") into
separate series, or funds, including Scudder California Tax Free Fund (the
"Fund"). Series may be abolished and dissolved, and additional series
established, from time to time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the sole
investment manager of the Fund and to provide certain other services, as more
fully set forth below, and you have indicated that you are willing to act as
such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Trust on behalf of the Fund
agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of
investing and reinvesting the assets of the Fund in the manner and in accordance
with the investment objectives, policies and restrictions specified in the
currently effective Prospectus (the "Prospectus") and Statement of Additional
Information (the "SAI") relating to the Fund included in the Trust's
Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Trust under the Investment Company Act of
1940, as amended, (the "1940 Act") and the Securities Act of 1933, as amended.
Copies of the documents referred to in the preceding sentence have been
furnished to you by the Trust. The Trust has also furnished you with copies
properly certified or authenticated of each of the following additional
documents related to the Trust and the Fund:
(a) The Declaration dated December 8, 1987, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders of the Fund
selecting you as investment manager and approving the form of this
Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated April 1, 1987 relating to the Fund.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of
the rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Trust a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Trust's name
(the "Fund Name"), and (ii) the Scudder Marks in connection with the Trust's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Trust,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Trust agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Trust's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Trust shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Trust further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Trust rendered during the one-year period preceding
the date of this Agreement are acceptable. At your reasonable request, the Trust
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Trust as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Trust, or you no longer are a
licensee of the Scudder Marks, the Trust shall (to the extent that, and as soon
as, it lawfully can) cease to use the Fund Name or any other name indicating
that it is advised by, managed by or otherwise connected with you (or any
organization which shall have succeeded to your business as investment manager)
or the Trademark Owner. In no event shall the Trust use the Scudder Marks or any
other name or mark confusingly similar thereto (including, but not limited to,
any name or mark that includes the name "Scudder") if this Agreement or any
other investment advisory agreement between you (or your successor) and the Fund
is terminated.
3. Portfolio Management Services. As manager of the assets of the Fund,
you shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue Code of 1986, as amended, (the "Code") relating to regulated
investment companies and all rules and regulations thereunder; and all other
applicable federal and state laws and regulations of which you have knowledge;
subject always to policies and instructions adopted by the Trust's Board of
Trustees. In connection therewith, you shall use reasonable efforts to manage
the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 3, you shall
be entitled to receive and act upon advice of counsel to the Trust or counsel to
you. You shall also make available to the Trust promptly upon request all of the
Fund's investment records and
2
<PAGE>
ledgers as are necessary to assist the Trust in complying with the requirements
of the 1940 Act and other applicable laws. To the extent required by law, you
shall furnish to regulatory authorities having the requisite authority any
information or reports in connection with the services provided pursuant to this
Agreement which may be requested in order to ascertain whether the operations of
the Trust are being conducted in a manner consistent with applicable laws and
regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts relating
to investments to be purchased, sold or entered into by the Fund and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Fund policies as expressed in the Registration Statement. You shall determine
what portion of the Fund's portfolio shall be invested in securities and other
assets and what portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on
the investment performance of the Fund and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Trust's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Fund such office space and facilities in the United States as the
Fund may require for its reasonable needs, and you (or one or more of your
affiliates designated by you) shall render to the Trust administrative services
on behalf of the Fund necessary for operating as an open-end investment company
and not provided by persons not parties to this Agreement including, but not
limited to, preparing reports to and meeting materials for the Trust's Board of
Trustees and reports and notices to Fund shareholders; supervising, negotiating
contractual arrangements with, to the extent appropriate, and monitoring the
performance of, accounting agents, custodians, depositories, transfer agents and
pricing agents, accountants, attorneys, printers, underwriters, brokers and
dealers, insurers and other persons in any capacity deemed to be necessary or
desirable to Fund operations; preparing and making filings with the Securities
and Exchange Commission (the "SEC") and other regulatory and self-regulatory
organizations, including, but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; assisting in
the preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax return pursuant to Section
4982 of the Code; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation of
net asset value; monitoring the registration of Shares of the Fund under
applicable federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent that such books, records and reports
and other information are not maintained by the Fund's custodian or other agents
of the Fund; assisting in establishing the accounting policies of the Fund;
assisting in the resolution of accounting issues that may arise with respect to
the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
establishing and monitoring the Fund's operating expense budgets; reviewing the
Fund's bills; processing the payment of bills that have been approved by an
authorized person; assisting the Fund in determining the amount of dividends and
distributions available to be paid by the Fund to its shareholders, preparing
and arranging for the printing of dividend notices to shareholders, and
providing the transfer and dividend paying agent, the custodian, and the
accounting agent with such information as is required for such parties to effect
the payment of dividends and distributions; and otherwise assisting the Trust as
it may reasonably request in the conduct of the Fund's business, subject to the
direction and control of the Trust's Board of Trustees.
3
<PAGE>
Nothing in this Agreement shall be deemed to shift to you or to diminish the
obligations of any agent of the Fund or any other person not a party to this
Agreement which is obligated to provide services to the Fund.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including the Fund's
share of payroll taxes) who are affiliated persons of you, and you shall make
available, without expense to the Fund, the services of such of your 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. You
shall provide at your expense the portfolio management services described in
section 3 hereof and the administrative services described in section 4 hereof.
You shall not be required to pay any expenses of the Fund other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Fund's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Fund: organization
expenses of the Fund (including out-of-pocket expenses, but not including your
overhead or employee costs); fees payable to you and to any other Fund advisors
or consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars;
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing share
certificates and, except as provided below in this section 5, other expenses in
connection with the issuance, offering, distribution, sale, redemption or
repurchase of securities issued by the Fund; expenses relating to investor and
public relations; expenses and fees of registering or qualifying Shares of the
Fund for sale; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Trust business) of Trustees, officers and
employees of the Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; costs of
shareholders' and other meetings; and travel expenses (or an appropriate portion
thereof) of Trustees and officers of the Trust who are directors, officers or
employees of you to the extent that such expenses relate to attendance at
meetings of the Board of Trustees of the Trust or any committees thereof or
advisors thereto held outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Fund if and to the extent
that (i) such expenses are required to be borne by a principal underwriter which
acts as the distributor of the Fund's Shares pursuant to an underwriting
agreement which provides that the underwriter shall assume some or all of such
expenses, or (ii) the Trust on behalf of the Fund shall have adopted a plan in
conformity with Rule 12b-1 under the 1940 Act providing that the Fund (or some
other party) shall assume some or all of such expenses. You shall be required to
pay such of the foregoing sales expenses as are not required to be paid by the
principal underwriter pursuant to the underwriting agreement or are not
permitted to be paid by the Fund (or some other party) pursuant to such a plan.
4
<PAGE>
6. Management Fee. For all services to be rendered, payments to be made
and costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the
Trust on behalf of the Fund shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.625 of 1 percent of the average daily net assets as defined below of the Fund
for such month; provided that, for any calendar month during which the average
of such values exceeds $200 million, the fee payable for that month based on the
portion of the average of such values in excess of $200 million shall be 1/12 of
0.60 of 1 percent of such portion over any compensation waived by you from time
to time (as more fully described below). You shall be entitled to receive during
any month such interim payments of your fee hereunder as you shall request,
provided that no such payment shall exceed 75 percent of the amount of your fee
then accrued on the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the average of
the values placed on the Fund's net assets as of 4:00 p.m. (New York time) on
each day on which the net asset value of the Fund is determined consistent with
the provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully
determines the value of its net assets as of some other time on each business
day, as of such time. The value of the net assets of the Fund shall always be
determined pursuant to the applicable provisions of the Declaration and the
Registration Statement. If the determination of net asset value does not take
place for any particular day, then for the purposes of this section 6, the value
of the net assets of the Fund as last determined shall be deemed to be the value
of its net assets as of 4:00 p.m. (New York time), or as of such other time as
the value of the net assets of the Fund's portfolio may be lawfully determined
on that day. If the Fund determines the value of the net assets of its portfolio
more than once on any day, then the last such determination thereof on that day
shall be deemed to be the sole determination thereof on that day for the
purposes of this section 6.
You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your services.
You shall be contractually bound hereunder by the terms of any publicly
announced waiver of your fee, or any limitation of the Fund's expenses, as if
such waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be
deemed to be exclusive and it is understood that you may render investment
advice, management and services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Trust. Whenever the
Fund and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Fund recognizes that in some cases this procedure may adversely
affect the size of the position that may be acquired or disposed of for the
Fund.
5
<PAGE>
8. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Trust agrees that
you shall not be liable under this Agreement for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates, provided that nothing in this Agreement
shall be deemed to protect or purport to protect you against any liability to
the Trust, the Fund or its shareholders to which you would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties hereunder. Any person, even though also employed by you,
who may be or become an employee of and paid by the Fund shall be deemed, when
acting within the scope of his or her employment by the Fund, to be acting in
such employment solely for the Fund and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall
remain in force until September 30, 1999, and continue in force from year to
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Trustees of the Trust, or by the vote of a majority of the
outstanding voting securities of the Fund. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually" shall
be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Fund or by the Trust's Board of Trustees on 60 days'
written notice to you, or by you on 60 days' written notice to the Trust. This
Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of
which, together with all amendments thereto, is on file in the Office of the
Secretary of the Commonwealth of Massachusetts, provides that the name "Scudder
California Tax Free Trust" refers to the Trustees under the Declaration
collectively as Trustees and not as individuals or personally, and that no
shareholder of the Fund, or Trustee, officer, employee or agent of the Trust,
shall be subject to claims against or obligations of the Trust or of the Fund to
any extent whatsoever, but that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability
as set forth in the Declaration and you agree that the obligations assumed by
the Trust on behalf of the Fund pursuant to this Agreement shall be limited in
all cases to the Fund and its assets, and you shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of the Fund or any
other series of the Trust, or from any Trustee, officer, employee or agent of
the Trust. You understand that the rights and obligations of each Fund, or
series, under the Declaration are separate and distinct from those of any and
all other series.
6
<PAGE>
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or
management agreements entered into between you and the Trust on behalf of the
Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
SCUDDER CALIFORNIA TAX FREE
TRUST, on behalf of
Scudder California Tax Free Fund
By: /s/Thomas F. McDonough
----------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/Daniel Pierce
----------------------------
Managing Director
7
Exhibit (d)(2)
Scudder California Tax Free Trust
Two International Place
Boston, Massachusetts 02110
September 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Scudder California Tax Free Money Fund
Ladies and Gentlemen:
Scudder California Tax Free Trust (the "Trust") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Trust's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Trust's
shares of beneficial interest, par value $0.01 per share, (the "Shares") into
separate series, or funds, including Scudder California Tax Free Money Fund (the
"Fund"). Series may be abolished and dissolved, and additional series
established, from time to time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the sole
investment manager of the Fund and to provide certain other services, as more
fully set forth below, and you have indicated that you are willing to act as
such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Trust on behalf of the Fund
agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of
investing and reinvesting the assets of the Fund in the manner and in accordance
with the investment objectives, policies and restrictions specified in the
currently effective Prospectus (the "Prospectus") and Statement of Additional
Information (the "SAI") relating to the Fund included in the Trust's
Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Trust under the Investment Company Act of
1940, as amended, (the "1940 Act") and the Securities Act of 1933, as amended.
Copies of the documents referred to in the preceding sentence have been
furnished to you by the Trust. The Trust has also furnished you with copies
properly certified or authenticated of each of the following additional
documents related to the Trust and the Fund:
(a) The Declaration dated December 8, 1987, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders of the Fund
selecting you as investment manager and approving the form of this
Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated April 1, 1987 relating to the Fund.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of
the rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Trust a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Trust's name
(the "Fund Name"), and (ii) the Scudder Marks in connection with the Trust's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Trust,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Trust agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Trust's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Trust shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Trust further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Trust rendered during the one-year period preceding
the date of this Agreement are acceptable. At your reasonable request, the Trust
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Trust as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Trust, or you no longer are a
licensee of the Scudder Marks, the Trust shall (to the extent that, and as soon
as, it lawfully can) cease to use the Fund Name or any other name indicating
that it is advised by, managed by or otherwise connected with you (or any
organization which shall have succeeded to your business as investment manager)
or the Trademark Owner. In no event shall the Trust use the Scudder Marks or any
other name or mark confusingly similar thereto (including, but not limited to,
any name or mark that includes the name "Scudder") if this Agreement or any
other investment advisory agreement between you (or your successor) and the Fund
is terminated.
3. Portfolio Management Services. As manager of the assets of the Fund,
you shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue Code of 1986, as amended, (the "Code") relating to regulated
investment companies and all rules and regulations thereunder; and all other
applicable federal and state laws and regulations of which you have knowledge;
subject always to policies and instructions adopted by the Trust's Board of
Trustees. In connection therewith, you shall use reasonable efforts to manage
the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 3, you shall
be entitled to receive and act upon advice of counsel to the Trust or counsel to
you. You shall also make available to the Trust promptly upon request all of the
Fund's investment records and
2
<PAGE>
ledgers as are necessary to assist the Trust in complying with the requirements
of the 1940 Act and other applicable laws. To the extent required by law, you
shall furnish to regulatory authorities having the requisite authority any
information or reports in connection with the services provided pursuant to this
Agreement which may be requested in order to ascertain whether the operations of
the Trust are being conducted in a manner consistent with applicable laws and
regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts relating
to investments to be purchased, sold or entered into by the Fund and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Fund policies as expressed in the Registration Statement. You shall determine
what portion of the Fund's portfolio shall be invested in securities and other
assets and what portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on
the investment performance of the Fund and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Trust's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Fund such office space and facilities in the United States as the
Fund may require for its reasonable needs, and you (or one or more of your
affiliates designated by you) shall render to the Trust administrative services
on behalf of the Fund necessary for operating as an open-end investment company
and not provided by persons not parties to this Agreement including, but not
limited to, preparing reports to and meeting materials for the Trust's Board of
Trustees and reports and notices to Fund shareholders; supervising, negotiating
contractual arrangements with, to the extent appropriate, and monitoring the
performance of, accounting agents, custodians, depositories, transfer agents and
pricing agents, accountants, attorneys, printers, underwriters, brokers and
dealers, insurers and other persons in any capacity deemed to be necessary or
desirable to Fund operations; preparing and making filings with the Securities
and Exchange Commission (the "SEC") and other regulatory and self-regulatory
organizations, including, but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; assisting in
the preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax return pursuant to Section
4982 of the Code; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation of
net asset value; monitoring the registration of Shares of the Fund under
applicable federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent that such books, records and reports
and other information are not maintained by the Fund's custodian or other agents
of the Fund; assisting in establishing the accounting policies of the Fund;
assisting in the resolution of accounting issues that may arise with respect to
the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
establishing and monitoring the Fund's operating expense budgets; reviewing the
Fund's bills; processing the payment of bills that have been approved by an
authorized person; assisting the Fund in determining the amount of dividends and
distributions available to be paid by the Fund to its shareholders, preparing
and arranging for the printing of dividend notices to shareholders, and
providing the transfer and dividend paying agent, the custodian, and the
accounting agent with such information as is required for such parties to effect
the payment of dividends and distributions; and otherwise assisting the Trust as
it may reasonably request in the conduct of the Fund's business, subject to the
direction and control of the Trust's Board of Trustees.
3
<PAGE>
Nothing in this Agreement shall be deemed to shift to you or to diminish the
obligations of any agent of the Fund or any other person not a party to this
Agreement which is obligated to provide services to the Fund.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including the Fund's
share of payroll taxes) who are affiliated persons of you, and you shall make
available, without expense to the Fund, the services of such of your 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. You
shall provide at your expense the portfolio management services described in
section 3 hereof and the administrative services described in section 4 hereof.
You shall not be required to pay any expenses of the Fund other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Fund's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Fund: organization
expenses of the Fund (including out-of-pocket expenses, but not including your
overhead or employee costs); fees payable to you and to any other Fund advisors
or consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars;
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing share
certificates and, except as provided below in this section 5, other expenses in
connection with the issuance, offering, distribution, sale, redemption or
repurchase of securities issued by the Fund; expenses relating to investor and
public relations; expenses and fees of registering or qualifying Shares of the
Fund for sale; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Trust business) of Trustees, officers and
employees of the Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; costs of
shareholders' and other meetings; and travel expenses (or an appropriate portion
thereof) of Trustees and officers of the Trust who are directors, officers or
employees of you to the extent that such expenses relate to attendance at
meetings of the Board of Trustees of the Trust or any committees thereof or
advisors thereto held outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Fund if and to the extent
that (i) such expenses are required to be borne by a principal underwriter which
acts as the distributor of the Fund's Shares pursuant to an underwriting
agreement which provides that the underwriter shall assume some or all of such
expenses, or (ii) the Trust on behalf of the Fund shall have adopted a plan in
conformity with Rule 12b-1 under the 1940 Act providing that the Fund (or some
other party) shall assume some or all of such expenses. You shall be required to
pay such of the foregoing sales expenses as are not required to be paid by the
principal underwriter pursuant to the underwriting agreement or are not
permitted to be paid by the Fund (or some other party) pursuant to such a plan.
4
<PAGE>
6. Management Fee. For all services to be rendered, payments to be made
and costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the
Trust on behalf of the Fund shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.50 of 1 percent of the average daily net assets as defined below of the Fund
for such month over any compensation waived by you from time to time (as more
fully described below). You shall be entitled to receive during any month such
interim payments of your fee hereunder as you shall request, provided that no
such payment shall exceed 75 percent of the amount of your fee then accrued on
the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the average of
the values placed on the Fund's net assets as of 4:00 p.m. (New York time) on
each day on which the net asset value of the Fund is determined consistent with
the provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully
determines the value of its net assets as of some other time on each business
day, as of such time. The value of the net assets of the Fund shall always be
determined pursuant to the applicable provisions of the Declaration and the
Registration Statement. If the determination of net asset value does not take
place for any particular day, then for the purposes of this section 6, the value
of the net assets of the Fund as last determined shall be deemed to be the value
of its net assets as of 4:00 p.m. (New York time), or as of such other time as
the value of the net assets of the Fund's portfolio may be lawfully determined
on that day. If the Fund determines the value of the net assets of its portfolio
more than once on any day, then the last such determination thereof on that day
shall be deemed to be the sole determination thereof on that day for the
purposes of this section 6.
You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your services.
You shall be contractually bound hereunder by the terms of any publicly
announced waiver of your fee, or any limitation of the Fund's expenses, as if
such waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be
deemed to be exclusive and it is understood that you may render investment
advice, management and services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Trust. Whenever the
Fund and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Fund recognizes that in some cases this procedure may adversely
affect the size of the position that may be acquired or disposed of for the
Fund.
5
<PAGE>
8. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Trust agrees that
you shall not be liable under this Agreement for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates, provided that nothing in this Agreement
shall be deemed to protect or purport to protect you against any liability to
the Trust, the Fund or its shareholders to which you would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties hereunder. Any person, even though also employed by you,
who may be or become an employee of and paid by the Fund shall be deemed, when
acting within the scope of his or her employment by the Fund, to be acting in
such employment solely for the Fund and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall
remain in force until September 30, 1999, and continue in force from year to
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Trustees of the Trust, or by the vote of a majority of the
outstanding voting securities of the Fund. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually" shall
be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Fund or by the Trust's Board of Trustees on 60 days'
written notice to you, or by you on 60 days' written notice to the Trust. This
Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of
which, together with all amendments thereto, is on file in the Office of the
Secretary of the Commonwealth of Massachusetts, provides that the name "Scudder
California Tax Free Trust" refers to the Trustees under the Declaration
collectively as Trustees and not as individuals or personally, and that no
shareholder of the Fund, or Trustee, officer, employee or agent of the Trust,
shall be subject to claims against or obligations of the Trust or of the Fund to
any extent whatsoever, but that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability
as set forth in the Declaration and you agree that the obligations assumed by
the Trust on behalf of the Fund pursuant to this Agreement shall be limited in
all cases to the Fund and its assets, and you shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of the Fund or any
other series of the Trust, or from any Trustee, officer, employee or agent of
the Trust. You understand that the rights and obligations of each Fund, or
series, under the Declaration are separate and distinct from those of any and
all other series.
6
<PAGE>
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or
management agreements entered into between you and the Trust on behalf of the
Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
SCUDDER CALIFORNIA TAX FREE
TRUST, on behalf of
Scudder California Tax Free Money Fund
By: /s/Thomas F. McDonough
----------------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/Daniel Pierce
----------------------------------
Managing Director
7
Exhibit (e)(1)
SCUDDER CALIFORNIA TAX FREE TRUST
Two International Place
Boston, MA 02110
September 7, 1998
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Underwriting Agreement
----------------------
Dear Ladies and Gentlemen:
Scudder California Tax Free Trust (hereinafter called the "Trust") is a
business trust organized under the laws of Massachusetts and is engaged in the
business of an investment company. The authorized capital of the Trust consists
of shares of beneficial interest, with par value of $0.01 per share ("Shares"),
currently divided into two portfolios (each a "Portfolio"); however, shares may
be divided into additional Portfolios of the Trust and the Portfolios may be
terminated from time to time. The Trust has selected you to act as principal
underwriter (as such term is defined in Section 2(a)(29) of the Investment
Company Act of 1940, as amended (the "1940 Act")) of the Shares and you are
willing to act as such principal underwriter and to perform the duties and
functions of underwriter in the manner and on the terms and conditions
hereinafter set forth. Accordingly, the Trust hereby agrees with you as follows:
1. Delivery of Documents. The Trust has furnished you with copies
properly certified or authenticated of each of the following:
(a) Declaration of Trust of the Trust, dated December 8, 1987, as
amended to date.
(b) By-Laws of the Trust as in effect on the date hereof.
<PAGE>
(c) Resolutions of the Board of Trustees of the Trust selecting you as
principal underwriter and approving this form of Agreement.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
The Trust will furnish you promptly with properly certified or
authenticated copies of any registration statement filed by it with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
(the "1933 Act") or the 1940 Act, together with any financial statements and
exhibits included therein, and all amendments or supplements thereto hereafter
filed.
2. Registration and Sale of Additional Shares. The Trust will from time
to time use its best efforts to register under the 1933 Act such number of
Shares not already so registered as you may reasonably be expected to sell on
behalf of the Trust. You and the Trust will cooperate in taking such action as
may be necessary from time to time to comply with requirements applicable to the
sale of Shares by you or the Trust in any states mutually agreeable to you and
the Trust, and to maintain such compliance. This Agreement relates to the issue
and sale of Shares that are duly authorized and registered under the 1933 Act
and available for sale by the Trust, including redeemed or repurchased Shares if
and to the extent that they may be legally sold and if, but only if, the Trust
sees fit to sell them.
3. Sale of Shares. Subject to the provisions of paragraphs 5 and 7
hereof and to such minimum purchase requirements as may from time to time be
currently indicated in the Trust's prospectus or statement of additional
information, you are authorized to sell as agent on behalf of the Trust Shares
authorized for issue and registered under the 1933 Act. You may also purchase as
principal Shares for resale to the public. Such sales will be made by you on
behalf of the Trust by accepting unconditional orders to purchase Shares placed
with you by investors and such purchases will be made by you only after
acceptance by you of such orders. The sales price to the public of Shares shall
be the public offering price as defined in paragraph 6 hereof.
4. Solicitation of Orders. You will use your best efforts (but only in
states in which you may lawfully do so) to obtain from investors unconditional
orders for Shares authorized for issue by
2
<PAGE>
the Trust and registered under the 1933 Act, provided that you may in your
discretion refuse to accept orders for Shares from any particular applicant.
5. Sale of Shares by the Trust. Unless you are otherwise notified by
the Trust, any right granted to you to accept orders for Shares or to make sales
on behalf of the Trust or to purchase Shares for resale will not apply to (i)
Shares issued in connection with the merger or consolidation of any other
investment company with the Trust or its acquisition, by purchase or otherwise,
of all or substantially all of the assets of any investment company or
substantially all the outstanding shares of any such company, and (ii) to Shares
that may be offered by the Trust to shareholders of the Trust by virtue of their
being such shareholders.
6. Public Offering Price. All Shares sold to investors by you will be
sold at the public offering price. The public offering price for all accepted
subscriptions will be the net asset value per Share, determined, in the manner
provided in the Trust's registration statements as from time to time in effect
under the 1933 Act and the 1940 Act, next after the order is accepted by you.
7. Suspension of Sales. If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further orders
for Shares shall be accepted by you except unconditional orders placed with you
before you had knowledge of the suspension. In addition, the Trust reserves the
right to suspend sales and your authority to accept orders for Shares on behalf
of the Trust if, in the judgment of a majority of the Board of Trustees or a
majority of the Executive Committee of such Board, if such body exists, it is in
the best interests of the Trust to do so, such suspension to continue for such
period as may be determined by such majority; and in that event, no Shares will
be sold by you on behalf of the Trust while such suspension remains in effect
except for Shares necessary to cover unconditional orders accepted by you before
you had knowledge of the suspension.
8. Portfolio Securities. Portfolio securities of any Portfolio of the
Trust may be bought or sold by or through you and you may participate directly
or indirectly in brokerage commissions or "spread" in respect of transactions in
portfolio securities of any Portfolio of the Trust; provided, however, that all
sums of money received by you as a result of such purchases and sales or as a
result
3
<PAGE>
of such participation must, after reimbursement of your actual expenses in
connection with such activity, be paid over by you to or for the benefit of the
Trust.
9. Expenses. (a) The Trust will pay (or will enter into arrangements
providing that others than you will pay) all fees and expenses:
(1) in connection with the preparation, setting in type and filing
of any registration statement (including a prospectus and
statement of additional information) under the 1933 Act or the
1940 Act, or both, and any amendments or supplements thereto
that may be made from time to time;
(2) in connection with the registration and qualification of
Shares for sale, or compliance with other conditions
applicable to the sale of Shares in the various jurisdictions
in which the Trust shall determine it advisable to sell such
Shares (including registering the Trust as a broker or dealer
or any officer of the Trust or other person as agent or
salesman of the Trust in any such jurisdictions);
(3) of preparing, setting in type, printing and mailing any
notice, proxy statement, report, prospectus or other
communication to shareholders of the Trust in their capacity
as such;
(4) of preparing, setting in type, printing and mailing
prospectuses annually, and any supplements thereto, to
existing shareholders;
(5) in connection with the issue and transfer of Shares resulting
from the acceptance by you of orders to purchase Shares placed
with you by investors, including the expenses of printing and
mailing confirmations of such purchase orders and the expenses
of printing and mailing a prospectus included with the
confirmation of such orders;
(6) of any issue taxes or any initial transfer taxes;
(7) of WATS (or equivalent) telephone lines other than the portion
allocated to you in this paragraph 9;
4
<PAGE>
(8) of wiring funds in payment of Share purchases or in
satisfaction of redemption or repurchase requests, unless such
expenses are paid for by the investor or shareholder who
initiates the transaction;
(9) of the cost of printing and postage of business reply
envelopes sent to Trust shareholders;
(10) of one or more CRT terminals connected with the computer
facilities of the transfer agent other than the portion
allocated to you in this paragraph 9;
(11) permitted to be paid or assumed by the Trust pursuant to a
plan ("12b-1 Plan"), if any, adopted by the Trust in
conformity with the requirements of Rule 12b-1 under the 1940
Act ("Rule 12b-1") or any successor rule, notwithstanding any
other provision to the contrary herein;
(12) of the expense of setting in type, printing and postage of the
periodic newsletter to shareholders other than the portion
allocated to you in this paragraph 9; and
(13) of the salaries and overhead of persons employed by you as
shareholder representatives other than the portion allocated
to you in this paragraph 9.
b) You shall pay or arrange for the payment of all fees and expenses:
(1) of printing and distributing any prospectuses or reports
prepared for your use in connection with the offering of
Shares to the public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of
Shares to the public;
(3) of advertising in connection with the offering of Shares to
the public;
(4) incurred in connection with your registration as a broker or
dealer or the registration or qualification of your officers,
trustees, agents or representatives under Federal and state
laws;
(5) of that portion of WATS (or equivalent) telephone lines,
allocated to you on the basis of use by investors (but not
shareholders) who request information or prospectuses;
5
<PAGE>
(6) of that portion of the expenses of setting in type, printing
and postage of the periodic newsletter to shareholders
attributable to promotional material included in such
newsletter at your request concerning investment companies
other than the Trust or concerning the Trust to the extent you
are required to assume the expense thereof pursuant to
paragraph 9(b)(8), except such material which is limited to
information, such as listings of other investment companies
and their investment objectives, given in connection with the
exchange privilege as from time to time described in the
Trust's prospectus;
(7) of that portion of the salaries and overhead of persons
employed by you as shareholder representatives attributable to
the time spent by such persons in responding to requests from
prospective investors and shareholders for information about
the Trust;
(8) of any activity which is primarily intended to result in the
sale of Shares, unless a 12b-1 Plan shall be in effect which
provides that the Trust shall bear some or all of such
expenses, in which case the Trust shall bear such expenses in
accordance with such Plan; and
(9) of that portion of one or more CRT terminals connected with
the computer facilities of the transfer agent attributable to
your use of such terminal(s) to gain access to such of the
transfer agent's records as also serve as your records.
Expenses which are to be allocated between you and the Trust shall be
allocated pursuant to reasonable procedures or formulae mutually agreed upon
from time to time, which procedures or formulae shall to the extent practicable
reflect studies of relevant empirical data.
10. Conformity with Law. You agree that in selling Shares you will duly
conform in all respects with the laws of the United States and any state in
which Shares may be offered for sale by you pursuant to this Agreement and to
the rules and regulations of the National Association of Securities Dealers,
Inc., of which you are a member.
6
<PAGE>
11. Independent Contractor. You shall be an independent contractor and
neither you nor any of your officers or employees is or shall be an employee of
the Trust in the performance of your duties hereunder. You shall be responsible
for your own conduct and the employment, control and conduct of your agents and
employees and for injury to such agents or employees or to others through your
agents or employees. You assume full responsibility for your agents and
employees under applicable statutes and agree to pay all employee taxes
thereunder.
12. Indemnification. You agree to indemnify and hold harmless the Trust
and each of its trustees and officers and each person, if any, who controls the
Trust within the meaning of Section 15 of the 1933 Act, against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which the Trust or such trustees, officers, or controlling person
may become subject under such Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by you or any of your employees or
representatives, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement
(including a prospectus or statement of additional information) covering Shares
or any amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Trust by you, or
(iii) may be incurred or arise by reason of your acting as the Trust's agent
instead of purchasing and reselling Shares as principal in distributing the
Shares to the public, provided, however, that in no case (i) is your indemnity
in favor of a trustee or officer or any other person deemed to protect such
trustee or officer or other person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of his duties or by reason of his
reckless disregard of obligations and duties under this Agreement or (ii) are
you to be liable under your indemnity agreement contained in this paragraph with
respect to any claim made against the Trust or any person indemnified unless the
Trust or such person, as the case may be, shall have notified you in writing
within a reasonable time after the summons or other first legal process giving
7
<PAGE>
information of the nature of the claims shall have been served upon the Trust or
upon such person (or after the Trust or such person shall have received notice
of such service on any designated agent), but failure to notify you of any such
claim shall not relieve you from any liability which you may have to the Trust
or any person against whom such action is brought otherwise than on account of
your indemnity agreement contained in this paragraph. You shall be entitled to
participate, at your own expense, in the defense, or, if you so elect, to assume
the defense of any suit brought to enforce any such liability, but if you elect
to assume the defense, such defense shall be conducted by counsel chosen by you
and satisfactory to the Trust, to its officers and trustees, or to any
controlling person or persons, defendant or defendants in the suit. In the event
that you elect to assume the defense of any such suit and retain such counsel,
the Trust, such officers and trustees or controlling person or persons,
defendant or defendants in the suit shall bear the fees and expenses of any
additional counsel retained by them, but, in case you do not elect to assume the
defense of any such suit, you will reimburse the Trust, such officers and
trustees or controlling person or persons, defendant or defendants in such suit
for the reasonable fees and expenses of any counsel retained by them. You agree
promptly to notify the Trust of the commencement of any litigation or
proceedings against it in connection with the issue and sale of any Shares.
The Trust agrees to indemnify and hold harmless you and each of your
trustees and officers and each person, if any, who controls you within the
meaning of Section 15 of the 1933 Act, against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
you or such trustees, officers or controlling person may become subject under
such Act, under any other statute, at common law or otherwise, arising out of
the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Trust or any of its employees or representatives, or (ii)
may be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement (including a prospectus or statement
of additional information) covering Shares or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance upon
8
<PAGE>
information furnished to you by the Trust; provided, however, that in no case
(i) is the Trust's indemnity in favor of you, a trustee or officer or any other
person deemed to protect you, such trustee or officer or other person against
any liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
duties or by reason of his reckless disregard of obligations and duties under
this Agreement or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claims made against you or any
such trustee, officer or controlling person unless you or such trustee, officer
or controlling person, as the case may be, shall have notified the Trust in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon you or
upon such trustee, officer or controlling person (or after you or such trustee,
officer or controlling person shall have received notice of such service on any
designated agent), but failure to notify the Trust of any such claim shall not
relieve it from any liability which it may have to the person against whom such
action is brought otherwise than on account of its indemnity agreement contained
in this paragraph. The Trust will be entitled to participate at its own expense
in the defense, or, if it so elects, to assume the defense of any suit brought
to enforce any such liability, but if the Trust elects to assume the defense,
such defense shall be conducted by counsel chosen by it and satisfactory to you,
your trustees, officers, or controlling person or persons, defendant or
defendants in the suit. In the event that the Trust elects to assume the defense
of any such suit and retain such counsel, you, your trustees, officers or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, but, in case
the Trust does not elect to assume the defense of any such suit, it will
reimburse you or such trustees, officers or controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Trust agrees promptly to notify you of the
commencement of any litigation or proceedings against it or any of its officers
or trustees in connection with the issuance or sale of any Shares.
13. Authorized Representations. The Trust is not authorized to give any
information or to make any representations on behalf of you other than the
information and representations contained
9
<PAGE>
in a registration statement (including a prospectus or statement of additional
information) covering Shares, as such registration statement and prospectus may
be amended or supplemented from time to time.
You are not authorized to give any information or to make any
representations on behalf of the Trust or in connection with the sale of Shares
other than the information and representations contained in a registration
statement (including a prospectus or statement of additional information)
covering Shares, as such registration statement may be amended or supplemented
from time to time. No person other than you is authorized to act as principal
underwriter (as such term is defined in the 1940 Act) for the Trust.
14. Duration and Termination of this Agreement. This Agreement shall
become effective upon the date first written above and will remain in effect
until September 30, 1999 and from year to year thereafter, but only so long as
such continuance is specifically approved at least annually by the vote of a
majority of the trustees who are not interested persons of you or of the Trust,
cast in person at a meeting called for the purpose of voting on such approval,
and by vote of the Board of Trustees or of a majority of the outstanding voting
securities of the Trust. This Agreement may, on 60 days' written notice, be
terminated at any time without the payment of any penalty, by the Board of
Trustees of the Trust, by a vote of a majority of the outstanding voting
securities of the Trust, or by you. This Agreement will automatically terminate
in the event of its assignment. In interpreting the provisions of this paragraph
14, the definitions contained in Section 2(a) of the 1940 Act (particularly the
definitions of "interested person", "assignment" and "majority of the
outstanding voting securities"), as modified by any applicable order of the
Securities and Exchange Commission, shall be applied.
15. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. If the Trust should at any time deem it
necessary or advisable in the best interests of the Trust that any amendment of
this Agreement be made in order to comply with the recommendations or
10
<PAGE>
requirements of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under state or federal tax laws and should
notify you of the form of such amendment, and the reasons therefor, and if you
should decline to assent to such amendment, the Trust may terminate this
Agreement forthwith. If you should at any time request that a change be made in
the Trust's Declaration of Trust or By-laws or in its methods of doing business,
in order to comply with any requirements of federal law or regulations of the
Securities and Exchange Commission or of a national securities association of
which you are or may be a member relating to the sale of shares of the Trust,
and the Trust should not make such necessary change within a reasonable time,
you may terminate this Agreement forthwith.
16 Termination of Prior Agreements. This Agreement upon its
effectiveness terminates and supersedes all prior underwriting contracts between
the parties.
17. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
The name "Scudder California Tax Free Trust" is the designation of the
Trustees for the time being under a Declaration of Trust dated December 8, 1987,
as amended from time to time, and all persons dealing with the Trust must look
solely to the property of the Trust for the enforcement of any claims against
the Trust, as neither the Trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Trust.
11
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract.
Very truly yours,
SCUDDER CALIFORNIA TAX FREE TRUST
By: /s/Thomas F. McDonough
-----------------------------------
Thomas F. McDonough
Vice President
The foregoing agreement is hereby accepted as of the foregoing date
thereof.
SCUDDER INVESTOR SERVICES, INC.
By: /s/Daniel Pierce
-----------------------------------
Daniel Pierce
Vice President
12
