This combined prospectus sets forth concisely the information about Scudder New
York Tax Free Money Fund and Scudder New York Tax Free Fund, each a series of
Scudder State Tax Free Trust, an open-end management investment company, that a
prospective investor should know before investing. Please retain it for future
reference.
Shares of the Funds are not insured or guaranteed by the U.S. Government.
Scudder New York Tax Free Money Fund seeks to maintain a constant net asset
value of $1.00 per share but there can be no assurance that the stable net asset
value will be maintained.
If you require more detailed information, a Statement of Additional Information
for the Funds dated August 1, 1995, as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103 or calling 1-800-225-2470. The
Statement, which is incorporated by reference into the Funds' prospectus, has
been filed with the Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Contents--see page 5.
Scudder New York
Tax Free Money Fund
-------------------------------------
Scudder New York
Tax Free Fund
Prospectus
August 1, 1995
Two pure no-load(TM) (no sales charges) mutual fund series which seek to provide
triple tax-free income, exempt from New York state and New York City personal
income taxes and regular federal income tax.
<PAGE>
<TABLE>
<CAPTION>
Expense information
-------------------------------------------------------------------------------
How to compare a Scudder pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder New York Tax Free Money Fund and Scudder New
York Tax Free Fund (the "Funds"). By reviewing this table and those in other
mutual funds' prospectuses, you can compare each Fund's fees and expenses with
those of other funds. With Scudder's pure no-load(TM) funds, you pay no
commissions to purchase or redeem shares, or to exchange from one fund to
another. As a result, all of your investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your individual account in either Fund
for various transactions.
Scudder New York Scudder New York
Tax Free Money Fund Tax Free Fund
<S> <C> <C>
Sales commissions to purchase shares (sales load) NONE NONE
Commissions to reinvest dividends NONE NONE
Redemption fees NONE* NONE*
Fees to exchange shares NONE NONE
2) Annual Fund operating expenses: Expenses paid by either Fund before it distributes its net investment income,
expressed as a percentage of its average daily net assets for the fiscal year ended March 31, 1995.
Investment management fees 0.21%** 0.62%
12b-1 fees NONE NONE
Other expenses 0.39%** 0.20%
------- -----
Total Fund operating expenses 0.60%** 0.82%
======= =====
Example
Based on the levels of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by each Fund before it distributes its
net investment income to shareholders. (As noted above, the Funds have no
redemption fees of any kind.)
One year $ 6 $ 8
Three years 19 26
Five years 33 46
Ten years 75 101
</TABLE>
See "Fund organization--Investment adviser" for further information about the
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and returns vary from year to year and may be higher or lower than
those shown.
* You may redeem by writing or calling the Funds, or by Write-A-Check for
Scudder New York Tax Free Money Fund. If you wish to receive redemption
proceeds via wire, there is a $5 wire service fee. For additional
information, please refer to "Transaction information--Redeeming shares."
** Until July 31, 1996, the Adviser has agreed to waive a portion of its fee
for Scudder New York Tax Free Money Fund to the extent necessary so that
the total annualized expenses of the Fund do not exceed 0.60% of average
daily net assets. If the Adviser had not done so, Fund expenses would have
been: investment management fee 0.50%, other expenses 0.39% and total
operating expenses 0.89% for the fiscal year ended March 31, 1995. To the
extent that expenses fall below 0.60% during the fiscal year, the Adviser
reserves the right to recoup, during the fiscal year incurred, amounts
reimbursed or waived during the period, but only to the extent that the
Fund's expenses do not exceed 0.60%.
2
<PAGE>
-------------------------------------------------------------------------------
<TABLE>
FINANCIAL HIGHLIGHTS
SCUDDER NEW YORK TAX FREE MONEY FUND
----------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE AUDITED FINANCIAL
STATEMENTS.
IF YOU WOULD LIKE MORE DETAILED INFORMATION CONCERNING THE FUND'S PERFORMANCE, A
COMPLETE PORTFOLIO LISTING AND AUDITED FINANCIAL STATEMENTS ARE AVAILABLE IN THE
FUND'S ANNUAL REPORT DATED MARCH 31, 1995 AND MAY BE OBTAINED WITHOUT CHARGE BY
WRITING OR CALLING SCUDDER INVESTOR SERVICES, INC.
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
------------------------------------------------------- TO MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period............ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------
Net investment income (a)......... .025 .017 .022 .035 .046 .052 .047 .033
Distributions from net
investment income.............. (.025) (.017) (.022) (.035) (.046) (.052) (.047) (.033)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period.... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (b).............. 2.57 1.75 2.22 3.55 4.69 5.33 4.78 3.33**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)................... 55 47 40 36 40 36 41 30
Ratio of operating expenses, net
to average daily net
assets (%) (a)................. .60 .60 .60 .60 .60 .60 .53 .50*
Ratio of net investment income to
average daily net assets (%)... 2.56 1.73 2.19 3.46 4.57 5.21 4.76 4.08*
<FN>
(a) Reflects a per share amount
of expenses, exclusive of
management fees,
reimbursed by the
Adviser of................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ .002
Reflects a per share amount
of management fee not
imposed by the Adviser of.. $ .003 $ .004 $ .004 $ .004 $ .004 $ .004 $ .004 $ .004
Operating expense ratio
including expenses
reimbursed, management
fee and other expenses
not imposed (%)............ .89 .97 .97 1.01 1.08 1.08 .98 1.19*
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
3
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (CONT'D)
SCUDDER NEW YORK TAX FREE FUND
--------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
IF YOU WOULD LIKE MORE DETAILED INFORMATION CONCERNING THE FUND'S PERFORMANCE, A
COMPLETE PORTFOLIO LISTING AND AUDITED FINANCIAL STATEMENTS ARE AVAILABLE IN THE
FUND'S ANNUAL REPORT DATED MARCH 31, 1995 AND MAY BE OBTAINED WITHOUT CHARGE BY
WRITING OR CALLING SCUDDER INVESTOR SERVICES, INC.
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period......... $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39 $11.43 $11.19 $10.11
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income.................... .52 .54 .61 .65 .67 .69 .72 .73 .75 .75
Net realized and
unrealized gain
(loss) on investment
transactions.............. .11 (.35) 1.03 .50 .13 .16 .14 (.84) .39 1.08
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. .63 .19 1.64 1.15 .80 .85 .86 (.11) 1.14 1.83
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income ................... (.52) (.54) (.61) (.65) (.67) (.69) (.72) (.73) (.75) (.75)
From paid-in
capital................... -- -- -- -- -- (.08) -- -- -- --
From net realized
gains..................... -- (.67) (.61) (.25) -- (.01) -- (.20) (.15) --
In excess of net
realized gains............ (.05) (.06) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions............ (.57) (1.27) (1.22) (.90) (.67) (.78) (.72) (.93) (.90) (.75)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period............... $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39 $11.43 $11.19
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) 6.39 1.31 15.60 11.11 7.79 8.18 8.55 (.61) 10.71 18.71
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)......... 194 207 201 159 142 132 123 116 154 102
Ratio of operating
expenses, net to
average daily net
assets (%).................. .82 .82 .82 .87 .91 .89 .89 .95 .88 .88
Ratio of net investment
income to average
daily net assets (%)........ 5.13 4.80 5.36 5.96 6.29 6.39 6.89 7.05 6.70 7.01
Portfolio turnover
rate (%).................... 83.8 158.0 201.4 168.2 224.9 114.3 132.1 44.2 71.9 40.4
</TABLE>
4
<PAGE>
A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $90 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
The Funds
* active portfolio management by Scudder's professional team of credit
analysts and municipal bond market experts
* dividends declared daily and paid monthly
Scudder New York Tax Free Money Fund
* capital stability and income exempt from New York state and New York City
personal income taxes and regular federal income tax
* seeks to maintain a constant share price of $1.00 and investment in high
quality, short-term municipal securities tax-exempt in New York
Scudder New York Tax Free Fund
* income exempt from New York state and New York City personal income taxes
and regular federal income tax
* primarily long-term investment-grade municipal securities tax-exempt in New
York
Contents
Why invest in these funds? 6
Summary of important features 7
Tax-exempt vs. taxable income 7
Scudder New York Tax Free Money Fund 8
Scudder New York Tax Free Fund 9
Additional information about policies
and investments 10
Purchases 14
Exchanges and redemptions 15
Distribution and performance information 17
Fund organization 19
Transaction information 20
Shareholder benefits 23
Trustees and Officers 26
Investment products and services 27
How to contact Scudder Back cover
5
<PAGE>
Why invest in these Funds?
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund (the
"Funds") are non-diversified and diversified series, respectively, of Scudder
State Tax Free Trust, and are designed for investors seeking double tax-free
income (triple tax-free income for New York City taxpayers)--exempt from New
York state and New York City personal income taxes and regular federal income
tax. Because these Funds are intended for investors subject to New York and
regular federal income taxes, they may not be appropriate for all investors and
are not available in all states.
Tax-free income
As illustrated in the chart on the following page, depending on your tax bracket
and individual situation, you may earn a substantially higher after-tax return
from these Funds than from comparable investments that pay income subject to New
York state and New York City personal income taxes and regular federal income
tax. For example, if your federal marginal tax rate is 36%, your New York state
marginal tax rate is 7.50% and your New York City marginal tax rate is 4.46%,
your effective combined marginal tax rate is 43.65%. Thus, you would need to
earn a taxable return of 6.05% to receive after-tax income equal to the 3.41%
tax-free yield provided by Scudder New York Tax Free Money Fund for the
seven-day period ended March 31, 1995, or earn a taxable return of 8.80% to
receive after-tax income equal to the 4.96% tax-free yield provided by Scudder
New York Tax Free Fund for the 30-day period ended March 31, 1995. In other
words, it would be necessary to earn $1,774 from a taxable investment to equal
$1,000 of tax-free income you receive from either Fund. The yield levels of
tax-free and taxable investments change continuously. Before investing in either
Fund, you should compare its yield to the after-tax yield you would receive from
a comparable investment paying taxable income. For up-to-date yield information
on either Fund, shareholders can call SAIL, Scudder Automated Information Line,
for toll-free information at any time.
Investment characteristics of each Fund
The Funds are income-oriented portfolios advised by Scudder, Stevens & Clark,
Inc. (the "Adviser"). Each Fund seeks to provide income free from New York state
and New York City personal income taxes and regular federal income tax. The two
Funds, however, have different investment objectives and characteristics. The
two Funds' prospectuses are presented together so you can understand their
important differences and decide which Fund or combination of the two is most
suitable for your needs.
Scudder New York Tax Free Money Fund's objectives include stability of capital
and the maintenance of a $1.00 net asset value per share. Scudder New York Tax
Free Fund ordinarily provides a higher, more stable income stream, but its net
asset value per share will fluctuate with market changes. As a result of these
different objectives, the average portfolio maturities of the Funds are
different.
Scudder New York Tax Free Money Fund invests primarily in short-term municipal
obligations (notes and bonds) with individual remaining maturities of 397
calendar days or less. The weighted average maturity of the portfolio is 90 days
or less. Scudder New York Tax Free Fund has flexible investment policies
regarding maturity but normally invests primarily in long-term municipal bonds.
The yield and the potential for price fluctuation are generally greater, the
greater the maturity of the municipal security. Other factors affecting the
yield and price variability include the absolute level of interest rates, the
relationship among short-, medium- and long-term interest rates, the quality of
each Fund's investments and each Fund's expenses.
Except as otherwise indicated, each Fund's investment objectives and policies
are not fundamental and may be changed without a vote
6
<PAGE>
<TABLE>
<CAPTION>
Summary of important features
-----------------------------------------------------------------------------------------------------------------------
Investment objectives Investments Maturity Quality Dividends
and characteristics
<S> <C> <C> <C> <C> <C>
Scudder o price stability o short-term o average maturity o 100% of o declared daily
New York New York of 90 days or investments and paid monthly
Tax Free Money o income exempt from municipal less; no single rated within top
Fund New York state and securities investment two quality o option to
New York City maturity longer ratings or receive in cash
personal income than 397 judged to be of or reinvest in
taxes and regular calendar days comparable additional
federal income tax quality shares
Scudder o prices will o primarily o primarily o 100% of o declared daily
New York fluctuate with long-term long-term bonds investments and paid monthly
Tax Free Fund changes in New York rated within top
interest rates municipal six quality o option to
bonds ratings or receive in cash
o income exempt from judged to be of or reinvest in
New York state and comparable additional
New York City quality shares
personal income
taxes and regular
federal income tax
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Tax-exempt vs. taxable income
-----------------------------------------------------------------------------------------------------------------------
Tax Free Yields and Corresponding Taxable Equivalents: The table below shows
New York City taxpayers what an investor would have to earn from a comparable
taxable investment to equal Scudder New York Tax Free Fund and Scudder New York
Tax Free Money Fund's triple tax-free yield. Today many investors may find that
regular federal income tax and New York City and New York state personal income
tax rates make these Funds attractive alternatives to investments paying
taxable income.
1995 TAXABLE INCOME: COMBINED MARGINAL TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7% AND
TAX 9%, A TAXABLE INVESTMENT WOULD HAVE TO EARN*:
<S> <C> <C> <C> <C> <C>
INDIVIDUAL JOINT RETURN RATE: 5% 7% 9%
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
$25,001-56,550 $45,001-94,250 36.57% 7.88% 11.04% 14.19%
56,551-60,000 94,251-108,000 39.21 8.23 11.52 14.81
60,001-117,950 108,001-143,600 39.25 8.23 11.52 14.82
117,951-256,500 143,601-256,500 43.65 8.87 12.42 15.97
OVER $256,500 OVER $256,500 46.82 9.40 13.16 16.92
Combined marginal tax rates are adjusted for the deductibility of state and City
taxes. *These illustrations assume a marginal federal income tax rate of 28% to
39.6% and that the federal alternative minimum tax is not applicable. Upper
income individuals may be subject to an effective federal income tax rate in
excess of the applicable marginal rate as a result of the phase-out of personal
exemptions and itemized deductions made permanent by the Revenue Reconciliation
Act of 1993. 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 on the table in order to achieve an after-tax yield equivalent to
the yield on a comparable tax-exempt security.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
of shareholders. Shareholders will receive written notice of any changes in
either Fund's objective. If there is a change in investment objective,
shareholders should consider whether that Fund remains an appropriate investment
in light of their then current financial position and needs. There can be no
assurance that either Fund's objectives will be met.
In addition, the Funds offer all of the benefits of the Scudder Family of Funds.
Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-load(TM)
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.
Scudder New York Tax Free Money Fund
Investment objectives and policies
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. The Fund is a professionally
managed portfolio of high quality, short-term New York municipal securities. All
of the Fund's investments are high quality, have a remaining maturity of 397
calendar days or less and have minimal credit risk as determined by the Adviser.
The weighted average effective maturity of the Fund's portfolio is 90 days or
less.
Quality
All of the Fund's municipal securities must meet certain quality criteria at the
time of purchase. Generally, the Fund may purchase only securities which are
rated, or issued by an issuer rated, within the two highest quality ratings of
two or more of the following rating agencies: Moody's Investors Service, Inc.
("Moody's") (Aaa and Aa, MIG-1 and MIG-2, and P1), Standard & Poor's ("S&P")
(AAA and AA, SP1+ and SP1, A1+ and A1) and Fitch Investors Service, Inc.
("Fitch") (AAA and AA, F1+, F1 and F2). Where only one rating agency has rated a
security (or its issuer), the Fund may purchase that security as long as the
rating falls within the categories described above. Where a security (or its
issuer) is unrated, the Fund may purchase that security if, in the judgment of
the Adviser, it is comparable in quality to securities described above. All of
the securities in which the Fund may invest are dollar-denominated and must meet
credit standards applied by the Adviser pursuant to procedures established by
the Trustees. Should an issue of municipal securities cease to be rated or if
its rating is reduced below the minimum required for purchase by a money market
fund, the Adviser will dispose of any such security unless the Trustees of the
Fund determine that such disposal would not be in the best interests of the
Fund.
Investments
The Fund'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 income tax as well as New York state and New York City personal
income taxes ("New York municipal securities"). These securities include general
obligation and revenue bonds and notes of issuers located in New York 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.
8
<PAGE>
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 New
York municipal securities. The Fund may also, for temporary defensive purposes,
hold cash or invest its assets in short-term taxable securities.
The Fund may invest in stand-by commitments, third party puts, when-issued
securities, and enter into repurchase agreements and reverse repurchase
agreements, which may involve certain expenses and risks, including credit
risks. The Fund may also invest in variable rate demand instruments. These
securities and techniques are not expected to comprise a major portion of the
Fund's investments. See "Additional information about policies and investments"
for more information about certain of these investment techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
Scudder New York Tax Free Fund
Investment objective and policies
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 investment-grade municipal securities.
The Adviser believes that investment results can be enhanced by active
professional management. Professional management distinguishes the Fund from
unit investment trusts, which cannot be actively managed.
Quality
Normally, at least 75% of the intermediate- and long-term securities purchased
by the Fund will be investment-grade municipal securities which are those rated
Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or Fitch, or unrated
securities judged by the Adviser to be of equivalent quality, or securities
issued or guaranteed by the U.S. Government. The Fund may also invest up to 25%
of its total assets in fixed-income securities rated below investment-grade,
that is, rated below Baa by Moody's or below BBB by S&P or Fitch, or in unrated
securities of equivalent quality as determined by the Adviser. The Fund may not
invest in fixed-income securities rated below B by Moody's, S&P or Fitch, or
their equivalent. The Fund expects to invest principally in securities rated A
or better by Moody's, S&P or Fitch or unrated securities judged by the Adviser
to be of equivalent quality at the time of purchase. Securities in these three
rating categories are judged by the Adviser to have an adequate if not strong
capacity to repay principal and pay interest.
During the year ended March 31, 1995, the average monthly dollar-weighted market
value of the bonds in the Fund's portfolio were as follows: 37% rated AAA, 22%
AA, 23% A and 18% BBB. The bonds are rated by Moody's, S&P or Fitch, or of
equivalent quality as determined by the Adviser.
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.
9
<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.
Investments
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.
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 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 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 taxable securities.
The Fund may invest in stand-by commitments, third party puts, when-issued
securities, and enter into repurchase agreements and reverse repurchase
agreements, which may involve certain expenses and risks, including credit
risks. The Fund may also invest in variable rate demand instruments. These
securities and techniques are not expected to comprise a major portion of the
Fund's investments. The Fund may also utilize various other strategic
transactions. See "Additional information about policies and investments" for
more information about these investment techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
Additional information about policies and investments
Investment restrictions
Each Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce each Fund's
investment risk.
10
<PAGE>
Each Fund may not borrow money except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse repurchase
agreements. Scudder New York Tax Free Money Fund may not make loans except
through the purchase of debt obligations or through repurchase agreements.
Scudder New York Tax Free Fund may not make loans except through the lending of
portfolio securities, the purchase of debt securities or through repurchase
agreements.
Scudder New York Tax Free Money Fund is a non-diversified fund (except to the
extent diversification is required for federal income tax purposes). Scudder New
York Tax Free Fund is a diversified fund.
Each Fund normally invests at least 80% of its net assets in New York municipal
securities. When the Adviser determines that market conditions warrant, each
Fund may, for temporary defensive purposes, invest more than 20% of its net
assets in taxable securities.
Each Fund may invest more than 25% of its assets in industrial development or
other private activity bonds. For purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, all such bonds
ultimately payable by companies within the same industry will be considered as
if they were issued by issuers in same industry.
As a matter of non-fundamental policy, each Fund does not invest more than 10%
of its net assets, in the aggregate, in repurchase agreements maturing in more
than seven days, restricted securities or securities which are not readily
marketable. Each Fund may not invest more than 5% of its net assets in
restricted securities. Scudder New York Tax Free Money Fund does not expect to,
and Scudder New York Tax Free Fund may not, invest more than 25% of its net
assets in each of non-publicly offered securities or New York municipal
securities which are secured by revenues from health facilities, toll roads,
ports and airports.
In addition, up to 20% of each Fund's net assets may be held in cash or invested
in short-term taxable investments, including repurchase agreements, U.S.
Government and other money market instruments and in New York municipal
securities whose interest income is specifically treated as a tax preference
item under the individual alternative minimum tax.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Funds' Statement of Additional
Information.
Investing in New York
Each Fund is more susceptible to factors adversely affecting issuers of New York
municipal securities than are comparable municipal bond funds that do not
emphasize these issuers to this degree.
Each Fund's ability to achieve its investment objective is dependent upon the
ability of the issuers of New York municipal securities to meet their continuing
obligations for the payment of principal and interest. New York state and New
York City face long-term economic problems that could seriously affect their
ability and that of other issuers of New York municipal securities to meet their
financial obligations.
Certain substantial issuers of New York municipal securities (including issuers
whose obligations may be acquired by the Funds) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. In recent
years, several different issues of municipal securities of New York state and
its agencies and instrumentalities and of New York City have been downgraded by
S&P and Moody's. On the other hand, strong demand for New York municipal
11
<PAGE>
securities has at times had the effect of permitting New York municipal
securities to be issued with yields relatively lower, and after issuance, to
trade in the market at prices relatively higher, than comparably rated municipal
obligations issued by other jurisdictions. A recurrence of the financial
difficulties previously experienced by certain issuers of New York municipal
securities could result in defaults or declines in the market values of those
issuers' existing obligations and, possibly, in the obligations of other issuers
of New York municipal securities.
For additional information about the New York economy and other considerations
affecting each Fund's investments in New York municipal securities see the
Funds' Statement of Additional Information dated August 1, 1995.
When-issued securities
Each Fund may purchase securities on a when-issued or forward delivery basis,
for payment and delivery at a later date. The price and yield are generally
fixed on the date of commitment to purchase. During the period between purchase
and settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, each
Fund may enter into repurchase agreements with selected banks and
broker/dealers. Under a repurchase agreement, a Fund acquires securities,
subject to the seller's agreement to repurchase at a specified time and price.
Income from repurchase agreements will be taxable when distributed to
shareholders.
Stand-by commitments
To facilitate liquidity, each Fund may enter into "stand-by commitments"
permitting them to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost to the Fund, and
any costs would be, in any event, limited to no more than 0.50% of the value of
the total assets of the Fund. Any such costs may, however, reduce yield.
Third party puts
Each Fund may purchase long-term fixed-rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Fund at
specified intervals (not exceeding 397 calendar days in the case of Scudder New
York Tax Free Money Fund) to tender (or "put") its bonds to the institution and
receive the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps.
Variable rate demand instruments
Each Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit each Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent.
Municipal lease obligations
Scudder New York Tax Free Fund may invest in municipal lease obligations and
participation interests in such obligations. These obligations, which may take
the form of a lease, an installment purchase contract or a conditional sales
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, the Fund will
not hold such obligations directly, but will purchase a certificate of
participation or other participation interest in a municipal obligation from a
bank or other financial intermediary. A participation interest gives the Fund a
proportionate interest in the underlying obligation.
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<PAGE>
Indexed securities
Scudder New York Tax Free Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). The interest rate or (unlike
most fixed-income securities) the principal amount payable at maturity of an
indexed security may be increased or decreased, depending on changes in the
value of the reference instrument.
Strategic Transactions and derivatives
Scudder New York Tax Free Fund may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates and broad or specific market movements), to manage the
effective maturity or duration of the Fund's portfolio, or to enhance potential
gain. These strategies may be executed through the use of derivative contracts.
Such strategies are generally accepted as a part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments may change over time as new instruments
and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, Scudder New York Tax Free
Fund may purchase and sell exchange-listed and over-the-counter put and call
options on securities, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, and enter
into various interest rate transactions such as swaps, caps, floors or collars
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used without limit to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of Scudder New York Tax Free
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes. Please refer to "Risk
factors--Strategic Transactions" for more information.
Risk factors
The Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Funds may use from time to time.
Non-diversified investment company. As a "non-diversified" investment company,
Scudder New York Tax Free Money Fund may invest a greater proportion of its
assets in the securities of a smaller number of issuers. Investment in the Fund
may involve greater risk than investment in a diversified fund.
(Continued on page 16)
13
<PAGE>
<TABLE>
<CAPTION>
Purchases
-----------------------------------------------------------------------------------------------------------------------
<S> <C>
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.
Make checks * By Mail Send your completed and signed application and check
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 1099 Hingham Street
Boston, MA Rockland, MA
02107-2291 02370-1052
* By Wire Please see Transaction information-Purchasing shares-
By wire following these tables for details, including the ABA wire
transfer number. Then call 1-800-225-5163 for instructions.
* In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.
Make checks * By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
* By Wire Please see Transaction information-Purchasing shares-
By wire following these tables for details, including the ABA wire
transfer number.
* In Person Visit one of our Funds Centers to make an additional investment in your
Scudder fund account. Funds Center locations are listed under Shareholder
benefits.
* By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Exchanges and redemptions
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exchanging shares Minimum investments:$1,000 to establish a new account; $100 to exchange among existing accounts
* By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
* By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into; and
- your signature(s) as it appears on your account and a daytime telephone
number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 1099 Hingham Street
Boston, MA 02107-2291 Rockland, MA 02370-1052
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Redeeming shares * By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may have redemption
proceeds sent to your predesignated bank account, or redemption proceeds of up
to $50,000 sent to your address of record.
* By "Write- For Scudder New York Tax Free Money, you may redeem shares by writing checks
A-Check" against your account balance as often as you like for at least $100, but not
more than $5,000,000.
* By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem; and
- your signature(s) as it appears on your account and a daytime telephone
number.
A signature guarantee is required for redemptions over $50,000. See Transaction
information-Redeeming shares following these tables.
* By Automatic You may arrange to receive automatic cash payments periodically if the value of
Withdrawal Plan your account is $10,000 or more. Call 1-800-225-5163 for more information and
an enrollment form.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
(Continued from page 13)
Investing in New York. If either New York or any of its local governmental
entities or public instrumentalities were to be unable to meet its financial
obligations, the income derived by the Funds, their net asset value or liquidity
and the ability to preserve or realize appreciation of each Fund's capital could
be adversely affected. Although as of the date of this prospectus, no issuers of
New York municipal securities are in default with respect to the payment of
their municipal obligations, the occurrence of any such default could adversely
affect the market values and marketability of all New York municipal securities
and, consequently, the net asset value of each Fund's portfolio. See "Investing
in New York" in the Funds' Statement of Additional Information for further
details about the risks of investing in New York obligations.
Debt securities. Scudder New York Tax Free Fund may invest in securities rated
below Baa by Moody's or BBB by S&P or Fitch. Moody's considers bonds it rates
Baa to have speculative elements as well as investment-grade characteristics.
Securities rated below investment-grade are commonly referred to as "junk bonds"
and involve greater price volatility and higher degrees of speculation with
respect to the payment of principal and interest than higher quality
fixed-income securities. The market prices of such lower-rated debt securities
may decline significantly in periods of general economic difficulty. In
addition, the trading market for these securities is generally less liquid than
for higher-rated securities and the Fund may have difficulty disposing of these
securities at the time it wishes to do so. The lack of a liquid secondary market
for certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing its portfolio and calculating
its net asset value.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted, or
the value of the securities may decline before the Fund is able to dispose of
them. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities.
Third party puts. In connection with third party puts, the financial institution
granting the option does not provide credit enhancement, and typically if there
is a default on or significant downgrading of the bond or a loss of its
tax-exempt status, the put option will terminate automatically, the risk to the
Fund will be that of holding a long-term bond and, in the case of Scudder New
York Tax Free Money Fund, the weighted average maturity of the Fund's portfolio
would be adversely affected.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Fund. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
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<PAGE>
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property. For more information
please refer to the Funds' Statement of Additional Information.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, the Fund will bear the
market risk of the reference instrument.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Funds' Statement of
Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Funds' dividends from net investment income are declared daily and
distributed monthly. The Funds intend to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of federal excise tax, although an additional
distribution may be made within three months of each Fund's fiscal year end, if
necessary. Any dividends or capital gains distributions declared in October,
November or December with a record date in such a month and paid during the
following January will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared. According
to preference, shareholders may receive distributions in cash or have them
reinvested in additional shares of the Funds. Distributions derived from
17
<PAGE>
interest on New York municipal securities are not subject to New York state or
New York City personal income taxes or to regular federal income taxes, except
for the possible applicability of the federal alternative minimum tax. For
federal income tax purposes, a portion of each Fund's income may be taxable to
shareholders as ordinary income. Long-term capital gain distributions, if any,
are taxable as long-term capital gains for federal, New York state and New York
City personal income tax purposes, regardless of the length of time shareholders
have owned their shares. Short-term capital gains and any other taxable income
distributions are taxable as ordinary income. Distributions of tax-exempt income
are taken into consideration in computing the portion, if any, of Social
Security and railroad retirement benefits subject to federal and, in some cases,
state taxes.
Each Fund ordinarily provides income that is 100% free from New York state, New
York City and regular federal income taxes. However, income from repurchase
agreements and gains from certain Strategic Transactions are taxable. Some of a
Fund's interest income may be treated as a tax preference item that may subject
an individual investor to liability (or increased liability) under the
alternative minimum tax, depending upon an investor's particular situation.
However, at least 80% of a Fund's net assets will normally be invested in New
York municipal securities whose interest income is not treated as a tax
preference item under the individual alternative minimum tax. Tax-exempt income
may also subject a corporate investor to liability (or increased liability)
under the corporate alternative minimum tax.
Each Fund sends detailed tax information to shareholders about the amount and
type of its distributions by January 31 of each year.
Performance information
From time to time, quotations of the Funds' performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. The "yield" of Scudder New York Tax
Free Money Fund refers to income generated by an investment in the Fund over a
specified seven-day period. The "SEC yield" of Scudder New York Tax Free Fund is
an annualized expression of the net income generated by the Fund over a
specified 30-day (one month) period, as a percentage of the Fund's share price
on the last day of that period. This yield is calculated according to methods
required by the Securities and Exchange Commission (the "SEC"), and therefore
may not equate to the level of income paid to shareholders. The "effective
yield" of Scudder New York Tax Free Money Fund is expressed similarly but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested and will reflect the effects of compounding. Each Fund's
"tax-equivalent yield" is calculated by determining the rate of return that
would have to be achieved on a fully taxable investment to produce the combined
federal and state after-tax equivalent of the Fund's yield, assuming certain tax
brackets for a Fund shareholder. Yields are expressed as annualized percentages.
"Total return" is the change in value of an investment in a Fund for a specified
period. The "average annual total return" of each Fund is the average annual
compound rate of return of an investment in a Fund assuming the investment has
been held for one year, five years, ten years and the life of the Fund as of a
stated ending date. (If a Fund has not been in operation for at least ten years,
the life of the Fund is used where applicable.) "Cumulative total return"
represents the cumulative change in value of an investment in each Fund for
various periods. All types of total return calculations assume that all
18
<PAGE>
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. Performance will vary based upon, among other things,
changes in market conditions and the level of each Fund's expenses.
Fund organization
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund are
series of Scudder State Tax Free Trust (the "Trust"), an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). The Trust was organized as a Massachusetts business trust in May
1983.
Each Fund's activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold and has no current intention
of holding annual shareholder meetings, although special meetings may be called
for purposes such as electing or removing Trustees, changing fundamental
investment policies or approving an investment advisory contract. Shareholders
will be assisted in communicating with other shareholders in connection with
removing a Trustee as if Section 16(c) of the 1940 Act were applicable.
The prospectuses of both Funds are combined in this prospectus. Each Fund offers
only its own shares, yet it is possible that a Fund might become liable for a
misstatement or omission in the prospectus of the other Fund. The Trustees of
the Funds have considered this and approved the use of a combined prospectus.
Investment adviser
Each Fund retains the investment management firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, to manage its daily investment and business
affairs subject to the policies established by the Board of Trustees. The
Trustees have overall responsibility for the management of the Funds under
Massachusetts law.
For the fiscal year ended March 31, 1995, the Adviser received monthly an
investment management fee equal to 0.62% of Scudder New York Tax Free Fund's
average daily net assets. The fee is graduated so that increases in the Fund's
net assets may result in a lower fee and decreases in the Fund's net assets may
result in a higher fee.
The fee payable under Scudder New York Tax Free Money Fund's Investment
Management Agreement is equal to an annual rate of 0.50% of the Fund's average
daily net assets. The Adviser has agreed to maintain the annualized expenses of
the Fund at not more than 0.60% of the average daily net assets of the Fund
until July 31, 1996.
For the fiscal year ended March 31, 1995, the Adviser received monthly an
investment management fee equal to 0.21% of Scudder New York Tax Free Money
Fund's average daily net assets on an annual basis.
Each Fund's management fee is payable monthly, provided that a Fund will make
such interim payments as may be requested by the Adviser not to exceed 75% of
the amount of the fee then accrued on the books of a Fund and unpaid.
All of a Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.
Scudder, Stevens & Clark, Inc. is located at
Two International Place, Boston, Massachusetts.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
wholly-owned subsidiary of the Adviser, is the transfer, shareholder servicing
and dividend-paying agent for the Funds.
Underwriter
Scudder Investor Services, Inc., a wholly-owned subsidiary of the Adviser, is
the Funds' principal underwriter. Scudder Investor Services, Inc. confirms, as
19
<PAGE>
agent, all purchases of shares of each Fund. Scudder Investor Relations is a
telephone information service provided by Scudder Investor Services, Inc.
Custodian
State Street Bank and Trust Company is the Funds' custodian.
Fund accounting agent
Scudder Fund Accounting Corporation, a wholly-owned subsidiary of the Adviser,
is responsible for determining the daily net asset value per share and
maintaining the general accounting records of the Funds.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Funds' transfer agent in Boston receives the purchase request in good order.
Purchases are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
or exchange requests by telephone or by "Write-A-Check," in the case of Scudder
New York Tax Free Money Fund, prior to the expiration of the seven-day period
will not be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent in Boston. Accounts cannot
be opened without a completed, signed application and a Scudder fund account
number. Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
-- the name of the fund in which the money is to be invested,
-- the account number of the fund, and
-- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By exchange. Your new account will have the same registration and address as
your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
Redeeming shares
Each Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
20
<PAGE>
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Funds' transfer agent has received your completed and signed application.
In the event that you are unable to reach a Fund by telephone, you should write
to the Fund; see "How to contact Scudder" for the address.
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $50,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
By "Write-A-Check." You may redeem shares of Scudder New York Tax Free Money
Fund by writing checks against your account balance for at least $100. Your Fund
investments will continue to earn dividends until your check is presented to the
Fund for payment.
Checks will be returned by the Funds' transfer agent if there are insufficient
shares to meet the withdrawal amount. You should not attempt to close an account
by check, because the exact balance at the time the check clears will not be
known when the check is written.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. Each Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share for
Scudder New York Tax Free Money Fund as of twelve o'clock noon and as of the
close of regular trading on the New York Stock Exchange (the "Exchange"),
normally 4 p.m. eastern time, on each day the Exchange is open for trading. For
Scudder New York Tax Free Fund, Scudder Fund Accounting Corporation determines
net asset value per share once a day as of the close of regular trading on the
Exchange. Net asset value per share is calculated by dividing the value of total
Fund assets, less all liabilities, by the total number of shares outstanding. In
21
<PAGE>
calculating the net asset value per share, Scudder New York Tax Free Fund uses
the current market value of the securities, and Scudder New York Tax Free Money
Fund uses the amortized cost value.
Processing time
All purchase and redemption requests must be received in good order by the
Funds' transfer agent in Boston. For Scudder New York Tax Free Money Fund,
purchases made by wire and received by the Funds' transfer agent before noon on
any business day are executed at noon on that day and begin earning income the
same day. Those made by wire between noon and the close of regular trading on
the Exchange on any business day are executed at the close of trading the same
day and begin earning income the next business day. Purchases made by check are
executed on the day the check is received in good order by the Funds' transfer
agent in Boston and begin earning income on the next business day. Redemption
requests received in good order by the Funds' transfer agent between noon and
the close of regular trading on the Exchange are executed at the net asset value
calculated at the close of regular trading on that day and will earn a dividend
on the redeemed shares that day. If a redemption request for Scudder New York
Tax Free Money Fund is received by noon, proceeds will normally be wired that
day, if requested by the shareholder, but no dividend will be earned on the
redeemed shares on that day.
For Scudder New York Tax Free Fund, those requests received by the close of
regular trading on the Exchange are executed at the net asset value per share
calculated at the close of trading that day. Purchase and redemption requests
received after the close of regular trading on the Exchange will be executed the
following business day. Purchases made by federal funds wire before noon eastern
time will begin earning income that day; all other purchases received before the
close of regular trading on the Exchange will begin earning income the next
business day. Redeemed shares will earn income on the day on which the
redemption request is executed.
If you wish to make a purchase of $500,000 or more you should notify Scudder
Investor Relations by calling 1-800-225-5163.
Each Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Short-term trading
Purchases and sales of shares of Scudder New York Tax Free Fund should be made
for long-term investment purposes only. The Fund and Scudder Investor Services,
Inc. each reserve the right to restrict purchases of Fund shares (including
exchanges) when a pattern of frequent purchases and sales made in response to
short-term fluctuations in a Fund's share price appears evident.
Tax information
A redemption of shares of Scudder New York Tax Free Fund, including an exchange
into another Scudder fund, is a sale of shares and may result in a gain or loss
for income tax purposes (although no gain or loss will be realized in the case
of a redemption or exchange of shares of Scudder New York Tax Free Money Fund if
it maintains a constant net asset value per share).
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires a Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. Each Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
Each Fund also reserves the right, following 30 days' notice, to redeem all
22
<PAGE>
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $1,000, which amount
may be changed by the Board of Trustees. Each Fund reserves the right, following
60 days' written notice to shareholders, to redeem all shares in sub-minimum
accounts, including accounts of new investors, where a reduction in value has
occurred due to a redemption or exchange out of the account. Reductions in value
that result solely from market activity will not trigger an involuntary
redemption. Each Fund will mail the proceeds of the redeemed account to the
shareholder. The shareholder may restore the share balance to $1,000 or more
during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.
Third party transactions
If purchases and redemptions of a Fund's shares are arranged and settlement is
made at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
Shareholde benefits
Experienced professional management
Scudder, Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.
A team approach to investing
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund are each
managed by a team of Scudder investment professionals who each play an important
role in the Funds' management process. Team members work together to develop
investment strategies and select securities for the Funds' portfolios. They are
supported by Scudder's large staff of economists, research analysts, traders and
other investment specialists. We believe our team approach benefits the Funds'
investors by bringing together many disciplines and leveraging Scudder's
extensive resources.
Rebecca Wilson is Lead Portfolio Manager for Scudder New York Tax Free Money
Fund and contributes nine years of experience in municipal investing and
research. Ms. Wilson assumed responsibility for the Fund in 1987 after joining
Scudder in 1986. K. Sue Cote, Portfolio Manager, joined the Fund's team in 1987
and has spent 11 years working with short-term fixed-income investments.
Scudder New York Tax Free Fund's Lead Portfolio Manager, Jeremy L. Ragus, has
had responsibility for the Fund's day-to-day operations since he joined Scudder
in 1990. Mr. Ragus has 14 years of experience in municipal investing. Donald C.
Carleton, Portfolio Manager, has over 25 years of investment management
experience and has worked on the Fund's team since he arrived at Scudder in
1983.
SAIL(TM)--Scudder Automated Information Line
For touchtone access to account information, prices and yields, or to perform
transactions in existing Scudder fund accounts, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890. During periods of extreme
economic or market changes, or other conditions, it may be difficult for you to
23
<PAGE>
effect telephone transactions in your account. In such an event you should write
to the Fund; please see "How to contact Scudder" for the address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you At the Helm, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
24
<PAGE>
Scuder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
* Scudder No-Fee IRA
* 401(k) Plans
* Profit Sharing and Money Purchase Pension Plans (Keogh Plans)
* 403(b) Plans
* SEP-IRA
* Scudder Horizon Plan (a variable annuity)
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.
25
<PAGE>
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager,
WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
College of Business Administration
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; General Partner, TL Ventures
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
* Scudder, Stevens & Clark, Inc.
26
<PAGE>
<TABLE>
<CAPTION>
Investment products and services
<S> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder GNMA Fund
Scudder U.S. Treasury Money Fund Scudder Income Fund
Tax free money market+ Scudder International Bond Fund
Scudder Tax Free Money Fund Scudder Short Term Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Global Income Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Fund
Scudder Managed Municipal Bonds Scudder Global Small Company Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Value Fund
Scudder Balanced Fund The Japan Fund
Scudder Growth and Income Fund
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +A portion of the income from the tax-free funds may
be subject to federal, state and local taxes. *Not available in all states. +++A
no-load variable annuity contract provided by Charter National Life Insurance
Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc., are
traded on various stock exchanges. ++For information on Scudder Treasurers
Trust(TM), an institutional cash management service that utilizes certain
portfolios of Scudder Fund, Inc. ($100,000 minimum), call: 1-800-541-7703.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
How to Contact Scudder
<S> <C>
Account Service and Information: Please address all correspondence to:
The Scudder Funds
For existing account service Scudder Investor Relations P.O. Box 2291
and transactions 1-800-225-5163 Boston, Massachusetts
02107-2291
For account updates, prices, Scudder Automated
yields, exchanges and Information Line (SAIL)
redemptions 1-800-343-2890
Investment Information: Or Stop by a Scudder Funds Center:
To receive information about Scudder Investor Relations Many shareholders enjoy the personal, one-on-one
the Scudder funds, for 1-800-225-2470 service of the Scudder Funds Centers. Check for a
additional applications and Funds Center near you-they can be found in the
prospectuses, or for following cities:
investment questions
For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM),an For information on Scudder Institutional Funds*, funds
institutional cash management service for corporations, designed to meet the broad investment management and
non-profit organizations and trusts which utilizes service needs of banks and other institutions, call:
certain portfolios of Scudder Fund, Inc.* ($100,000 1-800-854-8525.
minimum), call: 1-800-541-7703.
Scudder Investor Relations and Scudder Funds Centers are services provided through Scudder
Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
</TABLE>
<PAGE>
This prospectus sets forth concisely the information about Scudder Ohio Tax Free
Fund, a series of Scudder State Tax Free Trust, an open-end management
investment company, that a prospective investor should know before investing.
Please retain it for future reference.
If you require more detailed information, a Statement of Additional Information
dated August 1, 1995, as amended from time to time, may be obtained without
charge by writing Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103 or calling 1-800-225-2470. The Statement, which is
incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Contents--see page 4.
Scudder
Ohio
Tax Free Fund
Prospectus
August 1, 1995
A pure no-load(TM) (no sales charges) mutual fund series which seeks to provide
double tax-free income, exempt from both Ohio personal income tax and regular
federal income tax.
<PAGE>
Expense information
How to compare a Scudder pure no-load(TM) fund This information is designed to
help you understand the various costs and expenses of investing in Scudder Ohio
Tax Free Fund (the "Fund"). By reviewing this table and those in other mutual
funds' prospectuses, you can compare the Fund's fees and expenses with those of
other funds. With Scudder's pure no-load(TM) funds, you pay no commissions to
purchase or redeem shares, or to exchange from one fund to another. As a result,
all of your investment goes to work for you.
1) Shareholder transaction expenses:
Expenses charged
directly to your individual account in the Fund for
various transactions.
Sales commissions to NONE
purchase shares (sales
load)
Commissions to reinvest NONE
dividends
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the
Fund before it distributes its net investment
income, expressed as a percentage of the Fund's
average daily net assets for the fiscal year ended
March 31, 1995.
Investment management 0.19%**
fee (after waiver)
12b-1 fees NONE
Other expenses 0.31%**
-----
Total Fund operating 0.50%**
expenses =====
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$5 $16 $28 $63
See "Fund organization--Investment adviser" for further information about
the investment management fee. This example assumes reinvestment of all
dividends and distributions and that the percentage amounts listed under "Annual
Fund operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."
** Until July 31, 1996, the Adviser has agreed to waive a portion of its fee
to the extent necessary so that the total annualized expenses of the Fund
do not exceed 0.50% of average daily net assets. If the Adviser had not
done so, Fund expenses would have been: investment management fee 0.60%,
other expenses 0.31% and total operating expenses 0.91% for the fiscal year
ended March 31, 1995. To the extent that expenses fall below 0.50% during
the fiscal year, the Adviser reserves the right to recoup, during the
fiscal year incurred, amounts reimbursed or waived during the period, but
only to the extent that the Fund's expenses do not exceed 0.50%.
2
<PAGE>
Financial highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited
financial statements. If you would like more detailed information concerning
the Fund's performance, a complete portfolio listing and audited financial
statements are available in the Fund's Annual Report dated March 31, 1995 and
may be obtained without charge by writing or calling Scudder Investor
Services, Inc.
<TABLE>
<CAPTION>
For the Period
May 28, 1987
(Commencement
Years Ended March 31, of operations) to
------------------------------------------------------------- March 31,
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period......................... $12.68 $13.13 $12.47 $12.14 $11.97 $11.94 $11.65 $12.00
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a)................................. .70 .70 .72 .75 .78 .82 .79 .66
Net realized and
unrealized gain
(loss) on investment
transactions............................... .13 (.35) .85 .36 .23 .10 .36 (.40)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................................. .83 .35 1.57 1.11 1.01 .92 1.15 .26
------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income...................... (.70) (.70) (.72) (.75) (.78) (.82) (.84) (.61)
Net realized gains on
investment transactions................... -- (.08) (.19) (.03) (.06) (.07) (.02) --
In excess of net realized gains............ (.04) (.02) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions.......................... (.74) (.80) (.91) (.78) (.84) (.89) (.86) (.61)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period............... $12.77 $12.68 $13.13 $12.47 $12.14 $11.97 $11.94 $11.65
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (b)......................... 6.82 2.48 13.04 9.33 8.75 7.80 10.83 2.30**
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of period
($ millions)................................ 78 80 69 51 37 25 12 6
Ratio of operating expenses,
net to average daily
net assets (%) (a).......................... .50 .50 .50 .50 .50 .50 .50 .50*
Ratio of net investment income to
average daily net assets (%)................ 5.59 5.23 5.61 6.05 6.50 6.74 7.13 7.17*
Portfolio turnover rate (%).................. 19.9 12.2 34.7 13.2 22.6 15.9 35.7 105.5*
(a) Reflects a per share amount of expenses,
exclusive of management fees, reimbursed
by the Adviser of....................... $ -- $ -- $ -- $ -- $ -- $ .03 $ .11 $ .31
Reflects a per share amount of management
fee not imposed of...................... $ .05 $ .05 $ .06 $ .07 $ .07 $ .07 $ .07 $ .05
Operating expense ratio including
expenses reimbursed, management fee and
other expenses not imposed (%).......... .91 .90 .95 1.03 1.21 1.62 2.14 4.51*
<FN>
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
3
<PAGE>
A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $90 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less
costly. It includes money market, tax free, income and growth funds as well as
IRAs, 401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no
commissions to purchase or redeem your shares or to exchange from one fund to
another. There are no "12b-1" fees either, which many other funds now charge to
support their marketing efforts. All of your investment goes to work for you. We
look forward to welcoming you as a shareholder.
/s/Daniel Pierce
Scudder Ohio Tax Free Fund
Investment objective
o income exempt from Ohio personal income tax and regular federal income tax
Investment characteristics
o primarily long-term investment-grade municipal securities tax-exempt in Ohio
o active professional management
o dividends declared daily and paid monthly
Contents
Investment objective and policies 5
Tax-exempt vs. taxable income 6
Why invest in the Fund? 7
Additional information about policies
and investments 8
Purchases 12
Exchanges and redemptions 13
Distribution and performance information 14
Fund organization 16
Transaction information 17
Shareholder benefits 19
Trustees and Officers 22
Investment products and services 23
How to contact Scudder Back cover
4
<PAGE>
Investment objective and policies
Scudder Ohio Tax Free Fund (the "Fund"), a non-diversified series of Scudder
State Tax Free Trust, 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.
The Fund's investment adviser, Scudder, Stevens & Clark, Inc. (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.
Except as otherwise indicated, the Fund's investment objective and policies
are not fundamental and may be changed without a shareholder vote. Shareholders
will receive written notice of any changes in the Fund's objective. If there is
a change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
Quality
Normally, at least 75% of the intermediate- and long-term securities purchased
by the Fund will be investment-grade municipal securities which are those rated
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A,
or BBB by Standard & Poor's ("S&P") or Fitch Investors Service, Inc. ("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 year ended March 31, 1995, the average monthly dollar-weighted market
value of the bonds in the Fund's portfolio were as follows: 54% rated AAA, 17%
AA, 18% A and 11% BBB. The bonds are rated by Moody's, S&P or Fitch, or of
equivalent quality as determined by the Adviser.
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.
Investments
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
5
<PAGE>
Tax-exempt vs. taxable income
Tax Free Yields and Corresponding Taxable Equivalents. The table below
shows Ohio taxpayers what an investor would have to earn from a comparable
taxable investment to equal Scudder Ohio Tax Free Fund's double tax-free yield.
Today many investors may find that federal tax and Ohio personal income tax
rates make Scudder Ohio Tax Free Fund an attractive alternative to investments
paying taxable income.
<TABLE>
<CAPTION>
TO EQUAL HYPOTHETICAL TAX-FREE YIELDS
OF 5%, 7% AND 9%, A TAXABLE
COMBINED INVESTMENT WOULD HAVE TO EARN*:
1995 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
------------------------------------------
$ 20,000-23,350 18.79% 6.16% 8.62% 11.08%
23,351-40,000 31.21 7.27 10.18 13.08
40,001-56,550 31.74 7.33 10.26 13.19
56,551-80,000 34.59 7.64 10.70 13.76
80,001-100,000 35.10 7.70 10.79 13.87
100,001-117,950 35.76 7.78 10.90 14.01
117,951-200,000 40.42 8.39 11.75 15.11
200,001-256,500 40.80 8.45 11.82 15.20
OVER $256,500 44.13 8.95 12.53 16.11
JOINT RETURN
------------------------------------------
$ 20,000-39,000 18.79% 6.16% 8.62% 11.08%
39,001-40,000 31.21 7.27 10.18 13.08
40,001-80,000 31.74 7.33 10.26 13.19
80,001-94,250 32.28 7.38 10.34 13.29
94,251-100,000 35.10 7.70 10.79 13.87
100,001-143,600 35.76 7.78 10.90 14.01
143,601-200,000 40.42 8.39 11.75 15.11
200,001-256,500 40.80 8.45 11.82 15.20
OVER $256,500 44.13 8.95 12.53 16.11
</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. Individuals subject to these phase-out provisions
would have to invest in taxable securities with a yield in excess of those
shown on the table in order to achieve an after-tax yield equivalent to the
yield on a comparable tax-exempt security.
6
<PAGE>
income from 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 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
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.
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 that 100% of its portfolio securities will be
Ohio municipal securities. The Fund may also hold cash or invest its assets in
taxable securities.
The Fund may invest in stand-by commitments, third party puts, when-issued
or forward delivery securities, and enter into repurchase agreements and reverse
repurchase agreements, which may involve certain expenses and risks, including
credit risks. These securities and techniques are not expected to comprise a
major portion of the Fund's investments. The Fund may engage in strategic
transactions for hedging purposes and to seek gain. 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.
Why invest in the Fund?
The Fund is designed for investors seeking double tax-free income--exempt both
from Ohio personal income tax and regular federal income tax. Because the Fund
is intended for investors subject to Ohio personal income tax and regular
federal income tax, it may not be appropriate for all investors and is not
available in all states.
As illustrated by the chart on the preceding page, depending on your tax
bracket and individual situation, you may earn a substantially higher after-tax
return from the Fund than from comparable investments that pay income subject to
both Ohio state personal income tax and regular federal income tax. For example,
if your regular federal marginal tax rate is 36% and your Ohio tax rate is 6.9%,
your effective combined marginal tax rate is 40.42% when adjusted for the
deductibility of state taxes. Thus, you would need to earn a taxable return of
7
<PAGE>
8.76% to receive after-tax income equal to the 5.22% tax-free yield
provided by Scudder Ohio Tax Free Fund for the 30-day period ended March 31,
1995. In other words, it would be necessary to earn $1,678 from a taxable
investment to equal $1,000 of tax-free income you receive from the Fund. The
yield levels of tax-free and taxable investments continually change. Before
investing in the Fund, you should compare its yield to the after-tax yield you
would receive from a comparable investment paying taxable income. For up-to-date
yield information on the Fund, shareholders can call SAIL, Scudder Automated
Information Line, for toll-free information at any time.
In addition, the Fund offers all the benefits of the Scudder Family of
Funds. Scudder, Stevens & Clark, Inc. manages a diverse family of pure
no-load(TM) funds and provides a wide range of services to help investors meet
their investment needs. Please refer to "Investment products and services" for
additional information.
Additional information about policies and investments
Investment restrictions
The Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk.
The Fund may not borrow money except as a temporary measure for
extraordinary or emergency purposes or except in connection with reverse
repurchase agreements, and may not make loans except through the purchase of
debt obligations or through repurchase agreements.
Scudder Ohio Tax Free Fund is a non-diversified fund (except to the extent
diversification is required for federal income tax purposes).
The Fund may invest more than 25% of its assets in industrial development
or other private activity bonds. For purposes of the Fund's investment
limitation regarding concentration of investments in any one industry, all such
bonds ultimately payable by companies within the same industry will be
considered as if they were issued by issuers in the same industry.
At least 80% of the Fund's net assets is normally invested in Ohio
municipal securities.
When the Adviser determines that market conditions warrant, the Fund may,
for temporary defensive purposes, invest more than 20% of its net assets in
taxable securities.
In addition, as a matter of nonfundamental policy, the Fund may not invest
more than 10% of its total assets, in the aggregate, in repurchase agreements
maturing in more than seven days, restricted securities or securities which are
not readily marketable. The Fund may not invest more than 5% of its net assets
in restricted securities, and will not invest more than 25% of its assets in
Ohio municipal securities which are secured by revenues from health facilities,
toll roads, ports and airports, or colleges and universities. The Fund does not
expect to invest in non-publicly offered securities.
Up to 20% of the Fund's assets may be held in cash or invested in
short-term taxable investments, including repurchase agreements, U.S. Government
obligations and other money market instruments.
A complete description of these and other policies and restrictions is
contained under "Investment Restrictions" in the Fund's Statement of Additional
Information.
Investing in Ohio
The Fund is more susceptible to factors adversely affecting issuers of Ohio
municipal securities than is a comparable municipal bond fund that does not
emphasize these issuers to this degree. Ohio encountered, successfully dealt
with, and abated some financial difficulties in prior years and may, as may any
state, face some long-term problems in certain regions of the State and in
8
<PAGE>
certain sectors of its economy, which continues to rely in part on durable goods
manufacturing, largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. For additional information about the
Ohio economy, see the Fund's Statement of Additional Information dated August 1,
1995.
When-issued securities
The Fund may purchase securities on a when-issued or forward delivery
basis, for payment and delivery at a later date. The price and yield are
generally fixed on the date of commitment to purchase. During the period between
purchase and settlement, no interest accrues to the Fund. At the time of
settlement, the market value of the security may be more or less than the
purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, the
Fund may enter into repurchase agreements with selected banks and
broker/dealers. Under a repurchase agreement, the Fund acquires securities,
subject to the seller's agreement to repurchase at a specified time and price.
Income from repurchase agreements will be taxable when distributed to
shareholders.
Stand-by commitments
To facilitate liquidity, the Fund may enter into "stand-by commitments"
permitting it to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost to the Fund, and
any costs would be, in any event, limited to no more than 0.50% of the value of
the total assets of the Fund. Any such costs may, however, reduce yield.
Third party puts
The Fund may purchase long-term fixed rate bonds that have been coupled
with an option granted by a third party financial institution allowing the Fund
at specified intervals to tender (or "put") its bonds to the institution and
receive the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps.
Variable rate demand instruments
The 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 Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent.
Municipal lease obligations
The Fund may invest in municipal lease obligations and participation
interests in such obligations. These obligations, which may take the form of a
lease, an installment purchase contract or a conditional sales contract, are
issued by state and local governments and authorities to acquire land and a wide
variety of equipment and facilities. Generally, the Fund will not hold such
obligations directly, but will purchase a certificate of participation or other
participation interest in a municipal obligation from a bank or other financial
intermediary. A participation interest gives the Fund a proportionate interest
in the underlying obligation.
Indexed securities
The Fund may invest in indexed securities, the value of which is linked to
currencies, interest rates, commodities, indices or other financial indicators
("reference instruments"). The interest rate or (unlike most fixed-income
securities) the principal amount payable at maturity of an indexed security may
be increased or decreased, depending on changes in the value of the reference
instrument.
Strategic Transactions and derivatives
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
9
<PAGE>
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of the Fund's
portfolio or to enhance potential gain. These strategies may be executed through
the use of derivative contracts. Such strategies are generally accepted as a
part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect
against possible changes in the market value of securities held in or to be
purchased for the Fund's portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect the Fund's unrealized gains in the value
of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. Some Strategic
Transactions may also be used to enhance potential gain although no more than 5%
of the Fund's assets will be committed to Strategic Transactions entered into
for non-hedging purposes. Any or all of these investment techniques may be used
at any time and in any combination, and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes. Please refer to "Risk
factors--Strategic Transactions and derivatives" for more information.
Risk factors
The Fund's risks are determined by the nature of the securities held and
the portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Fund may use from time to time.
Non-diversified investment company. As a "non-diversified" investment
company, the Fund may invest a greater proportion of its assets in the
securities of a smaller number of issuers. The investment of a large percentage
of the Fund's assets in the securities of a small number of issuers may cause
the Fund's share price to fluctuate more than that of a diversified investment
company.
Investing in Ohio. If either Ohio or any of its local governmental entities
were to be unable to meet its financial obligations, the income derived by the
Fund, its net asset value or liquidity and the ability to preserve or realize
appreciation of the Fund's capital could be adversely affected.
10
<PAGE>
Since the Fund will invest primarily in securities of Ohio issuers,
political and economic factors affecting Ohio could affect the creditworthiness
and the value of the securities in its portfolio. The Ohio economy, while
diversifying more into the service and other non-manufacturing areas, 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 in Ohio, 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 15% 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 four years the State rates were below the national
rates (5.5% versus 6.1% in 1994). The unemployment rate and its effects vary
among geographic areas of the State. Future national, regional or statewide
economic difficulties, and the resulting impact on State or local government
finances generally, could adversely affect the market value of Ohio municipal
securities held in the portfolio of the Fund or the ability of particular
obligors to make timely payments of debt service on those obligations. See
"Investing in Ohio" in the Fund's Statement of Additional Information for
further details about the risks of investing in Ohio obligations.
Debt securities. The Fund may invest in securities rated below Baa by
Moody's or BBB by S&P or Fitch. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. Securities
rated below investment-grade are commonly referred to as "junk bonds" and
involve greater price volatility and higher degrees of speculation with respect
to the payment of principal and interest than higher quality fixed-income
securities. The market prices of such lower-rated debt securities may decline
significantly in periods of general economic difficulty. In addition, the
trading market for these securities is generally less liquid than for higher
rated securities and the Fund may have difficulty disposing of these securities
at the time it wishes to do so. The lack of a liquid secondary market for
certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing its portfolio and calculating
its net asset value.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of securities may be restricted, or the
value of the securities may decline before the Fund is able to dispose of them.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities before being able to sell the
securities.
Third party puts. In connection with a third party put, the financial
institution granting the option does not provide credit enhancement, and
typically if there is a default on or significant downgrading of the bond or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Fund will be that of holding a long-term bond. Municipal lease
obligations.
Municipal lease obligations and participation interests in such obligations
frequently have risks distinct from those associated with general obligation or
revenue bonds. Municipal lease obligations are not secured by the governmental
issuer's credit, and if funds are not appropriated for lease payments, the lease
may terminate, with the possibility of default on the lease obligation and
(Continued on page 14)
11
<PAGE>
Purchases
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.
<S> <C> <C> <C>
Make checks payable o By Mail Send your completed and signed application and check
to "The Scudder
Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 1099 Hingham Street
Boston, MA Rockland, MA
02107-2291 02370-1052
o By Wire Please see Transaction information--Purchasing shares-- By
wire following these tables for details, including the ABA wire
transfer number. Then call 1-800-225-5163 for instructions.
o In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.
Make checks payable o By Mail Send a check with a Scudder investment slip, or with a letter of
to "The Scudder instruction including your account number and the complete Fund name,
Funds." to the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares--
By wire following these tables for details, including the ABA
wire transfer number.
o In Person Visit one of our Funds Centers to make an additional
investment in your Scudder fund account. Funds Center locations
are listed under Shareholder benefits.
o By Automatic You may arrange to make investments on a regular basis
Investment Plan through automatic deductions from your bank checking account.
($50 minimum) Please call 1-800-225-5163 for more information and an
enrollment form.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Exchanges and redemptions
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Exchanging Minimum investments: $1,000 to establish a new
shares account; $100 to exchange among existing accounts
<S> <C> <C>
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account
number you are exchanging from;
- your name(s) and address as they appear on
your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into; and
- your signature(s) as it appears on your account and a daytime
telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 1099 Hingham Street
Boston, MA 02107-2291 Rockland, MA 02370-1052
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM),
Scudder's Automated Information Line, call 1-800-343-2890
(24 hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$50,000 sent to your address of record.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem; and
- your signature(s) as it appears on your account and a daytime telephone
number.
A signature guarantee is required for redemptions over $50,000. See Transaction
information--Redeeming shares following these tables.
o By Automatic You may arrange to receive automatic cash payments periodically if the value of
Withdrawal Plan your account is $10,000 or more. Call 1-800-225-5163 for more information and
an enrollment form.
------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
(Continued from page 11)
significant loss to the Fund. Although "non-appropriation" obligations are
secured by the leased property, disposition of that property in the event of
foreclosure might prove difficult, time consuming and costly. In addition, the
tax treatment of such obligations in the event of non-appropriation is unclear.
In evaluating the credit quality of a municipal lease obligation that is
unrated, the Adviser will consider a number of factors including the likelihood
that the governmental issuer will discontinue appropriating funding for the
leased property. For more information please refer to the Fund's Statement of
Additional Information.
Indexed securities. Indexed securities may be positively or negatively
indexed, so that appreciation of the reference instrument may produce an
increase or a decrease in the interest rate or value at maturity of the
security. In addition, the change in the interest rate or value at maturity of
the security may be some multiple of the change in the value of the reference
instrument. Thus, in addition to the credit risk of the security's issuer, the
Fund will bear the market risk of the reference instrument.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets.
As a result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position.
Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.
Distribution and performance information
Dividends and capital gains distributions The Fund's dividends from net
investment income are declared daily and distributed monthly. The Fund intends
14
<PAGE>
to distribute net realized capital gains after utilization of capital loss
carryforwards, if any, in November or December to prevent application of federal
excise tax, although an additional distribution may be made within three months
of the Fund's fiscal year end, if necessary. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. According to preference, shareholders may receive
distributions in cash or have them reinvested in additional shares of the Fund.
Distributions derived from interest on Ohio municipal securities are not
subject to regular federal income taxes, except for the possible applicability
of the federal alternative minimum tax. For federal income tax purposes, a
portion of the Fund's income may be taxable to shareholders as ordinary income.
Long-term capital gains distributions, if any, are taxable as long-term capital
gains for federal income tax purposes, regardless of the length of time
shareholders have owned their shares. Short-term capital gains and any other
taxable income distributions are taxable as ordinary income. Distributions of
tax-exempt income are taken into consideration in computing the portion, if any,
of Social Security and railroad retirement benefits subject to federal and, in
some cases, state taxes. Under Ohio law, provided that at all times the Fund
qualifies as a regulated investment company for federal income tax purposes and
at least 50% 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 and agencies and instrumentalities of the State or its political
subdivisions ("Ohio Obligations") or similar obligations of other states or
their subdivisions, (i) individuals otherwise subject to the Ohio personal
income tax will not be subject to such tax on dividends paid by the Fund to the
extent such dividends are properly attributable to interest payments on Ohio
Obligations; and (ii) dividends paid by the Fund will be excluded from the net
income base for purposes of the Ohio corporation franchise tax to the extent
such dividends are excluded from gross income for federal income tax purposes or
are properly attributable to interest payments on Ohio Obligations. However, the
Fund's shares will be included in the net worth base for purposes of the Ohio
corporation franchise tax.
The Fund ordinarily provides income that is 100% free from Ohio personal
income tax and regular federal income tax. However, income from repurchase
agreements and gains from certain Strategic Transactions are taxable. Some of
the Fund's interest income may be treated as a tax preference item that may
subject an individual investor to liability (or increased liability) under the
alternative minimum tax, depending upon an investor's particular situation.
However, at least 80% of the Fund's net assets will normally be invested in Ohio
municipal securities whose interest income is not treated as a tax preference
item under the individual alternative minimum tax. Tax-exempt income may also
subject a corporate investor to liability (or increased liability) under the
corporate alternative minimum tax.
The Fund sends detailed tax information to shareholders about the amount
and type of its distributions by January 31 of the following year.
Performance information
From time to time, quotations of the Fund's performance may be
included in advertisements, sales literature, or shareholder reports. All
performance figures are historical, show the performance of a hypothetical
investment and are not intended to indicate future performance. The "SEC yield"
of the Fund is an annualized expression of the net income generated by the Fund
over a specified 30-day (one month) period, as a percentage of the Fund's share
15
<PAGE>
price on the last day of that period. This yield is calculated according to
methods required by the Securities and Exchange Commission (the "SEC"), and
therefore may not equate to the level of income paid to shareholders. The Fund's
"tax-equivalent yield" is calculated by determining the rate of return that
would have to be achieved on a fully taxable investment to produce the after-tax
equivalent of the Fund's yield, assuming certain tax brackets for a Fund
shareholder. Yields are expressed as annualized percentages. "Total return" is
the change in value of an investment in the Fund for a specified period. The
"average annual total return" of the Fund is the average annual compound rate of
return of an investment in the Fund assuming the investment has been held for
one year, five years and the life of the Fund as of a stated ending date.
"Cumulative total return" represents the cumulative change in value of an
investment in the Fund for various periods. All types of total return
calculations assume that all dividends and capital gains distributions during
the period were reinvested in shares of the Fund. Performance will vary based
upon, among other things, changes in market conditions and the level of the
Fund's expenses.
Fund organization
Scudder Ohio Tax Free Fund is a series of Scudder State Tax Free Trust (the
"Trust"), an open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as a
Massachusetts business trust in May 1983.
The Fund's activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Trustees, changing
fundamental investment policies or approving an investment management contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Trustee as if Section 16(c) of the 1940 Act were
applicable.
Investment adviser
The Fund retains the investment management firm of Scudder, Stevens &
Clark, Inc., a Delaware corporation, to manage the Fund's daily investment and
business affairs subject to the policies established by the Board of Trustees.
The Trustees have overall responsibility for the management of the Fund under
Massachusetts law.
The Adviser receives monthly an investment management fee for its services,
which fee equals approximately 0.60% of the Fund's average daily net assets on
an annual basis.
The Adviser has agreed to maintain the annualized expenses of the Fund at
not more than 0.50% of the average daily net assets of the Fund until July 31,
1996. For the fiscal year ended March 31, 1995, the Adviser received an
investment management fee of 0.19% of the Fund's average daily net assets on an
annual basis.
All of the Fund's expenses are paid out of gross investment income.
Shareholders pay no direct charges or fees for investment services.
Scudder, Stevens & Clark, Inc. is located at Two International Place,
Boston, Massachusetts.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts
02107-2291, a wholly-owned subsidiary of the Adviser, is the transfer,
shareholder servicing and dividend-paying agent for the Fund.
Underwriter
Scudder Investor Services, Inc., a wholly-owned subsidiary of the Adviser,
is the Fund's principal underwriter. Scudder Investor Services, Inc. confirms,
16
<PAGE>
as agent, all purchases of shares of the Fund. Scudder Investor Relations is a
telephone information service provided by Scudder Investor Services, Inc.
Custodian
State Street Bank and Trust Company is the Fund's custodian.
Fund accounting agent
Scudder Fund Accounting Corporation, a wholly-owned subsidiary of the
Adviser, is responsible for determining the daily net asset value per share and
maintaining the general accounting records of the Fund.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent in Boston receives the purchase request in good order.
Purchases are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. Checks must be drawn on or payable through a U.S. bank. If
you purchase shares by check and redeem them within seven business days of
purchase, the Fund may hold redemption proceeds until the purchase check has
cleared. If you purchase shares by federal funds wire, you may avoid this delay.
Redemption or exchange requests by telephone prior to the expiration of the
seven-day period will not be accepted.
By wire. To open a new account by wire, first call Scudder at
1-800-225-5163 to obtain an account number. A representative will instruct you
to send a completed, signed application to the transfer agent in Boston.
Accounts cannot be opened without a completed, signed application and a Scudder
fund account number. Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
-- the name of the fund in which the money is to be invested,
-- the account number of the fund, and
-- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire. By exchange. Your new account will have the same registration
and address as your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
Redeeming shares
The Fund allows you to redeem shares (i.e., sell them back to the Fund)
without redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If
you elected telephone redemption to your bank on your application, you can call
to request that federal funds be sent to your authorized bank account. If you
did not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
17
<PAGE>
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until
the Fund's transfer agent has received your completed and signed application.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
Signature guarantees. For your protection and to prevent fraudulent
redemptions, on written redemption requests in excess of $50,000 we require an
original signature and an original signature guarantee for each person in whose
name the account is registered. (The Fund reserves the right, however, to
require a signature guarantee for all redemptions.) You can obtain a signature
guarantee from most banks, credit unions or savings associations, or from
broker/dealers, municipal securities broker/dealers, government securities
broker/dealers, national securities exchanges, registered securities
associations or clearing agencies deemed eligible by the Securities and Exchange
Commission. Signature guarantees by notaries public are not acceptable.
Redemption requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. For more information, please call
1-800-225-5163.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and
the right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If 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.
Share price
Purchases and redemptions, including exchanges, are made at net asset
value. Scudder Fund Accounting Corporation determines net asset value per share
as of the close of regular trading on the New York Stock Exchange (the
"Exchange"), normally 4 p.m. eastern time, on each day the Exchange is open for
trading. Net asset value per share is calculated by dividing the value of total
Fund assets, less all liabilities, by the total number of shares outstanding.
Processing time
All purchase and redemption requests must be received in good order by the
Fund's transfer agent in Boston. Those requests received by the close of regular
trading on the Exchange are executed at the net asset value per share calculated
at the close of trading that day. Purchase and redemption requests received
after the close of regular trading on the Exchange will be executed the
following business day. Purchases made by federal funds wire before noon eastern
time will begin earning income that day; all other purchases received before the
close of regular trading on the Exchange will begin earning income the next
18
<PAGE>
business day. Redeemed shares will earn income on the day on which the
redemption request is executed.
If you wish to make a purchase of $500,000 or more, you should notify
Scudder Investor Relations by calling 1-800-225-5163.
The Fund will normally send redemption proceeds within one
business day following the redemption request, but may take up to seven business
days (or longer in the case of shares recently purchased by check).
Short-term trading
Purchases and sales should be made for long-term investment purposes
only. The Fund and Scudder Investor Services, Inc. each reserves the right to
restrict purchases of Fund shares (including exchanges) when a pattern of
frequent purchases and sales made in response to short-term fluctuations in the
Fund's share price appears evident.
Tax information
A redemption of shares, including an exchange into another Scudder fund, is
a sale of shares and may result in a gain or loss for income tax purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. The Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
The Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $1,000, which
amount may be changed by the Board of Trustees. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
sub-minimum accounts, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account.
Reductions in value that result solely from market activity will not trigger an
involuntary redemption. The Fund will mail the proceeds of the redeemed account
to the shareholder. The shareholder may restore the share balance to $1,000 or
more during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is
made at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
Shareholder benefits
Experienced professional management
Scudder, Stevens & Clark, Inc., one of the nation's most experienced
investment management firms, actively manages your Scudder fund investment.
Professional management is an important advantage for investors who do not have
the time or expertise to invest directly in individual securities.
A team approach to investing
Scudder Ohio Tax Free Fund is managed by a team of Scudder investment
professionals, who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
19
<PAGE>
securities for the Fund's portfolio. They are supported by Scudder's large
staff of economists, research analysts, traders and other investment
specialists. We believe our team approach benefits Fund investors by bringing
together many disciplines and leveraging Scudder's extensive resources.
Lead Portfolio Manager Donald C. Carleton assumed responsibilities for the
Fund's day-to-day management and investment strategies in January 1995. Mr.
Carleton has over 25 years of investment management experience and has worked at
Scudder since 1983. Philip G. Condon, Portfolio Manager, became a member of the
team in 1987 and has worked at Scudder since 1983. Mr. Condon has 15 years of
experience in municipal investing and portfolio management.
SAIL(TM)--Scudder Automated Information Line
For touchtone access to account information, prices and yields, or to
perform transactions in existing Scudder fund accounts, shareholders can call
Scudder's Automated Information Line (SAIL) at 1-800-343-2890. During periods of
extreme economic or market changes, or other conditions, it may be difficult for
you to effect telephone transactions in your account. In such an event you
should write to the Fund; please see "How to contact Scudder" for the address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net
asset value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in
additional Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes. To reduce the volume of mail you receive, only one copy of
most Fund reports, such as the Fund's Annual Report, may be mailed to your
household (same surname, same address). Please call 1-800-225-5163 if you wish
to receive additional shareholder reports.
Newsletters
Four times a year, Scudder sends you At the Helm, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person,
Scudder Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston,
Chicago, Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San
Francisco and Scottsdale.
20
<PAGE>
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
Scudder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
o Scudder No-Fee IRA
o 401(k) Plans
o Profit Sharing and Money Purchase Pension Plans (Keogh Plans)
o 403(b) Plans
o SEP-IRA
o Scudder Horizon Plan (a variable annuity)
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian
for some of these plans and is paid an annual fee for some of the above
retirement plans. For information about establishing a Scudder No-Fee IRA,
SEP-IRA, Profit Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon
Plan, please call 1-800-225-2470. For information about 401(k)s or 403(b)s
please call 1-800-323-6105. To effect transactions in existing IRA, SEP-IRA,
Profit Sharing or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life
Insurance Company (in New York State, Intramerica Life Insurance Company [S
1802]). The contract is offered by Scudder Insurance Agency, Inc. (in New York
State, Nevada and Montana, Scudder Insurance Agency of New York, Inc.). CNL,
Inc. is the Principal Underwriter. Scudder Horizon Plan is not available in all
states.
21
<PAGE>
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
College of Business Administration
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; General Partner, TL Ventures
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
* Scudder, Stevens & Clark, Inc.
22
<PAGE>
<TABLE>
<CAPTION>
Investment products and services
<S> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder GNMA Fund
Scudder U.S. Treasury Money Fund Scudder Income Fund
Tax free money market+ Scudder International Bond Fund
Scudder Tax Free Money Fund Scudder Short Term Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Global Income Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Fund
Scudder Managed Municipal Bonds Scudder Global Small Company Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Value Fund
Scudder Balanced Fund The Japan Fund
Scudder Growth and Income Fund
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state and local taxes. *Not available
in all states. +++A no-load variable annuity contract provided by Charter
National Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens &
Clark, Inc., are traded on various stock exchanges. ++For information on Scudder
Treasurers Trust(TM), an institutional cash management service that utilizes
certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call:
1-800-541-7703.
23
<PAGE>
<TABLE>
<CAPTION>
How to contact Scudder
Account Service and Information: Please address all correspondence to:
<S> <C> <C>
For existing account service Scudder Investor Relations The Scudder Funds
and transactions 1-800-225-5163 P.O. Box 2291
Boston, Massachusetts
02107-2291
For account updates, prices, Scudder Automated
yields, exchanges and Information Line (SAIL)
redemptions 1-800-343-2890
Investment Information: Or Stop by a Scudder Funds Center:
To receive information about Scudder Investor Relations Many shareholders enjoy the personal, one-on-one service
the Scudder funds, for 1-800-225-2470 of the Scudder Funds Centers. Check for a Funds Center near you--they
additional applications and can be found in the following cities:
prospectuses, or for investment
questions
For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago SanDiego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*, funds designed
institutional cash management service for corporations, to meet the broad investment management and service
non-profit organizations and trusts which utilizes needs of banks and other institutions, call: 1-800-854-8525.
certain portfolios of Scudder Fund, Inc.* ($100,000
minimum), call: 1-800-541-7703.
</TABLE>
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
<PAGE>
This prospectus sets forth concisely the information about Scudder Pennsylvania
Tax Free Fund, a series of Scudder State Tax Free Trust, an open-end management
investment company, that a prospective investor should know before investing.
Please retain it for future reference.
If you require more detailed information, a Statement of Additional Information
dated August 1, 1995, as amended from time to time, may be obtained without
charge by writing Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103 or calling 1-800-225-2470. The Statement, which is
incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Contents--see page 4.
Scudder
Pennsylvania
Tax Free Fund
Prospectus
August 1, 1995
A pure no-load(TM) (no sales charges) mutual fund series which seeks to provide
double tax-free income, exempt from both Pennsylvania personal income tax and
regular federal income tax.
<PAGE>
Expense information
How to compare a Scudder pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Pennsylvania Tax Free Fund (the "Fund"). By
reviewing this table and those in other mutual funds' prospectuses, you can
compare the Fund's fees and expenses with those of other funds. With Scudder's
pure no-load(TM) funds, you pay no commissions to purchase or redeem shares, or
to exchange from one fund to another. As a result, all of your investment goes
to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended March 31, 1995.
Investment management fee (after waiver) 0.16%**
12b-1 fees NONE
Other expenses 0.34%**
-------
Total Fund operating expenses 0.50%**
=======
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its
net investment income to shareholders. (As noted above, the Fund has no
redemption fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$5 $16 $28 $63
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than
those shown.
* You may redeem by writing or calling the Fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."
** Until July 31, 1996, the Adviser has agreed to waive a portion of its fee
to the extent necessary so that the total annualized expenses of the Fund
do not exceed 0.50% of average daily net assets. If the Adviser had not
done so, Fund expenses would have been: investment management fee 0.60%,
other expenses 0.34% and total operating expenses 0.94% for the fiscal year
ended March 31, 1995. To the extent that expenses fall below 0.50% during
the fiscal year, the Adviser reserves the right to recoup, during the
fiscal year incurred, amounts reimbursed or waived during the period, but
only to the extent that the Fund's expenses do not exceed 0.50%.
2
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
SCUDDER PENNSYLVANIA TAX FREE FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION
DERIVED FROM THE FINANCIAL STATEMENTS. IF YOU WOULD LIKE MORE DETAILED INFORMATION CONCERNING THE FUND'S PERFORMANCE. A
COMPLETE PORTFOLIO LISTING AND AUDITED FINANCIAL STATEMENTS ARE AVAILABLE IN THE FUND'S ANNUAL REPORT DATED MARCH 31, 1995 AND
MAY BE OBTAINED WITHOUT CHARGE BY WRITING OR CALLING SCUDDER INVESTOR SERVICES, INC.
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
------------------------------------------------------------------ TO MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..................... $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80 $12.00
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (a)............... .73 .75 .76 .77 .82 .84 .79 .65
Net realized and unrealized gain
(loss) on investment
transactions.......................... .15 (.36) .87 .52 .08 .20 .40 (.26)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations.......... .88 .39 1.63 1.29 .90 1.04 1.19 .39
------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income.............. (.73) (.75) (.76) (.77) (.82) (.84) (.85) (.59)
From net realized gains on
investment transactions............... (.03) (.09) (.21) (.07) -- (.01) (.06) --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions....................... (.76) (.84) (.97) (.84) (.82) (.85) (.91) (.59)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period............ $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (b)...................... 7.09 2.70 13.19 10.70 7.58 8.75 11.00 3.39**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)............................ 72 74 61 39 26 18 11 5
Ratio of operating expenses, net to
average daily net assets (%) (a)........ .50 .50 .50 .50 .50 .50 .50 .50*
Ratio of net investment income to
average daily net assets (%)............ 5.74 5.42 5.79 6.05 6.67 6.78 7.09 7.16*
Portfolio turnover rate (%)............... 26.2 17.4 29.2 11.2 7.8 2.0 13.5 97.6*
(a) Reflects a per share amount of
expenses, exclusive of
management fees, reimbursed
by the Adviser of.................... $ -- $ -- $ -- $ -- $ .02 $ .06 $ .15 $ .43
Reflects a per share amount of
management fees and other
fees not imposed of.................. $ .06 $ .06 $ .07 $ .08 $ .07 $ .07 $ .07 $ .05
Operating expense ratio
including expenses reimbursed,
management fee and other
expenses not imposed (%)............. .94 .95 1.02 1.13 1.43 1.84 2.43 5.75*
<FN>
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
3
<PAGE>
A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $90 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
Scudder Pennsylvania Tax Free Fund
Investment objective
* income exempt from Pennsylvania personal income tax and regular federal
income tax
Investment characteristics
* primarily long-term investment-grade municipal securities tax-exempt in
Pennsylvania
* active professional management
* dividends declared daily and paid monthly
Contents
Investment objective and policies 5
Tax-exempt vs. taxable income 6
Why invest in the Fund? 7
Additional information about policies
and investments 8
Distribution and performance information 10
Purchases 12
Exchanges and redemptions 13
Fund organization 14
Transaction information 15
Shareholder benefits 17
Trustees and Officers 20
Investment products and services 21
How to contact Scudder 22
4
<PAGE>
Investment objective and policies
Scudder Pennsylvania Tax Free Fund (the "Fund"), a non-diversified series of
Scudder State Tax Free Trust, seeks to provide Pennsylvania taxpayers with
income exempt from both Pennsylvania personal income tax and regular federal
income tax. Shares of the Fund are also not subject to Pennsylvania personal
property tax, to the extent the Fund's assets would not be subject to such tax
if held directly by individual shareholders. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal securities.
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a shareholder vote. Shareholders will
receive written notice of any changes in the Fund's objective. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
Quality
Normally, at least 75% of the intermediate- and long-term securities purchased
by the Fund will be investment-grade municipal securities which are those rated
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A,
or BBB by Standard & Poor's ("S&P") or Fitch Investors Service, Inc. ("Fitch"),
or unrated securities judged by the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (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 year ended March 31, 1995, the average monthly dollar-weighted market
value of the bonds in the Fund's portfolio were as follows: 60% rated AAA, 12%
AA, 10% A, 15% BBB and 3% BB. The bonds are rated by Moody's, S&P or Fitch, or
of equivalent quality as determined by the Adviser.
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.
Investments
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
5
<PAGE>
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.
Tax-exempt vs. taxable income
-------------------------------------------------------------------------------
Tax Free Yields and Corresponding Taxable Equivalents. The table below shows
Pennsylvania taxpayers what an investor would have to earn from a comparable
taxable investment to equal Scudder Pennsylvania Tax Free Fund's double
tax-free yield. Today many investors may find that federal tax and Pennsylvania
personal income tax rates make Scudder Pennsylvania Tax Free Fund an attractive
alternative to investments paying taxable income.
<TABLE>
<CAPTION>
COMBINED TO EQUAL HYPOTHETICAL TAX-FREE
YIELDS OF 5%, 7% AND 9%, A TAXABLE
INVESTMENT WOULD HAVE TO EARN*:
1995 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
----------
<S> <C> <C> <C> <C>
$23,351-56,550 30.02% 7.15% 10.00% 12.86%
56,551-117,950 32.93 7.45 10.44 13.42
117,951-256,500 37.79 8.04 11.25 14.47
OVER $256,500 41.29 8.52 11.92 15.33
JOINT RETURN
------------
$39,001-94,250 30.02% 7.15% 10.00% 12.86%
94,251-143,600 32.93 7.45 10.44 13.42
143,601-256,500 37.79 8.04 11.25 14.47
OVER $256,500 41.29 8.52 11.92 15.33
</TABLE>
* These illustrations assume a marginal federal income tax rate of 28% to
39.6%, an effective Pennsylvania personal income tax rate of 2.80% for 1995
and that the federal alternative minimum tax is not applicable. Upper
income individuals may be subject to an effective federal income tax rate
in excess of the applicable marginal rate as a result of the phase-out of
personal exemptions and itemized deductions made permanent by the Revenue
Reconciliation Act of 1993. Individuals subject to these phase-out
provisions would have to invest in taxable securities with a yield in
excess of those shown on the table in order to achieve an after-tax yield
equivalent to the yield on a comparable tax-exempt security.
6
<PAGE>
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.
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 that 100% of its portfolio securities will be
Pennsylvania municipal securities. The Fund may also hold cash or invest its
assets in taxable securities.
The Fund may invest in stand-by commitments, third party puts, when-issued or
forward delivery securities, and enter into repurchase agreements and reverse
repurchase agreements, which may involve certain expenses and risks, including
credit risks. These securities and techniques are not expected to comprise a
major portion of the Fund's investments. See "Additional information about
policies and investments" for more information about these investment
techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
Why invest in the Fund?
The Fund is designed for investors seeking double tax-free income--exempt both
from Pennsylvania personal income tax and regular federal income tax. Because
the Fund is intended for investors subject to Pennsylvania personal income tax
and regular federal income tax, it may not be appropriate for all investors and
is not available in all states.
As illustrated by the chart on the preceding page, depending on your tax bracket
and individual situation, you may earn a substantially higher after-tax return
from the Fund than from comparable investments that pay income subject to both
Pennsylvania state personal income tax and regular federal income tax. For
example, if your regular federal marginal tax rate is 36% and your Pennsylvania
tax rate is 2.8%, your effective combined marginal tax rate is 37.8% when
adjusted for the deductibility of state taxes. Thus, you would need to earn a
taxable return of 8.50% to receive after-tax income equal to the 5.29% tax-free
yield provided by Scudder Pennsylvania Tax Free Fund for the 30-day period ended
March 31, 1995. In other words, it would be necessary to earn $1,607 from a
taxable investment to equal $1,000 of tax-free income you receive from the Fund.
The yield levels of tax-free and taxable investments continually change. Before
investing in the Fund, you should compare its yield to the after-tax yield you
would receive from a comparable investment paying taxable income. For up-to-date
yield information on the Fund, shareholders can call SAIL, Scudder Automated
Information Line, for toll-free information at any time.
In addition, the Fund offers all the benefits of the Scudder Family of Funds.
Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-load(TM)
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.
7
<PAGE>
Additional information about policies and investments
Investment restrictions
The Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk.
The Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase agreements,
and may not make loans except through the purchase of debt obligations or
through repurchase agreements.
Scudder Pennsylvania Tax Free Fund is a non-diversified fund (except to the
extent diversification is required for federal income tax purposes).
The Fund may invest more than 25% of its assets in industrial development or
other private activity bonds. For purposes of the Fund's investment limitation
regarding concentration of investments in any one industry, all such bonds
ultimately payable by companies within the same industry will be considered as
if they were issued by issuers in the same industry.
At least 80% of the Fund's net assets is normally invested in Pennsylvania
municipal securities.
When the Adviser determines that market conditions warrant, the Fund may, for
temporary defensive purposes, invest more than 20% of its net assets in taxable
securities.
In addition, as a matter of nonfundamental policy, the Fund may not invest more
than 10% of its total assets, in the aggregate, in restricted securities,
repurchase agreements maturing in more than seven days, and securities which are
not readily marketable. The Fund may not invest more than 5% of its net assets
in restricted securities, and will not invest more than 25% of its assets in
Pennsylvania municipal securities which are secured by revenues from health
facilities, toll roads, ports and airports. The Fund does not expect to invest
in non-publicly offered securities.
Up to 20% of the Fund's assets may be held in cash or invested in short-term
taxable investments, including repurchase agreements, U.S. Government
obligations and other money market instruments.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund's Statement of Additional
Information.
Investing in Pennsylvania
The Fund is more susceptible to factors adversely affecting issuers of
Pennsylvania municipal securities than is a comparable municipal bond fund that
does not emphasize these issuers to this degree. Pennsylvania encountered some
financial difficulties in prior years and may, as may any state, face some
long-term problems in certain regions of the State and in certain sectors of the
economy, which is concentrated in agriculture, heavy industry, medical and
health services, financial institutions, education and trade. For additional
information about the Pennsylvania economy, see the Fund's Statement of
Additional Information dated August 1, 1995.
When-issued securities
The Fund may purchase securities on a when-issued or forward delivery basis, for
payment and delivery at a later date. The price and yield are generally fixed on
the date of commitment to purchase. During the period between purchase and
settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, the Fund
may enter into repurchase agreements with selected banks and broker/dealers.
Under a repurchase agreement, the Fund acquires securities, subject to the
seller's agreement to repurchase at a specified time and price. Income from
repurchase agreements will be taxable when distributed to shareholders.
8
<PAGE>
Stand-by commitments
To facilitate liquidity, the Fund may enter into "stand-by commitments"
permitting it to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost to the Fund, and
any costs would be, in any event, limited to no more than 0.50% of the value of
the total assets of the Fund. Any such costs may, however, reduce yield.
Third party puts
The Fund may purchase long-term fixed rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Fund at
specified intervals to tender (or "put") its bonds to the institution and
receive the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps.
Variable rate demand instruments
The 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 Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent.
Municipal lease obligations
The Fund may invest in municipal lease obligations and participation interests
in such obligations. These obligations, which may take the form of a lease, an
installment purchase contract or a conditional sales contract, are issued by
state and local governments and authorities to acquire land and a wide variety
of equipment and facilities. Generally, the Fund will not hold such obligations
directly, but will purchase a certificate of participation or other
participation interest in a municipal obligation from a bank or other financial
intermediary. A participation interest gives the Fund a proportionate interest
in the underlying obligation.
Risk factors
The Fund's risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Fund may use from time to time.
Non-diversified investment company. As a "non-diversified" investment company,
the Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers. The investment of a large percentage of the Fund's
assets in the securities of a small number of issuers may cause the Fund's share
price to fluctuate more than that of a diversified investment company.
Investing in Pennsylvania. If either Pennsylvania or any of its local
governmental entities were to be unable to meet its financial obligations, the
income derived by the Fund, its net asset value or liquidity and the ability to
preserve or realize appreciation of the Fund's capital could be adversely
affected. Since the Fund will invest primarily in securities of Pennsylvania
issuers, political and economic factors affecting Pennsylvania could affect the
creditworthiness and the value of the securities in its portfolio. See
"Investing in Pennsylvania" in the Fund's Statement of Additional Information
for further details about the risks of investing in Pennsylvania obligations.
Debt securities. The Fund may invest in securities rated below Baa by Moody's or
BBB by S&P or Fitch. Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics. Securities rated below
9
<PAGE>
investment-grade are commonly referred to as "junk bonds" and involve greater
price volatility and higher degrees of speculation with respect to the payment
of principal and interest than higher quality fixed-income securities. The
market prices of such lower-rated debt securities may decline significantly in
periods of general economic difficulty. In addition, the trading market for
these securities is generally less liquid than for higher rated securities and
the Fund may have difficulty disposing of these securities at the time it wishes
to do so. The lack of a liquid secondary market for certain securities may also
make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing its portfolio and calculating its net asset value.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of securities may be restricted, or the
value of the securities may decline before the Fund is able to dispose of them.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities before being able to sell the
securities.
Third party puts. In connection with a third party put, the financial
institution granting the option does not provide credit enhancement, and
typically if there is a default on or significant downgrading of the bond or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Fund will be that of holding a long-term bond.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Fund. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property. For more information
please refer to the Fund's Statement of Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Fund's dividends from net investment income are declared daily and
distributed monthly. The Fund intends to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of federal excise tax, although an additional
distribution may be made within three months of the Fund's fiscal year end, if
necessary. Any dividends or capital gains distributions declared in October,
November or December with a record date in such a month and paid during the
following January will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared. According
to preference, shareholders may receive distributions in cash or have them
reinvested in additional shares of the Fund.
Distributions derived from interest on Pennsylvania municipal securities are not
subject to regular federal income taxes, except for the possible applicability
10
<PAGE>
of the federal alternative minimum tax. For federal income tax purposes, a
portion of the Fund's income may be taxable to shareholders as ordinary income.
Long-term capital gains distributions, if any, are taxable as long-term capital
gains for federal income tax purposes, regardless of the length of time
shareholders have owned their shares. Short-term capital gains and any other
taxable income distributions are taxable as ordinary income. Distributions of
tax-exempt income are taken into consideration in computing the portion, if any,
of Social Security and railroad retirement benefits subject to federal and, in
some cases, state taxes.
Under Pennsylvania law, distributions paid by the Fund are exempt from
Pennsylvania personal income tax for individuals who reside in Pennsylvania to
the extent such distributions constitute dividends derived from interest
payments on Pennsylvania municipal securities or distributions of gain from the
sale of Pennsylvania municipal securities issued before February 1, 1994.
Other distributions, including capital gains not described in the preceding
sentence, are taxable. Dividends derived from interest payments on Pennsylvania
municipal securities or distributions of gain from the sale of Pennsylvania
municipal securities issued before February 1, 1994 are not included in the
Pennsylvania taxable income of a corporate shareholder subject to the
Pennsylvania corporate net income tax.
Based upon written advice received by the Fund from the counties in which
Harrisburg, Philadelphia and Pittsburgh are located, the Fund believes that
individual shareholders of the Fund who are subject to the personal property tax
levied by all Pennsylvania counties and cities that impose such a tax will be
exempt from such tax on their shares of the Fund to the extent that the Fund's
portfolio consists entirely of Pennsylvania municipal securities and certain
other obligations not subject to the personal property tax on the annual
assessment date. Corporations are not subject to Pennsylvania personal property
taxes.
Information will also be provided to individual Pennsylvania shareholders
regarding the portion of the value of their shares, if any, subject to
Pennsylvania personal property tax.
The Fund ordinarily provides income that is 100% free from Pennsylvania personal
income tax and regular federal income tax. However, income from repurchase
agreements is taxable.
Some of the Fund's interest income may be treated as a tax preference item that
may subject an individual investor to liability (or increased liability) under
the federal alternative minimum tax, depending upon an investor's particular
situation. However, at least 80% of the Fund's net assets will normally be
invested in Pennsylvania municipal securities whose interest income is not
treated as a tax preference item under the individual alternative minimum tax.
Tax-exempt income may also subject a corporate investor to liability (or
increased liability) under the corporate alternative minimum tax.
The Fund sends detailed tax information to shareholders about the amount and
type of its distributions by January 31 of the following year.
Performance information
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature, or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance. The "SEC yield" of the Fund is
an annualized expression of the net income generated by the Fund over a
specified 30-day (one month) period, as a percentage of the Fund's share price
on the last day of that period. This yield is calculated according to methods
required by the Securities and Exchange Commission (the "SEC"), and therefore
may not equate to the level of income
(Continued on page 14)
11
<PAGE>
Purchases
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.
<S> <C>
Make checks * By Mail Send your completed and signed application and check
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 1099 Hingham Street
Boston, MA Rockland, MA
02107-2291 02370-1052
* By Wire Please see Transaction information-Purchasing shares-
By wire following these tables for details, including the ABA wire
transfer number. Then call 1-800-225-5163 for instructions.
* In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums. See appropriate
plan literature.
Make checks * By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
* By Wire Please see Transaction information-Purchasing shares-
By wire following these tables for details, including the ABA wire
transfer number.
* In Person Visit one of our Funds Centers to make an additional investment in your
Scudder fund account. Funds Center locations are listed under Shareholder
benefits.
* By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Exchanges and redemptions
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Exchanging shares Minimum investments: $1,000 to establish a new account; $100 to exchange among existing accounts
<S> <C>
* By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
* By Mail
or Fax Print or type your instructions and include:
- the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into; and
- your signature(s) as it appears on your account and a daytime telephone
number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 1099 Hingham Street
Boston, MA 02107-2291 Rockland, MA 02370-1052
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Redeeming shares * By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may have redemption
proceeds sent to your predesignated bank account, or redemption proceeds of up
to $50,000 sent to your address of record.
* By Mail
or Fax Send your instructions for redemption to the appropriate address or fax number
above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem; and
- your signature(s) as it appears on your account and a daytime telephone
number.
A signature guarantee is required for redemptions over $50,000. See Transaction
information-Redeeming shares following these tables.
* By Automatic You may arrange to receive automatic cash payments periodically if the value of
Withdrawal Plan your account is $10,000 or more. Call 1-800-225-5163 for more information and
an enrollment form.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
(Continued from page 11)
paid to shareholders. The Fund's "tax-equivalent yield" is calculated by
determining the rate of return that would have to be achieved on a fully taxable
investment to produce the after-tax equivalent of the Fund's yield, assuming
certain tax brackets for a Fund shareholder. Yields are expressed as annualized
percentages. "Total return" is the change in value of an investment in the Fund
for a specified period. The "average annual total return" of the Fund is the
average annual compound rate of return of an investment in the Fund assuming the
investment has been held for one year, five years and the life of the Fund as of
a stated ending date. "Cumulative total return" represents the cumulative change
in value of an investment in the Fund for various periods. All types of total
return calculations assume that all dividends and capital gains distributions
during the period were reinvested in shares of the Fund. Performance will vary
based upon, among other things, changes in market conditions and the level of
the Fund's expenses.
Fund organization
Scudder Pennsylvania Tax Free Fund is a series of Scudder State Tax Free Trust
(the "Trust"), an open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as a
Massachusetts business trust in May 1983.
The Fund's activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Trustees, changing
fundamental investment policies or approving an investment management contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Trustee as if Section 16(c) of the 1940 Act were
applicable.
Investment adviser
The Fund retains the investment management firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, to manage the Fund's daily investment and business
affairs subject to the policies established by the Board of Trustees. The
Trustees have overall responsibility for the management of the Fund under
Massachusetts law.
The Adviser receives monthly an investment management fee for its services,
which fee equals approximately 0.60% of the Fund's average daily net assets on
an annual basis.
The Adviser has agreed to maintain the annualized expenses of the Fund at not
more than 0.50% of the average daily net assets of the Fund until July 31, 1996.
For the year ended March 31, 1995, the Adviser received an investment management
fee of 0.16% of the Fund's average daily net assets on an annual basis.
All of the Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.
Scudder, Stevens & Clark, Inc. is located at
Two International Place, Boston, Massachusetts.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
wholly-owned subsidiary of the Adviser is the transfer, shareholder servicing
and dividend-paying agent for the Fund.
Underwriter
Scudder Investor Services, Inc., a wholly-owned subsidiary of the Adviser, is
the Fund's principal underwriter. Scudder Investor Services, Inc. confirms, as
agent, all purchases of shares of the Fund. Scudder Investor Relations is a
14
<PAGE>
telephone information service provided by Scudder Investor Services, Inc.
Custodian
State Street Bank and Trust Company is the Fund's custodian.
Fund accounting agent
Scudder Fund Accounting Corporation, a wholly-owned subsidiary of the Adviser,
is responsible for determining the daily net asset value per share and
maintaining the general accounting records of the Fund.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent in Boston receives the purchase request in good order.
Purchases are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
or exchange requests by telephone prior to the expiration of the seven-day
period will not be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent in Boston. Accounts cannot
be opened without a completed, signed application and a Scudder fund account
number. Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
-- the name of the fund in which the money is to be invested,
-- the account number of the fund, and
-- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By exchange. Your new account will have the same registration and address as
your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
Redeeming shares
The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
15
<PAGE>
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $50,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If 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.
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share as of
the close of regular trading on the New York Stock Exchange (the "Exchange"),
normally 4 p.m. eastern time, on each day the Exchange is open for trading. Net
asset value per share is calculated by dividing the value of total Fund assets,
less all liabilities, by the total number of shares outstanding.
Processing time
All purchase and redemption requests must be received in good order by the
Fund's transfer agent in Boston. Those requests received by the close of regular
trading on the Exchange are executed at the net asset value per share calculated
at the close of trading that day. Purchase and redemption requests received
after the close of regular trading on the Exchange will be executed the
following business day. Purchases made by federal funds wire before noon eastern
time will begin earning income that day; all other purchases received before the
close of regular trading on the Exchange will begin earning income the next
business day. Redeemed shares will earn income on the day on which the
redemption request is executed.
If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.
16
<PAGE>
The Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Short-term trading
Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to restrict
purchases of Fund shares (including exchanges) when a pattern of frequent
purchases and sales made in response to short-term fluctuations in the Fund's
share price appears evident.
Tax information
A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. The Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
The Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $1,000, which amount
may be changed by the Board of Trustees. The Fund reserves the right, following
60 days' written notice to shareholders, to redeem all shares in sub-minimum
accounts, including accounts of new investors, where a reduction in value has
occurred due to a redemption or exchange out of the account. Reductions in value
that result solely from market activity will not trigger an involuntary
redemption. The Fund will mail the proceeds of the redeemed account to the
shareholder. The shareholder may restore the share balance to $1,000 or more
during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
Shareholder benefits
Experienced professional management
Scudder, Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.
A team approach to investing
Scudder Pennsylvania Tax Free Fund is managed by a team of Scudder investment
professionals, who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by Scudder's large staff
of economists, research analysts, traders and other investment specialists. We
believe our team approach benefits Fund investors by bringing together many
17
<PAGE>
disciplines and leveraging Scudder's extensive resources.
Lead Portfolio Manager Donald C. Carleton assumed responsibilities for the
Fund's day-to-day management and investment strategies in January 1995. Mr.
Carleton has over 25 years of investment management experience and has worked at
Scudder since 1983. Philip G. Condon, Portfolio Manager, became a member of the
team in 1987 and has worked at Scudder since 1983. Mr. Condon has 15 years of
experience in municipal investing and portfolio management.
SAIL(TM)--Scudder Automated Information Line
For touchtone access to account information, prices and yields, or to perform
transactions in existing Scudder fund accounts, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890. During periods of extreme
economic or market changes, or other conditions, it may be difficult for you to
effect telephone transactions in your account. In such an event you should write
to the Fund; please see "How to contact Scudder" for the address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you At the Helm, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
18
<PAGE>
Scudder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
* Scudder No-Fee IRA
* 401(k) Plans
* Profit Sharing and Money Purchase Pension Plans (Keogh Plans)
* 403(b) Plans
* SEP-IRA
* Scudder Horizon Plan (a variable annuity)
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.
19
<PAGE>
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
College of Business Administration
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; General Partner, TL Ventures
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
20
<PAGE>
Investment products and services
<TABLE>
<CAPTION>
<S> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder GNMA Fund
Scudder U.S. Treasury Money Fund Scudder Income Fund
Tax free money market+ Scudder International Bond Fund
Scudder Tax Free Money Fund Scudder Short Term Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Global Income Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Fund
Scudder Managed Municipal Bonds Scudder Global Small Company Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Value Fund
Scudder Balanced Fund The Japan Fund
Scudder Growth and Income Fund
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++(a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including management fees and expenses, call or write for
a free prospectus. Read it carefully before you invest or send money. +A portion of the income from the tax-free funds
may be subject to federal, state and local taxes. *Not available in all states. +++A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc., are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust(TM), an institutional cash management service that utilizes certain portfolios of
Scudder Fund, Inc. ($100,000 minimum), call: 1-800-541-7703.
</TABLE>
21
<PAGE>
How to contact Scudder
<TABLE>
<CAPTION>
<S> <C>
Account Service and Information: Please address all correspondence to:
The Scudder Funds
For existing account service Scudder Investor Relations P.O. Box 2291
and transactions 1-800-225-5163 Boston, Massachusetts
02107-2291
For account updates, prices, Scudder Automated
yields, exchanges and Information Line (SAIL)
redemptions 1-800-343-2890
Investment Information: Or Stop by a Scudder Funds Center:
To receive information about Scudder Investor Relations Many shareholders enjoy the personal, one-on-one
the Scudder funds, for 1-800-225-2470 service of the Scudder Funds Centers. Check for a
additional applications and Funds Center near you-they can be found in the
prospectuses, or for following cities:
investment questions
For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*, funds
institutional cash management service for corporations, designed to meet the broad investment management and
non-profit organizations and trusts which utilizes service needs of banks and other institutions, call:
certain portfolios of Scudder Fund, Inc.* ($100,000 1-800-854-8525.
minimum), call: 1-800-541-7703.
</TABLE>
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
22
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
and
SCUDDER NEW YORK TAX FREE FUND
Two Pure No-Load(TM) (No Sales Charges) Mutual Funds
Specializing in the Management
of New York State Municipal
Security Portfolios
and
SCUDDER OHIO TAX FREE FUND
A Pure No-Load(TM) (No Sales Charges)
Mutual Fund Specializing in the
Management of an Ohio
Municipal Securities
Portfolio
and
SCUDDER PENNSYLVANIA TAX FREE FUND
A Pure No-Load(TM) (No Sales Charges)
Mutual Fund Specializing in the Management
of a Pennsylvania Municipal
Securities Portfolio
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1995
--------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder New
York Tax Free Money Fund and Scudder New York Tax Free Fund and the prospectuses
of Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund dated
August 1, 1995, as amended from time to time, a copy of which may be obtained
without charge by writing to Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objectives and Policies of Scudder New York Tax Free Money Fund...........................1
General Investment Objective and Policies of Scudder New York Tax Free Fund..................................3
General Investment Objective and Policies of Scudder Ohio Tax Free Fund......................................4
General Investment Objective and Policies of Scudder Pennsylvania Tax Free Fund..............................5
Management Strategies for Scudder New York Tax Free Fund and Scudder Ohio Tax Free Fund.....................11
Management Strategies for Scudder Pennsylvania Tax Free Fund................................................12
Investing in New York.......................................................................................12
Investing in Ohio...........................................................................................20
Investing in Pennsylvania...................................................................................23
Investments, Investment Techniques and Considerations Common to the Funds...................................27
Investment Restrictions of Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund..........33
Investment Restrictions of Scudder Ohio Tax Free Fund.......................................................37
Investment Restrictions of Scudder Pennsylvania Tax Free Fund...............................................39
PURCHASES............................................................................................................41
Additional Information About Opening An Account.............................................................41
Checks......................................................................................................41
Wire Transfer of Federal Funds..............................................................................41
Share Price.................................................................................................42
Share Certificates..........................................................................................42
Other Information...........................................................................................42
EXCHANGES AND REDEMPTIONS............................................................................................42
Exchanges...................................................................................................42
Redemption by Telephone.....................................................................................43
Redemption by Mail or Fax...................................................................................44
Redemption by Write-A-Check.................................................................................44
Other Information...........................................................................................44
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................45
The Pure No-Load(TM) Concept................................................................................45
Dividend Reinvestment Plan..................................................................................46
Scudder Funds Centers.......................................................................................46
Reports to Shareholders.....................................................................................46
Transaction Summaries.......................................................................................47
THE SCUDDER FAMILY OF FUNDS..........................................................................................47
SPECIAL PLAN ACCOUNTS................................................................................................50
Automatic Withdrawal Plan...................................................................................50
Cash Management System--Group Sub-Accounting Plan for Trust Accounts, Nominees and Corporations.............50
Automatic Investment Plan...................................................................................51
Uniform Transfers/Gifts to Minors Act.......................................................................51
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................51
PERFORMANCE INFORMATION..............................................................................................52
Average Annual Total Return.................................................................................52
Cumulative Total Return.....................................................................................52
Total Return................................................................................................53
Yield.......................................................................................................53
Effective Yield.............................................................................................54
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
----
Tax-Equivalent Yield........................................................................................54
Comparison of Portfolio Performance.........................................................................54
ORGANIZATION OF THE FUNDS............................................................................................58
INVESTMENT ADVISER...................................................................................................59
Scudder New York Tax Free Fund..............................................................................59
Scudder New York Tax Free Money Fund........................................................................61
Scudder Ohio Tax Free Fund..................................................................................62
Scudder Pennsylvania Tax Free Fund..........................................................................62
Personal Investments by Employees of the Adviser............................................................64
TRUSTEES AND OFFICERS................................................................................................64
REMUNERATION.........................................................................................................66
DISTRIBUTOR..........................................................................................................67
TAXES................................................................................................................68
Federal Taxation............................................................................................68
State Taxation..............................................................................................71
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund.....................................71
Scudder Ohio Tax Free Fund..................................................................................72
Scudder Pennsylvania Tax Free Fund..........................................................................72
PORTFOLIO TRANSACTIONS...............................................................................................73
Brokerage Commissions.......................................................................................73
Portfolio Turnover..........................................................................................74
NET ASSET VALUE......................................................................................................74
ADDITIONAL INFORMATION...............................................................................................75
Experts.....................................................................................................75
Shareholder Indemnification.................................................................................75
Ratings of Municipal Obligations............................................................................75
Commercial Paper Ratings....................................................................................76
Glossary....................................................................................................77
Other Information...........................................................................................77
FINANCIAL STATEMENTS.................................................................................................78
ii
</TABLE>
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See "Investment objectives and policies" and "Additional
information about policies and investments" in the Funds' prospectuses.)
Scudder New York Tax Free Money Fund, Scudder New York Tax Free Fund,
Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund (each a
"Fund," collectively the "Funds") are each a series of Scudder State Tax Free
Trust (the "Trust"). The Trust is a pure no-load(TM), open-end management
investment company (or mutual fund), presently consisting of six series.
General Investment Objectives and Policies of
Scudder New York Tax Free Money Fund
The investment objectives of Scudder New York Tax Free Money Fund 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.
Scudder New York Tax Free Money 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)
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.
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 Fund's investment adviser, Scudder, Stevens & Clark, Inc. (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.
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 categories of two or more of the
following rating agencies: Moody's Investors Service, Inc. ("Moody's") (Aaa and
Aa, MIG 1 and MIG 2, and P1), Standard & Poor's ("S&P") (AAA and AA, SP1+ and
SP1, A1+ and A1), and Fitch Investors Service, Inc. ("Fitch") (AAA and AA, F1+,
F1 and F2). Where only one rating agency has rated a security (or its issuer),
the Fund may purchase that security as long as the rating falls within the
categories described above. For a description of ratings for municipal
obligations, see "ADDITIONAL INFORMATION -- Ratings of Municipal Obligations."
In addition, unrated municipal obligations will be considered as being within
the foregoing quality ratings if other equal or junior municipal obligations of
the same issuer are rated and their ratings are within the foregoing ratings of
Moody's, S&P or Fitch. The Fund may also invest in municipal obligations which
are unrated if such securities possess creditworthiness comparable to those
rated securities in which the Fund may invest. Comparability is determined by
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the Adviser acting pursuant to guidelines adopted by, and under the supervision
of, the Trustees.
Subsequent to its purchase by the Fund, an issue of municipal
obligations may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. The Adviser will dispose of such security
unless the Board of Trustees of the 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 one year or less at the time of
purchase, consisting of (1) other obligations issued by or on behalf of
municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and bankers' acceptances; and (5)
repurchase agreements (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.
Amortized Cost Valuation of Portfolio Securities. Pursuant to Rule 2a-7 of the
Securities and Exchange Commission (the "SEC"), Scudder New York 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, 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
2
<PAGE>
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.
General Investment Objective and Policies of Scudder New York Tax Free Fund
The investment objective of the Fund 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.
Scudder New York Tax Free 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)
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.
Scudder New York 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
New York municipal securities except as stated in the second to last sentence of
the following paragraph. 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 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 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.
The 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. 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.
3
<PAGE>
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
the Fund will be purchased upon issuance, which may involve special risks
because the securities so acquired are new issues. In such instances the Fund
may be a substantial purchaser of the issue and therefore have the opportunity
to participate in structuring the terms of the offering. Although this may
enable the Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
During the year ended March 31, 1995, the average monthly
dollar-weighted market value of the bonds in the Fund's portfolio were as
follows: 37% rated AAA, 22% AA, 23% A and 18% BBB. The bonds are rated by
Moody's, S&P or Fitch, or of equivalent quality as determined by the Adviser.
General Investment Objective and Policies of Scudder Ohio Tax Free Fund
The Fund 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.
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 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.
4
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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
The Fund 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.
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 ratings categories assigned by Moody's,
S&P or Fitch, or (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 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.
Strategic Transactions and Derivatives. Scudder New York Tax Free Fund and
Scudder Ohio Tax Free Fund may each, but are not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates and broad or specific market movements), to manage the
effective maturity or duration of each Fund's portfolio, or to enhance potential
gain. These strategies may be executed through the use of derivatives contracts.
Such strategies are generally accepted as a part of modern portfolio management
5
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and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments may change over time as new instruments
and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit to attempt to protect against possible changes in the
market value of securities held in or to be purchased for each Fund's portfolio
resulting from securities markets fluctuations, to protect each Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of each Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of 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 Scudder New York Tax Free
Fund and Scudder Ohio Tax Free Fund to utilize these Strategic Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Funds will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions involving financial futures and options
thereon will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes and not for speculative purposes.
Strategic Transactions, including derivatives 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 each Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of each 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, each 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. Each 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
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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. Scudder
New York Tax Free Fund and Scudder Ohio Tax Free Fund are authorized to purchase
and sell exchange listed options and over-the-counter options ("OTC options").
Exchange listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
Scudder New York Tax Free Fund and Scudder Ohio Tax Free Fund's ability
to close out their positions as a purchaser or seller of an OCC or exchange
listed put or call option is dependent, in part, upon the liquidity of the
option market. Among the possible reasons for the absence of a liquid option
market on an exchange are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange;
(v) inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers", or broker dealers, domestic or foreign banks
or other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Adviser.
The staff of the SEC currently takes the position that OTC options purchased by
the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 10% of its assets in illiquid securities.
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If 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 the Fund's income. The sale of put options can also provide income.
Scudder New York Tax Free Fund and Scudder Ohio Tax Free Fund may each
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 each 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
each Fund will receive the option premium to help protect it against loss, a
call sold by a Fund exposes the Fund during the term of the option to possible
loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require 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. A Fund will not sell put options if, as a result, more than 50% of
that 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 each Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. Scudder New York Tax Free Fund and Scudder
Ohio Tax Free Fund may each enter into financial futures contracts or purchase
or sell put and call options on such futures as a hedge against anticipated
interest rate or fixed-income market changes, for duration management and for
risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by a Fund, as seller, to deliver to the buyer the specific type
of financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position.
Each Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires 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. Scudder New York Tax
Free Fund and Scudder Ohio Tax Free Fund also may each 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
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security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, they settle by cash settlement, i.e., an
option on an index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option (except if, in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments making up the market, market segment, industry or other composite on
which the underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.
Combined Transactions. Scudder New York Tax Free Fund and Scudder Ohio Tax Free
Fund may each 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
each Fund may enter are interest rate and index 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 intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream 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.
Scudder New York Tax Free Fund and Scudder Ohio Tax Free Fund will each
usually enter into swaps on a net basis, i.e., the two payment streams are
netted out in a cash settlement on the payment date or dates specified in the
instrument, with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. Inasmuch as these swaps, caps, floors and collars
are entered into for good faith hedging purposes, the Adviser and 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. A 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, each 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. Scudder New York Tax Free Fund and Scudder Ohio Tax Free
Fund may each 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
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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 the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that Scudder New York Tax Free Fund and
Scudder Ohio Tax Free Fund segregate liquid high grade assets with its custodian
to the extent Fund obligations are not otherwise "covered" through ownership of
the underlying security or financial instrument. In general, either the full
amount of any obligation by a 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 securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require that Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires that Fund to segregate liquid, high grade
assets equal to the exercise price.
OTC options entered into by Scudder New York Tax Free Fund and Scudder
Ohio Tax Free 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, a 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 a 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, each 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, each 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 a 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
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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.
Scudder New York Tax Free Fund and Scudder Ohio Tax Free Fund's
activities involving Strategic Transactions may be limited by the requirements
of Subchapter M of the Internal Revenue Code for qualification as a regulated
investment company. (See "TAXES.")
Management Strategies for Scudder New York Tax Free Fund and Scudder Ohio Tax
Free Fund
In pursuit of its investment objectives, 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' supervision, 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. Each Fund's portfolio will be invested in municipal
obligations rated within, or judged by the Adviser to be of a quality comparable
to, the six highest quality rating categories of Moody's, S&P or Fitch. The
ratings assigned by Moody's, S&P and Fitch represent their opinions as to the
quality of the securities which they undertake to rate. It should be emphasized,
however, that ratings are relative and are not absolute standards of quality.
Furthermore, even within this segment of the municipal bond market, relative
credit standing and market perceptions thereof may shift. Therefore, the Adviser
believes that it should review continuously the quality of municipal
obligations.
The Adviser has over many years developed an experienced staff to
assign its own quality ratings which are considered in making value judgments
and in arriving at purchase or sale decisions. Through the discipline of this
procedure the Adviser attempts to discern variations in credit rankings of the
published services and to anticipate changes in credit ranking.
Variations of Maturity. In an attempt to capitalize on the differences in total
return from municipal obligations of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Adviser's
expectations of changes therein. To the extent that the 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 each 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 the Fund's objective. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that each 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.
Indexed Securities. Scudder New York Tax Free Fund and Scudder Ohio Tax Free
Fund 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.
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Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
Management Strategies for Scudder Pennsylvania Tax Free Fund
In pursuit of its investment objective, 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. The primary strategies employed in the
management of the Fund's portfolio are:
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 the Fund holds primarily investment-grade
municipal obligations, the income earned on shares of the 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. The 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 the
Fund's quality standards are designed to minimize the credit risk of investing
in the Fund, that risk cannot be entirely eliminated. Shares of the Fund are not
insured by any agency of Pennsylvania or of the U.S.
Government.
Special Considerations
Investing in New York
Some of the significant financial considerations relating to Scudder
New York Tax Free Money Fund and Scudder New York Tax Free Fund'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,
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communications and services employment, and a very small share of the nation's
farming and mining activity. The State has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries. New York City (the "City"), which is the most populous city
in the State and nation and is the center of the nation's largest metropolitan
area, accounts for a large portion of the State's population and personal
income.
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. The recession has
been more severe in the State, owing to a significant retrenchment in the
financial services industry, cutbacks in defense spending, and an overbuilt real
estate market. There can be no assurance that the State economy will not
experience worse-than-predicted results in the 1995-96 fiscal year, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
The unemployment rate in the State dipped below the national rate in
the second half of 1981 and remained lower until 1991. It stood at 6.9% in 1994.
The total employment growth rate in the State has been below the national
average since 1984 and is expected to slow to less than 0.5% in 1995. State per
capita personal income remains above the national average. State per capita
income for 1994 was estimated at $25,999, which is 19.2% above the 1994
estimated national average of $21,809. During the past ten years, total personal
income in the State rose slightly faster than the national average only in 1986
through 1989.
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.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
financial plan for the 1995-96 fiscal year was formulated on June 20, 1995 and
is based upon the State's budget as enacted by the Legislature and signed into
law by the Governor (the "1995-96 State Financial Plan").
The 1995-96 State Financial Plan is the first to be enacted in the
administration of the Governor, who assumed office on January 1. It is the first
budget in over half a century which proposed and, as enacted, projects an
absolute year-over-year decline in disbursements in the General Fund, the
State's principal operating fund. Spending for State operations is projected to
drop even more sharply, by 4.6%. Nominal spending from all State spending
sources (i.e., excluding Federal aid) is proposed to increase by only 2.5% from
the prior fiscal year, in contrast to the prior decade when such spending growth
averaged more than 6.0% annually.
In his executive budget, the Governor indicated that in the 1995-96
fiscal year, the state financial plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded 1994-95
initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts to
spur economic growth and provide relief for low and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million to
the then projected imbalance or budget gap, bringing the total to approximately
$5 billion.
This gap is projected to be closed in the 1995-96 State Financial Plan
through a series of actions, mainly spending reductions and cost containment
measures and certain reestimates that are expected to be recurring, but also
through the use of one-time solutions. The 1995-96 State Financial Plan projects
(i) nearly $1.6 billion in savings from cost containment, disbursement
reestimates, and other savings in social welfare programs, including Medicaid,
income maintenance and various child and family care programs; (ii) $2.2 billion
in savings from State agency actions to reduce spending on the State workforce,
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SUNY and CUNY, mental hygiene programs, capital projects, the prison system and
fringe benefits; (iii) $300 million in savings from local assistance reforms,
including actions affecting school aid and revenue sharing while proposing
program legislation to provide relief from certain mandates that increase local
spending; (iv) over $400 million in revenue measures, primarily through a new
Quick Draw Lottery game, changes to tax payments schedules, and the sale of
assets; and (v) $300 million from reestimates in receipts.
The 1995-96 State Financial Plan includes actions that will have an
effect on the budget outlook for State fiscal year 1996-97 and beyond. The
Division of the Budget estimates that the 1995-96 State Financial Plan contains
actions that provide nonrecurring resources or savings totalling approximately
$900 million while the State comptroller (the "Comptroller") believes that such
amount exceeds $1 billion. In addition to this use of nonrecurring resources,
the 1995-96 State Financial Plan reflects actions that will directly affect the
State's 1996-97 fiscal year baseline receipts and disbursements. The three-year
plan to reduce State personal income taxes will decrease State tax receipts by
an estimated $1.7 billion in State fiscal year 1996-97 in addition to the amount
of reduction in State fiscal year 1995-96. Further significant reductions in the
personal income tax are scheduled for the 1997-98 State fiscal year. Other tax
reductions enacted in 1994 and 1995 are estimated to cause an additional
reduction in receipts of over $500 million in 1996-97, as compared to the level
of receipts in 1995-96. Similarly, many actions taken to reduce disbursements in
the State's 1995-96 fiscal year are expected to provide greater reductions in
the State's fiscal year 1996-97. These include actions to reduce the State
workforce, reduce Medicaid and welfare expenditures and slow community mental
hygiene program development.
The Division of the Budget and the Comptroller expect that the net
impact of these and other factors will produce a potential imbalance in receipts
and disbursements in fiscal year 1996-97. The Governor has indicated that in the
1996-97 executive budget he will propose to close this potential imbalance
primarily through General Fund expenditure reductions and without increases in
taxes or deferrals of scheduled tax reductions.
The 1995-96 State Financial Plan is based on a number of assumptions
and projections. Because it is not possible to predict accurately the occurrence
of all factors that may affect the 1995-96 State Financial Plan, actual results
could differ materially and adversely from projections made at the outset of a
fiscal year. There can be no assurance that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years.
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 General Fund is projected to be balanced on a cash basis for the
1995-96 fiscal year. Total receipts and transfers from other funds are projected
to be $33.110 billion, a decrease of $48 million from total receipts in the
prior fiscal year. Total General Fund disbursements and transfers to other funds
are projected to be $33.055 billion, a decrease of $344 million from the total
amount disbursed in the prior fiscal year.
The State's financial position on a GAAP (generally accepted accounting
principles) basis as of March 31, 1993 included a 1991-92 accumulated deficit in
its combined governmental funds of $681 million. Liabilities totalled $12.864
billion and assets of $12.183 billion were available to liquidate these
liabilities.
The State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of tax
and revenue anticipation notes. The national recession and then the lingering
economic slowdown in the New York and regional economy, resulted in repeated
shortfall in receipts and three budget deficits. For its 1992-93, 1993-94 and
1994-95 fiscal years, however, the State recorded balanced budgets on a cash
basis, with substantial fund balances in 1992-93 and 1993-94, and a smaller fund
balance in 1994-95.
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
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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 Local Government
Assistance Corporation ("LGAC") in an effort to restructure the way the State
makes certain local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a period
of years, the issuance of these long-term obligations, which are to be amortized
over no more than 30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual seasonal borrowing
of the State at $4.7 billion, less net proceeds of bonds issued by LGAC and
bonds issued to provide for capitalized interest, except in cases where the
Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing above
the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
As of June 1995, LGAC had issued bonds to provide net proceeds of $4.7 billion,
completing the program. The impact of LGAC's borrowing is that the State is able
to meet its cash flow needs in the first quarter of the fiscal year without
relying on short-term seasonal borrowings. The 1995-96 State Financial Plan
includes no spring borrowing nor did the 1994-95 State Financial Plan, which was
the first time in 35 years there was no short-term seasonal borrowing.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State funds dedicated for transportation purposes), and not
by the full faith and credit of the State. In addition, the proposed amendment
would (i) permit multiple purpose general obligation bond proposals to be
proposed on the same ballot, (ii) require that State debt be incurred only for
capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment can be presented to the
voters for their consideration, it must be passed by a separately elected
legislature. The amendment must therefore be passed by the newly elected
Legislature in 1995 prior to presentation to the voters in November 1995. The
amendment was passed by the Senate in June 1995, and the Assembly is expected to
pass the amendment shortly.
On January 13, 1992, S&P 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. Standard & Poor's also continued its negative rating outlook assessment on
State general obligation debt. On April 26, 1993, Standard & Poor's revised the
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rating outlook assessment to stable. On February 14, 1994, Standard & Poor's
raised its outlook to positive and, on February 28, 1994, confirmed its A-
rating. On January 6, 1992, 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.
The State anticipates that its capital programs will be financed, in
part, by State and public authorities borrowings in 1995-96. The State expects
to issue $248 million in general obligation bonds (including $170 million for
purposes of redeeming outstanding bond anticipation notes) and $186 million in
general obligation commercial paper. The Legislature has also authorized the
issuance of up to $33 million in certificates of participation during the
State's 1995-96 fiscal year for equipment purchases and $14 million for capital
purposes. These projections are subject to change if circumstances require.
Principal and interest payments on general obligation bonds and
interest payments on bond anticipation notes and on tax and revenue anticipation
notes were $793.3 million for the 1994-95 fiscal year, and are estimated to be
$774.4 million for the 1995-96 fiscal year. These figures do not include
interest payable on State General Obligation Refunding Bonds issued in July 1992
("Refunding Bonds") to the extent that such interest was paid from an escrow
fund established with the proceeds of such Refunding Bonds. Principal and
interest payments on fixed rate and variable rate bonds issued by LGAC were
$239.4 million for the 1994-95 fiscal year, and are estimated to be $328.2
million for 1995-96. State lease-purchase rental and contractual obligation
payments for 1994-95, including State installment payments relating to
certificates of participation, were $1.607 billion and are estimated to be
$1.641 billion in 1995-96.
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) challenges to the practice of reimbursing certain Office of Mental
Health patient care expenses from the client's Social Security benefits; (5)
alleged responsibility of New York State officials to assist in remedying racial
segregation in the City of Yonkers; (6) challenges by commercial insurers,
employee welfare benefit plans, and health maintenance organizations to the
imposition of 13%, 11% and 9% surcharges on inpatient hospital bills and a bad
debt and charity care allowance on all hospital bills and hospital bills paid by
such entities; (7) challenges to certain aspects of petroleum business taxes,
and (8) action alleging damages resulting from the failure by the State's
Department of Environmental Conservation to timely provide certain data.
A number of cases have also been instituted against the State
challenging the constitutionality of various public authority financing
programs.
In a proceeding commenced on August 6, 1991 (Schulz, et al. v. State of
New York, et al., Supreme Court, Albany County), petitioners challenge the
constitutionality of two bonding programs of the New York State Thruway
Authority authorized by Chapters 166 and 410 of the Laws of 1991. In addition,
petitioners challenge the fiscal year 1991-92 judiciary budget as having been
enacted in violation of Sections 1 and 2 of Article VII of the State
Constitution. The defendants' motion to dismiss the action on procedural grounds
was denied by order of the Supreme Court dated January 2, 1992. By order dated
November 5, 1992, the Appellate Division, Third Department, reversed the order
of the Supreme Court and granted defendants' motion to dismiss on grounds of
standing and mootness. By order dated September 16, 1993, on motion to
reconsider, the Appellate Division, Third Department, ruled that plaintiffs have
standing to challenge the bonding program authorized by Chapter 166 of the laws
of 1991. The proceeding is presently pending in Supreme Court, Albany County.
In Schulz, et al. v. State of New York, et al., commenced May 24, 1993,
Supreme Court, Albany County, petitioners challenge, among other things, the
constitutionality of, and seek to enjoin, certain highway, bridge and mass
transportation bonding programs of the New York State Thruway Authority and the
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Metropolitan Transportation Authority authorized by Chapter 56 of the Laws of
1993. Petitioners contend that the application of State tax receipts held in
dedicated transportation funds to pay debt service on bonds of the Thruway
Authority and of the Metropolitan Transportation Authority violates Sections 8
and 11 of Article VII and Section 5 of Article X of the State Constitution and
due process provisions of the State and Federal Constitutions. By order dated
July 27, 1993, the Supreme Court granted defendants' motions for summary
judgment, dismissed the complaint, and vacated the temporary restraining order
previously issued. By decision dated October 21, 1993, the Appellate Division,
Third Department, affirmed the judgment of the Supreme Court. On June 30, 1994,
the Court of Appeals unanimously affirmed the rulings of the trail court and the
Appellate Division in favor of the State.
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 has developed a plan to restore the State's retirement systems to
prior funding levels. Such funding is expected to exceed prior levels by $30
million in fiscal 1994-95, $63 million in fiscal 1995-96, $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 is required to make
aggregate payments of $351.4 million, of which $90.3 million have been made.
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.
The legal proceedings noted above involve State finances, State
programs and miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings could affect adversely the financial condition of the State. Adverse
developments in these proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced 1995-96 State Financial
Plan. An adverse decision in any of these proceedings could exceed the amount of
the 1995-96 State Financial Plan reserve for the payment of judgments and,
therefore, could affect the ability of the State to maintain a balanced 1995-96
State Financial Plan. In its audited financial statements for the fiscal year
ended March 31, 1994, the State reported its estimated liability for awarded and
anticipated unfavorable judgments to be $675 million.
Although other litigation is pending against New York State, except as
described above, 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 are
State-supported or State-related. As of September 30, 1994, date of the latest
data available, there were 18 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $70.3 billion. As of March 31, 1995, aggregate public
authority debt outstanding as State-supported debt was $27.9 billion and as
State-related debt was $36.1 billion.
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 18 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.
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New York City and Other Localities. The fiscal health of the State of New York
may also be impacted by the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
City has achieved balanced operating results for each of its fiscal years since
1981 as reported in accordance with the then-applicable GAAP.
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 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 July 2, 1993, Standard & Poor's reconfirmed its A-
rating of City bonds, continued its negative rating outlook assessment and
stated that maintenance of such rating depended upon the City's making further
progress towards reducing budget gaps in the outlying years. 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 January 17, 1995, Standard and Poor's placed the
City's general obligation bonds on its CreditWatch list citing concern over the
City's refunding plans.
On July 10, 1995, Standard and Poor's downgraded its rating on the
City's $23 billion of outstanding general obligation debt to BBB+ from A- and
removed the debt from its CreditWatch list.
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. 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
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. Under its
enabling legislation, MAC's authority to issue bonds and notes (other than
refunding bonds and notes) expired on December 31, 1984. Legislation has been
passed by the legislature which would, under certain conditions, permit MAC to
issue up to $1.465 billion of additional bonds, which are not subject to a moral
obligation provision.
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.
The staffs of OSDC, the Control Board and the City comptroller issue
periodic reports on the City's financial plans, as modified, analyzing forecasts
of revenues and expenditures, cash flow, and debt service requirements, as well
as compliance with the financial plan, as modified, by the City and its Covered
Organizations (i.e., those which receive or may receive monies from the City
directly, indirectly or contingently). OSDC staff reports issued during the
mid-1980's noted that the City's budgets benefited from a rapid rise in the
City's economy, which boosted the City's collection of property, business and
income taxes. These resources were used to increase the City's workforce and the
scope of discretionary and mandated City services. Subsequent OSDC staff reports
examined the 1987 stock market crash and the 1989-92 recession, which affected
the City's region more severely than the nation, and attributed an erosion of
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City revenues and increasing strain on City expenditures to that recession.
According to a recent OSDC staff report, the City's economy was slow to recover
from the recession and is expected to experience a weak employment situation,
and moderate wage and income growth, during the 1995-96 period. Also, reports of
OSDC, the Control Board and the City comptroller have variously indicated that
many of the City's balanced budgets have been accomplished, in part, through the
use of non-recurring resources, tax and fee increases, personnel reduction and
additional State assistance; that the City has not yet brought its long-term
expenditures in line with recurring revenues; that the City's proposed
gap-closing programs, if implemented, would narrow future budget gaps; that
these programs tend to rely heavily on actions outside the direct control of the
City; and that the City is therefore likely to continue to face future projected
budget gaps requiring the City to increase revenues and/or reduce expenditures.
According to the most recent staff reports of OSDC, the Control Board and the
comptroller, during the four-year period covered by the current financial plan,
the City is relying on obtaining substantial resources from initiatives needing
approval and cooperation of its municipal labor unions, Covered Organizations
and city council, as well as the state and federal governments, among others,
and there can be no assurance that such approval can be obtained.
On February 14, 1995, the Mayor released the preliminary budget for the
City's 1996 fiscal year, which addressed a projected $2.7 billion budget gap.
Most of the gap-closing initiatives may be implemented only with the cooperation
of the City's municipal unions, or the State or federal governments.
New York City officials estimated that the final State budget, enacted
by the Legislature on June 7, 1995, would result in a $670 million shortfall
from the $1.1 billion in additional state aid the Mayor had sought in order to
close the City's projected deficit. The City may have to take drastic actions to
balance its budget in the wake of such shortfall.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If expected federal or State aid is not
forthcoming, if unforeseen developments in the economy significantly reduce
revenues derived from economically sensitive taxes or necessitate increased
expenditures for public assistance, if the City should negotiate wage increases
for its employees greater than the amounts provided for in the City's financial
plan or if other uncertainties materialize that reduce expected revenues or
increase projected expenditures, then, to avoid operating deficits, the City may
be required to implement additional actions, including increases in taxes and
reductions in essential City services. The City might also seek additional
assistance from New York State.
The City requires certain amounts of financing for seasonal and capital
spending purposes. The City has issued $1.75 billion of notes for seasonal
financing purposes during fiscal year 1994. The City's capital financing program
projected long-term financing requirements of approximately $17 billion for the
City's fiscal years 1995 through 1998. The major capital requirements include
expenditures for the City's water supply and sewage disposal systems, roads,
bridges, mass transit, schools, hospitals and housing. In addition to financing
for new purposes, the City and the New York City Municipal Water Finance
Authority have issued refunding bonds totalling $1.8 billion in fiscal year
1994.
Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance. The
potential impact on the State of such requests by localities was not included in
the projections of the State's receipts and disbursements in the State's 1995-96
fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation 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
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1993, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $105 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York 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 authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding. Fifteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1993.
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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 New York State, New York 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 New York 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
New York State assistance in the future.
Investing in Ohio
Scudder Ohio Tax Free Fund, 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
political, economic or regulatory factors that may 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 1993 is 11,091,000.
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 15% 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 four years the State rates were below the national rates (5.5% versus
6.1% in 1994). The unemployment rate and its effects vary among particular
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's portfolio 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
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ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million
in the GRF and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). In the next two fiscal years, necessary corrective
steps were taken to respond to lower receipts and higher expenditures in certain
categories than earlier estimated. Those steps included selected reductions in
appropriations spending and the transfer of $64 million from the BSF to the GRF.
Reported June 30, 1991 ending fund balances were $135.3 million (GRF) and $300
million (BSF).
To allow time to resolve certain budget differences for the latest
complete biennium, an interim appropriations act was enacted effective July 1,
1991; it included GRF debt service and lease rental appropriations for the
entire 1992-93 biennium, while continuing most other appropriations for a month.
Pursuant to the general appropriations act for the entire biennium was passed on
July 11, 1991, and signed by the Governor, $200 million was transferred from the
BSF to the GRF in FY 1992.
Recent Financial Results. Based on updated results and forecasts in the
course of FY 1992, 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. GRF receipts significantly below original
forecasts resulted primarily from lower collections of certain taxes,
particularly sales-use taxes and personal income taxes. Higher expenditure
levels came in certain areas, particularly human services including Medicaid.
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. As authorized by the
General Assembly, the $100.4 million BSF balance and additional amounts from
certain other funds were transferred late in the FY to the GRF, and adjustments
made in the timing of certain tax payments. Other administrative revenue and
spending actions resolved the remaining GRF imbalance.
A significant GRF shortfall (approximately $520 million) was then
projected for the next year, FY 1993. It was addressed by appropriate
legislative and administrative actions. As a first step, the Governor ordered,
effective July 1, 1992, $300 million in selected GRF spending reductions.
Subsequent executive and legislative action in December 1992 -- a combination of
tax revisions and additional spending reductions -- resulted in a balance of GRF
resources and expenditures for the 1992-93 biennium. The June 30, 1993 ending
GRF fund balance was approximately $111 million, of which, as a first step to
BSF replenishment, $21 million was deposited in the BSF. (Based on June 30, 1994
balances, an additional $260 million has been deposited in the BSF, which has a
current balance of $288.7 million.)
No spending reductions were applied to appropriations needed for debt
service or lease rentals on any State obligations.
The GRF appropriations act for the current 1994-95 biennium was passed
and signed by the Governor on July 1, 1993. All necessary GRF appropriations for
State debt service and lease rental payments then projected for the biennium
were included in that act, and are included in the GRF appropriations bill for
the 1996-97 biennium that is currently nearing enactment.
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 13 constitutional amendments, the last adopted in 1993, Ohio voters
have authorized the incurrence of State debt and the pledge of taxes or excises
to its payment. At June 9, 1995, $820.1 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding or
awaiting delivery. The only such State debt then still authorized to be incurred
are 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
($34.7 million outstanding); and (b) $360 million of obligations authorized for
local infrastructure improvements, no more than $120 million of which may be
issued in any calendar year ($728.2 million outstanding); and (c) up to $200
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million in general obligation bonds for parks, recreation and natural resources
purposes which may be outstanding at any one time ($50 million outstanding or
awaiting delivery, with no more than $50 million to be issued in any one year,
and none have yet been issued).
Resolutions are pending in both houses of the General Assembly that
would submit at the November 1995 election constitutional amendments relating to
State debt. One, adopted by both houses, would, among other things, extend the
local infrastructure bond program by authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years, and expand
the authority for highway improvement bonds. Another amendment would authorize,
among other things, the issuance of State general obligations debt for a variety
of purposes and without additional vote of the people to the extent that debt
service on all State general obligation debt and GRF-supported obligations would
not exceed 5% of the preceding fiscal year's GRF expenditures. It cannot be
predicted whether any of the proposed amendment will in fact be submitted, or,
if submitted, approved by the electors.
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 $4.5 billion of
which were outstanding at June 9, 1995.
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.)
The House has adopted a resolution submitting to the electors a
constitutional amendment prohibiting the General Assembly from imposing a new
tax or increasing an existing tax unless approved by a three-fifths vote of each
house or by a majority vote of the electors. It cannot be predicted whether
required Senate concurrence will be received.
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 (statewide aggregate in the range of 44% in recent years) of their
operating moneys from State subsidies, but are dependent on local property
taxes, and in 101 districts from voter-authorized income taxes, for significant
portions of their budgets. Litigation, similar to that in other states, is
pending questioning the constitutionality of Ohio's system of school funding. In
one case, the trial court concluded that aspects of the system (including basic
operating assistance) are unconstitutional, and ordered the State to provide for
and fund a system complying with the Ohio Constitution. The State has appealed.
A small number of the State's 612 local school districts have in any year
required special assistance to avoid year-end deficits. A current program
provides for school district cash need borrowing directly from commercial
lenders, with diversion of State subsidy distributions to repayment if needed.
Borrowings under this program totalled $68.6 million for 44 districts (including
$46.6 million for one district) in FY 1992, $94.5 million for 27 districts
(including $75 million for one) in FY 1993, and $41.1 million for 28 districts
in FY 1994.
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 that on occasion have faced
significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the municipality's fiscal affairs and for
development of a financial plan to eliminate deficits and cure any defaults.
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Since inception in 1979, these procedures have been applied to 23 cities and
villages; for 18 of them the fiscal situation was resolved and the procedures
were terminated.
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 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
Scudder Pennsylvania Tax Free Fund 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, 1993, 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 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. 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 1993 level of 81.6 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 1993, manufacturing employment represented 18.4 percent of all
nonagricultural employment in Pennsylvania while the services sector accounted
for 29.9 percent and the trade sector accounted for 22.4 percent.
The Commonwealth recently experienced a slowdown in its economy.
Moreover, economic strengths and weaknesses vary in different parts of the
Commonwealth. For May 1995, the unadjusted unemployment rate in Pennsylvania was
5.9% compared to 5.5% for the United States. During 1993, the annual average
seasonally adjusted unemployment rate in Pennsylvania was 7.0% compared to 6.8%
for the United States.
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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.
Recent Financial Results. From fiscal 1984, when the Commonwealth first
prepared its financial statements on a GAAP basis, through fiscal 1989, the
Commonwealth reported a positive unreserved-undesignated fund balance for its
governmental fund types at each fiscal year end. Slowing economic growth during
1990, leading to a national economic recession beginning in fiscal 1991, reduced
revenue growth and increased expenditures and contributed to negative
unreserved-undesignated fund balances at the end of the 1990 and 1991 fiscal
years. The negative unreserved-undesignated fund balance was due largely to
operating deficits in the General Fund and the State Lottery Fund during those
fiscal years. Actions taken during fiscal 1992 to bring the General Fund back
into balance, including tax increases and expenditure restraints, resulted in a
$1.1 billion reduction to the unreserved-undesignated fund deficit for combined
governmental fund types at June 30, 1993, as a result of a $420.4 million
increase in the balance. These gains were produced by continued efforts to
control expenditure growth. The Combined Balance Sheet as of June 30, 1993,
showed total fund balance and other credits for the total governmental fund
types of $1,959.9 million, a S732.1 million increase from the balance at June
30, 1992. During fiscal 1993, total assets increased by $1,296.7 million to
$7,096.4 million, while liabilities increased $564.6 million to $5,136.5
million.
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Fiscal 1991 Financial Results. The Commonwealth experienced a $453.6
million General Fund deficit as of the end of its 1991 fiscal year. The deficit
reflected higher than budgeted expenditures, below-estimate economic activity
and growth rates of economic indicators and total tax revenue shortfalls below
those assumed in the enacted budget. Rising demands on state programs caused by
the economic recession, particularly for medical assistance and cash assistance
programs, and the increased costs of special education programs and correction
facilities and programs, contributed to increased expenditures in fiscal 1991,
while tax revenues for the 1991 fiscal year were severely affected by the
economic recession. Total corporation tax receipts and sales and use tax
receipts during fiscal 1991 were, respectively, 7.3 percent and 0.9 percent
below amounts collected during fiscal 1990. Personal income tax receipts also
were affected by the recession but not to the extent of the other major General
Fund taxes, increasing only 2.0 percent over fiscal 1990 collections. A number
of actions were taken throughout the fiscal year by the Commonwealth to mitigate
the effects of the recession on budget revenues and expenditures. The
Commonwealth initiated a number of cost-saving measures, including the firing of
2,000 state employees, deferral of paychecks and reduction of funds to state
universities, which resulted in approximately $871 million cost savings.
Fiscal 1992 Financial Results. Actions taken during fiscal 1992 to
bring the General Fund budget back into balance, including tax increases and
expenditure restraints resulted in a $1.1 billion reduction for the
unreserved-undesignated fund deficit for combined governmental fund types and a
return to a positive fund balance. Total General Fund revenues for fiscal 1992
were $14,516.8, 516. 8 million which is approximately 22 percent higher than
fiscal 1991 revenues of $11,877.3 million due in large part to tax increases.
The increased revenues funded substantial increases in education, social
services and corrections programs. As a result of the tax increases and certain
appropriation lapses, fiscal 1992 ended with an $8.8 million surplus after
having started the year with an unappropriated general fund balance deficit of
$453.6 million.
Fiscal 1993 Financial Results. Fiscal 1993 closed with revenues higher
than anticipated and expenditures approximately as projected, resulting in an
ending unappropriated balance surplus of $242.3 million. A deduction in the
personal income tax rate in July 1992 and the one-time receipt of revenues from
retroactive corporate tax increases in fiscal 1992 were responsible, in part,
for the low growth in fiscal 1993.
Fiscal 1994 Financial Results. 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 Budget. On June 16, 1994, the Governor signed a $15.7
billion General Fund budget, an increase of over 3.9 percent from the fiscal
1994 budget. A substantial amount of the increase is targeted for medical
assistance expenditures, reform of the state-funded public assistance program
and education subsidies to local school districts. The budget also includes tax
reductions totaling an estimated $166.4 million benefiting principally low
income families and corporations. The fiscal 1995 budget projects a $4 million
fiscal year-end unappropriated surplus.
Fiscal 1996 Budget. For the fiscal year ended June 30, 1996, the
Governor proposed a $16.1 billion general fund budget, an increase of
approximately 2.7 percent from the fiscal 1995 budget. Areas targeted for the
largest budgetary increases are medical assistance and basic education. In
addition, the Governor proposed accelerating corporate net income tax rate
reductions, eliminating the inheritance tax paid by a surviving spouse on
jointly owned property, and making other business tax reductions.
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, (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.
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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. According to the February 28, 1995
Auditor General certificate, the average annual tax revenues deposited in all
funds in the five fiscal years ended June 30, 1994 was $16.5 billion, and,
therefore, the net debt limitation for the 1995 fiscal year is $28.8 billion.
Outstanding net debt totaled $4.0 billion at June 30, 1993, approximately equal
to the net debt at June 30, 1993. On February 28, 1994, the amount of debt
authorized by law to be issued, but not yet incurred was $15 billion.
Local Governments. The City of Philadelphia (the "City" or
"Philadelphia") is the largest city in the Commonwealth. Philadelphia
experienced a series of general fund deficits for fiscal years 1988 through 1992
which have culminated in the City's present serious financial difficulties. In
its comprehensive Annual Financial Report, Philadelphia reported a cumulative
General Fund deficit of $71.4 million for fiscal year 1992.
In June, 1991, the Governor of Pennsylvania signed into law legislation
establishing the Pennsylvania Inter-Governmental Cooperation Authority, a
five-member board which will oversee the fiscal affairs of the City of
Philadelphia. The legislation empowers the authority to issue notes and bonds on
behalf of Philadelphia and also authorizes Philadelphia to levy a one-percent
sales tax the proceeds of which would be used to pay off the bonds. In return
for the authority's fiscal assistance, Philadelphia was required, among other
things, to establish a five-year financial plan that includes balanced annual
budgets. Under the legislation, if Philadelphia does not comply with such
requirements, the authority 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 6, 1992. Full implementation of the five-year plan was
delayed due to labor negotiations that were not completed until October 1992,
three months after the expiration of the old labor contracts. The terms of the
new labor contracts are estimated to cost approximately $144.4 million more than
what was budgeted in the original five-year plan. An amended five-year plan was
approved by PICA in May 1993. The Mayor's latest update of the five-year
financial plan was approved by PICA on May 2, 1994.
As of November 17, 1994, PICA has issued $l,296.7 million of its
Special Tax Revenue Bonds. In accordance with the enabling legislation, PICA was
guaranteed a percentage of the wage tax revenue expected to be collected from
Philadelphia residents to permit repayment of the bonds.
In January 1993, Philadelphia anticipated a cumulative general fund
budget deficit of $57 million for the 1993 fiscal year. In response to the
anticipated deficit, the Mayor unveiled a financial plan eliminating the budget
deficit for the 1993 budget year through significant service cuts that included
a plan to privatize certain city-provided services. Due to an upsurge in tax
receipts, cost-cutting and additional PICA borrowings, Philadelphia completed
the 1993 fiscal year with a balanced general fund budget. The audit findings for
fiscal year 1993 show a cumulative general fund surplus of approximately $3
million for the fiscal year ended June 30, 1993.
In January 1994, the Mayor proposed a $2.3 billion city general fund
budget that included no tax increases, no significant service cuts and a series
of modest health and welfare program increases. At that time, the Mayor also
unveiled a $2.2 billion program (the "Philadelphia Economic Stimulus Program")
designed to stimulate Philadelphia's economy and stop the loss of 1,000 jobs a
month. In its 1994 Comprehensive Annual Financial Report, Philadelphia reported
a cumulative general fund surplus of approximately $15.4 million for the fiscal
year ended June 30, 1994.
S&P's rating on Philadelphia's general obligation bonds is "B-."
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.
A number of banking institutions have filed actions against the
Commonwealth contesting the constitutionality of Act 1989-21, a law which
revised the Pennsylvania bank shares tax. The Commonwealth has estimated its
exposure from this action to be approximately $770 million.
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Investments, Investment Techniques and Considerations Common to the Funds
Income Level and Credit Risk. Because the Funds hold principally investment
grade (in the case of New York Tax Free Fund, Scudder Ohio Tax Free Fund and
Scudder Pennsylvania Tax Free Fund) and high quality (in the case of New York
Tax Free Money Fund) municipal obligations, the income earned on shares of each
Fund will tend to be less than it might be on a portfolio emphasizing lower
quality securities. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the federal bankruptcy laws, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions, the power or
ability of any one or more issuers to pay, when due, principal of and interest
on its or their municipal obligations may be materially affected. Scudder New
York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free
Fund may each invest in municipal securities rated B by S&P, Fitch or Moody's
although it intends to invest principally in securities rated in higher grades.
Although each Fund's quality standards are designed to minimize the credit risk
of investing in the Fund, that risk cannot be entirely eliminated. Shares of the
Funds are not insured by any agency of New York, Ohio, Pennsylvania or of the
U.S. Government.
Municipal Obligations. Municipal obligations are issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities to obtain funds for various public
purposes. The interest on most of these obligations is generally exempt from
regular federal income tax in the hands of most individual investors, although
it may be subject to the individual and corporate alternative minimum tax. The
two principal classifications of municipal obligations are "notes" and "bonds."
1. Municipal Notes. Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: tax anticipation notes; revenue anticipation notes;
bond anticipation notes; and construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, such financing provides for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes issued for
different purposes and secured differently from those described above.
2. Municipal Bonds. Municipal bonds which meet longer term capital
needs generally have maturities of more than one year when issued and 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 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.
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Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial development and pollution control bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Under federal tax legislation, certain
types of Industrial Development Bonds and Pollution Control Bonds may no longer
be issued on a tax-exempt basis, although previously-issued bonds of these types
and certain refundings of such bonds are not affected. Each Fund may invest more
than 25% of its assets in industrial development or other private activity
bonds, subject to each Fund's fundamental investment policies, and also subject
to each Fund's current intention not to invest in municipal securities whose
investment income is taxable or subject to the Fund's 20% limitation on
investing in AMT bonds. For the purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, industrial
development or other private activity bonds ultimately payable by companies
within the same industry will be considered as if they were issued by issuers in
the same industry.
3. 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.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of the Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by 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.
The 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. The Fund will
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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.
4. Other Municipal Obligations. There are, in addition, a variety of
hybrid and special types of municipal obligations as well as numerous
differences in the security of municipal obligations both within and between the
two principal classifications above.
The Funds may purchase variable rate demand instruments that are
tax-municipal obligations providing for a periodic adjustment in the interest
rate paid on the instrument according to changes in interest rates generally.
These instruments also permit a Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent. The demand feature may be backed by a bank letter of credit
or guarantee issued with respect to such instrument. The Funds intend to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to the Funds, or (3) to maintain
their respective investment portfolio ratings standards. A bank that issues a
repurchase commitment may receive a fee from a Fund for this arrangement. The
issuer of a variable rate demand instrument may have a corresponding right to
prepay in its discretion the outstanding principal of the instrument plus
accrued interest upon notice comparable to that required for the holder to
demand payment.
The variable rate demand instruments that these Funds may purchase are
payable on demand on not more than thirty calendar days' notice. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily up to six months, and the adjustments are based upon the prime rate
of a bank or other appropriate interest rate adjustment index as provided in the
respective instruments. The Funds 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 the 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 that it
continues to meet the Fund's quality criteria.
The value of the underlying variable rate demand instruments may change
with changes in interest rates generally, but the variable rate nature of these
instruments should decrease changes in value due to interest rate fluctuations.
Accordingly, as interest rates decrease or increase, the potential for capital
gain and the risk of capital loss on the disposition of portfolio securities are
less than would be the case with a comparable portfolio of fixed income
securities. The Funds may purchase variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value of such variable rate
demand notes may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed interest
rate securities. Accordingly, interest rates on the variable rate demand
instruments may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar final maturities.
The maturity of the variable rate demand instruments held by the Funds
are ordinarily deemed to be the longer of (1) the notice period required before
the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
General Considerations. An entire issue of municipal obligations may be
purchased by one or a small number of institutional investors such as one of the
Funds. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933 prior to offer and
sale unless an exemption from such registration is available, municipal
obligations which are not publicly offered may nevertheless be readily
marketable. A secondary market exists for municipal obligations which were not
publicly offered initially.
Obligations purchased for the Funds are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
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believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal and interest on such obligations.
Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue.
The Funds expect that each will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. Government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments, which might affect all
municipal obligations of a similar type. However, each Fund believes that the
most important consideration affecting risk is the quality of municipal
obligations.
When-Issued Securities. The Funds may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer and
no interest accrues to the purchaser. To the extent that assets of 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 the Funds will be fully invested to
the extent practicable and subject to the policies stated herein. When-issued or
forward delivery purchases are negotiated directly with the other party, and are
not traded on an exchange. While when-issued or forward delivery securities may
be sold prior to the settlement date, it is intended that the Fund will purchase
such securities with the purpose of actually acquiring them unless a sale
appears desirable for investment reasons. At the time the Fund makes the
commitment to purchase securities on a when-issued or forward delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. The Trust does not believe that either Fund's net asset
value or income will be adversely affected by its purchase of securities on a
when-issued or forward delivery basis. Each Fund will establish a segregated
account in which it will maintain cash, U.S. Government securities and other
high grade debt obligations equal in value to commitments for when-issued or
forward delivery securities. Such segregated securities either will mature or,
if necessary, be sold on or before the settlement date. Neither Fund will enter
into such transactions for leverage purposes.
Stand-by Commitments. Subject to the receipt of any required regulatory
authorization, a Fund may acquire "Stand-by Commitments," which will enable that
Fund to improve its portfolio liquidity by making available same-day settlements
on portfolio sales (and thus facilitate the payment of same-day payments of
redemption proceeds in federal funds). Each Fund may enter into such
transactions subject to the limitations in the rules under the Investment
Company Act of 1940, as amended, (the "1940 Act"). A Stand-by Commitment is a
right acquired by a Fund, when it purchases a municipal obligation from a
broker, dealer or other financial institution ("seller"), to sell up to the same
principal amount of such securities back to the seller, at the Fund's option, at
a specified price. Stand-by Commitments are also known as "puts." Each Fund's
investment policies permit the acquisition of Stand-by Commitments solely to
facilitate portfolio liquidity. The exercise by a Fund of a Stand-by Commitment
is subject to the ability of the other party to fulfill its contractual
commitment.
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 Fund's
custodian; (2) the 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) the Fund's
acquisition cost (excluding the cost, if any, of the Stand-by Commitment) of the
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municipal obligations which are subject to the commitment (excluding any accrued
interest which the Fund paid on their acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date. Each Fund expects to refrain
from exercising a Stand-by Commitment in the event that the amount receivable
upon exercise of the Stand-by Commitment is significantly greater than the then
current market value of the underlying municipal obligations determined, as
described 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, each Fund will pay for Stand-by Commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of 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 that Fund calculated
immediately after any Stand-by Commitment is acquired. If the Fund pays
additional consideration for a Stand-by Commitment, the yield on the security to
which the Stand-by Commitment relates will, in effect, be lower than if the Fund
had not acquired such Stand-by Commitment.
It is difficult to evaluate the likelihood of use or the potential
benefit of a Stand-by Commitment. Therefore, it is expected that the Trustees
will determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the Stand-by Commitment is less than
the exercise price of the Stand-by Commitment, such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a Stand-by Commitment,
its cost will be reflected as unrealized depreciation for the period during
which the commitment is held.
Management understands that the Internal Revenue Service (the "IRS")
has issued a revenue ruling to the effect that, under specified circumstances, a
registered investment company 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 a precedent for other
taxpayers) to the effect that tax-exempt interest received by a regulated
investment 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. Each Fund intends to take the position that it is the owner of any
municipal obligations acquired subject to a Stand-By Commitment and that
tax-exempt interest earned with respect to such municipal obligations 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 a Fund nor has either Fund assumed that such commitments
would continue to be available under all market conditions.
Third Party Puts. The Funds may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals (not exceeding 397 calendar days in the
case of Scudder New York Tax Free Money Fund) to tender (or "put") its bonds to
the institution and receive the face value thereof (plus accrued interest).
These third party puts are available in several different forms, may be
represented by custodial receipts or trust certificates and may be combined with
other features such as interest rate swaps. The Fund receives a short-term rate
of interest (which is periodically reset), and the interest rate differential
between that rate and the fixed rate on the bond is retained by the financial
institution. The financial institution granting the option does not provide
credit enhancement, and in the event that there is a default in the payment of
principal, or interest on, or downgrading of a bond to below investment grade,
or a loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond and, in the case of Scudder New York Tax Free Money Fund, the weighted
average maturity of the Fund's portfolio would be adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-By
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations 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
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the treatment of tender fees and swap payments, in relation to various regulated
investment company tax provisions is unclear. However, the Adviser intends to
manage the Funds' portfolios in a manner designed to minimize any adverse impact
from these investments.
Repurchase Agreements. The Funds may enter into repurchase agreements with any
member bank of the Federal Reserve System or any broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other obligations the Funds may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest
quality ratings categories assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable
income on funds for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Fund) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price on the date of repurchase. In either
case, the income to a Fund (which is taxable) is unrelated to the interest rate
on the Obligation itself. Obligations will be held by the Fund's custodian or in
the Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the Obligation before repurchase of the Obligation under a
repurchase agreement, a Fund may encounter delay and incur costs before being
able to sell the security. Delays may involve loss of interest or decline in
price of the Obligation. If the court characterizes the transaction as a loan
and a Fund has not perfected a security interest in the Obligation, the Fund may
be required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt obligation purchased for each Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case the Fund may incur a loss if the proceeds to the Fund of the sale to a
third party are less than the repurchase price. However, if the market value of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), each Fund will direct the seller of the
Obligation to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. The Funds may enter into "reverse repurchase
agreements," which are repurchase agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. Each Fund
will maintain a segregated account, as described under "When-Issued Securities"
in connection with outstanding reverse repurchase agreements. Reverse repurchase
agreements are deemed to be borrowings subject to each Fund's investment
restrictions applicable to that activity. Each Fund will enter into reverse
repurchase agreements only when the Adviser believes that the interest income to
be earned from the investment of the proceeds of the transaction will be greater
than the interest expense of the transaction. The Funds do not intend to invest
more than 5% in reverse repurchase agreements.
Trustees' Power to Change Objectives and Policies
Except as specifically stated to the contrary, the objectives and
policies of the Funds stated above may be changed by the Trustees without a vote
of the shareholders.
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Investment Restrictions of Scudder New York Tax Free Money Fund and Scudder New
York Tax Free Fund
Unless specified to the contrary, the following restrictions may not be
changed by a Fund 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%
or more of the shares of a Fund present at a meeting, if the holders of more
than 50% of the outstanding shares of that Fund are present or represented by
proxy; or (2) more than 50% of the outstanding shares of a Fund. Any investment
restrictions herein which involve a maximum percentage of securities or assets
shall not be considered to be violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, the Trust may not, on behalf of Scudder New
York Tax Free Money Fund:
(1) borrow money except from banks or pursuant to reverse
repurchase agreements as a temporary measure for extraordinary
or emergency purposes (the Fund is required to maintain asset
coverage (including borrowings) of 300% for all borrowings)
and no purchases of securities will be made while such
borrowings exceed 5% of the Fund's assets (The payment of
interest on borrowing by the Fund will reduce income.);
(2) purchase and sell real estate (though it may invest in
securities of companies which deal in real estate and in other
permitted investments secured by real estate) or commodities
or commodities contracts, except futures contracts, including
but not limited to contracts for the future delivery of
securities and contracts based on securities indices;
(3) act as underwriter of the securities issued by others, except
to the extent that it may be deemed to be an underwriter in
connection with the purchase of securities in accordance with
its investment objective and policies directly from the issuer
thereof and the later disposition thereof may be deemed to be
underwriting;
(4) make loans to other persons, except to the extent that the
purchase of debt obligations in accordance with its investment
objective and policies and the entry into repurchase
agreements may be deemed to be loans. The purchase of all of a
publicly offered issue of debt obligations or all or a portion
of non-publicly offered debt obligations may be deemed the
making of a loan for this purpose, but, although not a policy
which may be changed only by a vote of the shareholders,
management expects that such securities would seldom exceed
25% of the net assets of the Fund. These securities are not
expected to comprise a major portion of the Fund's
investments;
(5) issue senior securities, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to
investment restriction (1) and except for shares of any
additional series which may be established by the Trustees;
(6) purchase (i) pollution control and industrial development
bonds or (ii) securities which are not municipal obligations
if the purchase would cause more than 25% in the aggregate of
the market value of the total assets of the Fund at the time
of such purchase to be invested in the securities of one or
more issuers having their principal business activities in the
same industry;
(7) with respect to 50% of the total assets of the Fund, invest
more than 5% of its total assets in the securities of any one
issuer, except U.S. Government securities, and with respect to
100% of the value of the total assets of the Fund, the Fund
may not invest more than 25% of the value of its total assets
in the securities of any one issuer; or
(8) with respect to 50% of the total assets of the Fund, purchase
the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by
the Fund.
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As a matter of fundamental policy, the Trust may not, on behalf of Scudder New
York Tax Free Fund:
(9) with respect to 75% of its total assets taken at market value,
purchase more than 10% of the voting securities of any one
issuer or invest more than 5% of the value of its total assets
in the securities of any one issuer, except obligations issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities and except securities of other investment
companies;
(10) borrow money, except as a temporary measure for extraordinary
or emergency purposes or except in connection with reverse
repurchase agreements; provided that the Fund maintains asset
coverage of 300% for all borrowings;
(11) purchase or sell real estate (except that the Fund may invest
in (i) securities of companies which deal in real estate or
mortgages, and (ii) securities secured by real estate or
interests therein, and 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); the Fund may not purchase
or sell physical commodities or contracts relating to physical
commodities;
(12) act as underwriter of securities issued by others, except to
the extent that it may be deemed an underwriter in connection
with the disposition of portfolio securities of the Fund;
(13) make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent the purchase of debt
securities in accordance with its investment objective and
investment policies and the entry into repurchase agreements
may be deemed to be loans;
(14) issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for
shares of the separate classes or series of the Trust,
provided that collateral arrangements with respect to
currency-related contracts, futures contracts, options or
other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction; or
(15) purchase (a) private activity bonds, or (b) securities which
are neither municipal obligations nor securities of the U.S.
Government, its agencies or instrumentalities, if in either
case the purchase would cause more than 25% of the market
value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers having their
principal business activities in the same industry (for the
purposes of this restriction, telephone companies are
considered to be in a separate industry from gas and electric
public utilities, and wholly-owned finance companies are
considered to be in the industry of their parents if their
activities are related primarily to financing the activities
of their parents).
As a matter of non-fundamental policy, the Trust may not, on behalf of Scudder
New York Tax Free Money Fund:
(1) purchase or sell interests in oil, gas or other mineral
leases, or exploration or development programs (although it
may invest in municipal obligations and other permitted
investments of issuers which own or invest in such interests);
(2) invest in the securities of other investment companies, except
by purchase in the open market when no commission or profit to
a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase,
though not made on the open market, is part of a plan of
merger or consolidation. The Trust, on behalf of the Fund, has
no current intention of engaging in any borrowing, lending of
portfolio securities or investing in closed-end investment
companies;
(3) purchase restricted securities (for these purposes restricted
security means a security with a legal or contractual
restriction on resale in the principal market in which the
security is traded), including repurchase agreements maturing
in more than seven days and securities which are not readily
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marketable if as a result more than 10% of the Fund's net
assets (valued at market at purchase) would be invested in
such securities;
(4) purchase securities if, as a result thereof, more than 5% of
the value of the Fund's net assets would be invested in
restricted securities (for these purposes restricted security
means a security with a legal or contractual restriction on
resale in the principal market in which the security is
traded);
(5) purchase warrants, unless attached to other securities in
which it is permitted to invest, or options (except Stand-by
Commitments) on securities;
(6) enter into repurchase agreements or purchase any securities
if, as a result thereof, more than 10% of the total assets of
the Fund (taken at market value) would be, in the aggregate,
subject to repurchase agreements maturing in more than seven
days and invested in restricted securities or securities which
are not readily marketable;
(7) participate on a joint or a joint and several basis in any
trading account in securities, but may for the purpose of
possibly achieving better net results on portfolio
transactions or lower brokerage commission rates join with
other investment company and client accounts advised by
Scudder, Stevens & Clark, Inc. in the purchase or sale of debt
obligations;
(8) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Trust or a member or officer of the
investment adviser of the Trust if one or more of such
individuals owns beneficially more than one-half of one
percent (1/2 of 1%) of the shares or securities or both (taken
at market value) of such issuer and such individuals owning
more than one-half of one percent (1/2 or 1%) of such shares
or securities together own beneficially more than 5% of such
shares or securities or both;
(9) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions;
(10) purchase securities of any issuer with a record of less than
three years continuous operation, including predecessors,
except (a) obligations issued or guaranteed by the U.S.
Government or its agencies or (b) municipal obligations which
are rated by at least one nationally recognized municipal
obligations rating service, if such purchase would cause the
Fund's investments in all such issuers to exceed 5% of the
Fund's total assets taken at market value;
(11) purchase from or sell to any of the Trust's officers and
Trustees, its investment adviser, its principal underwriter or
the officers and directors of its investment adviser or
principal underwriter, portfolio securities of the Fund; or
(12) purchase or sell real estate limited partnership interests.
As a matter of non-fundamental policy, the Trust may not, on behalf of Scudder
New York Tax Free Fund:
(1) purchase or retain securities of any open-end investment
company, or securities of closed-end investment companies
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchases, or
except when such purchase, though not made in the open market,
is part of a plan of merger, or consolidation, reorganization
or acquisition of assets; in any event the Fund may not
purchase more than 3% of the outstanding voting securities of
another investment company, may not invest more than 5% of its
assets in another investment company, and may not invest more
than 10% of its assets in other investment companies;
(2) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
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(3) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer, director or trustee of the Trust or a member,
officer, director or trustee of the investment adviser of the
Trust if one or more of such individuals owns beneficially
more than one-half of one percent (1/2%) of the outstanding
shares or securities or both (taken at market value) of such
issuer and such individuals owning more than one-half of one
percent (1/2%) of such shares or securities together own
beneficially more than 5% of such shares or securities or
both;
(4) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions, except in connection with
arbitrage transactions and except that the Fund may obtain
such short-term credits as may be necessary for the clearance
of purchases and sales of securities;
(5) invest more than 10% of its net assets in securities which are
not readily marketable, the disposition of which is restricted
under Federal securities laws, or in repurchase agreements not
terminable within 7 days, and the Fund will not invest more
than 5% of its total assets in restricted securities;
(6) purchase securities of any issuer with a record of less than
three years continuous operations, including predecessors,
except U.S. Government securities, securities of such issuers
which are rated by at least one nationally recognized
statistical rating organization, municipal obligations and
obligations issued or guaranteed by any foreign government or
its agencies or instrumentalities, if such purchase would
cause the investments of the Fund in all such issuers to
exceed 5% of the total assets of the Fund taken at market
value;
(7) buy options on securities or financial instruments unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of its net assets; or sell put
options on securities if, as a result, the aggregate value of
the obligations underlying such put options would exceed 50%
of the Fund's net assets;
(8) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% of the fair
market value of the Fund's total assets; provided however,
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;
(9) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which
own or invest in such interests);
(10) borrow money (including reverse repurchase agreements), except
for temporary or emergency purposes, in excess of 5% of its
total assets (taken at market value) or borrow other than from
banks;
(11) purchase warrants if as a result warrants taken at the lower
of cost or market value would represent more than 5% of the
value of the Fund's total net assets or more than 2% of its
net assets in warrants that are not listed on the New York or
American Stock Exchanges or on an exchange with comparable
listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value);
(12) purchase from or sell to any of the Trust's officers and
Trustees, its investment advisor, its principal underwriter or
the officers and directors of its investment advisor or
principal underwriter, portfolio securities of the Fund;
(13) invest more than 25% of its net assets in each of non-publicly
offered securities or New York municipal securities which are
secured by revenues from health facilities, toll roads, ports
and airports; or
(14) purchase or sell real estate limited partnership interests; or
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(15) make securities loans unless all loans of portfolio securities
are fully collateralized and marked to market daily.
Investment Restrictions of Scudder Ohio Tax Free Fund
Unless specified to the contrary, the following restrictions may not be
changed without the approval of a majority of the outstanding voting securities
of the Fund which, under the Investment Company Act of 1940 and the rules
thereunder and as used in this Statement of Additional Information, means the
lesser of (1) 67% of the shares of the Fund present at a meeting if the holders
of more than 50% of the outstanding shares of the 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, the Trust, on behalf of Scudder Ohio Tax Free
Fund, may not:
(1) invest more than 25% of the value of its total assets in the
securities of any one issuer;
(2) borrow money except from banks or pursuant to reverse
repurchase agreements as a temporary measure for extraordinary
or emergency purposes (the Fund is required to maintain asset
coverage (including borrowings) of 300% for all borrowings)
and no purchases of securities will be made while such
borrowings exceed 5% of the Fund's assets;
(3) purchase and sell real estate (though it may invest in
securities of companies which deal in real estate and in other
permitted investments secured by real estate) or commodities
or commodities contracts, except futures contracts, including
but not limited to contracts for the future delivery of
securities and contracts based on securities indices;
(4) act as underwriter of the securities issued by others, except
to the extent that the purchase of securities in accordance
with its investment objective and policies directly from the
issuer thereof and the later disposition thereof may be deemed
to be underwriting;
(5) make loans to other persons, except to the extent that the
purchase of debt obligations in accordance with its investment
objective and policies and the entry into repurchase
agreements may be deemed to be loans. The purchase of all of a
publicly offered issue of debt obligations or all or a portion
of non-publicly offered debt obligations may be deemed the
making of a loan for this purpose, but, although not a policy
which may be changed only by a vote of the shareholders,
management expects that such securities would seldom exceed
25% of the net assets of the Fund;
(6) issue senior securities, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to
investment restriction (2) and except for shares of any
additional series which may be established by the Trustees;
(7) with respect to 50% of the total assets of the Fund, purchase
the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by
the Fund;
(8) with respect to 50% of the total assets of the Fund, invest
more than 5% of its total assets in securities of any one
issuer, except U.S. Government securities; and
(9) purchase (i) pollution control and industrial development
bonds or (ii) securities which are not municipal obligations
if the purchase would cause more than 25% in the aggregate of
the market value of the total assets of the Fund at the time
of such purchase to be invested in the securities of one or
more issuers having their principal business activities in the
same industry.
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As a matter of non-fundamental policy, the Trust, on behalf of Scudder Ohio Tax
Free Fund, may not:
(1) purchase or sell interests in oil, gas or other mineral
exploration or development programs (although it may invest in
municipal obligations and other permitted investments of
issuers which own or invest in such interests);
(2) purchase warrants, unless attached to other securities in
which it is permitted to invest;
(3) invest in the securities of other investment companies, or
except by purchase in the open market when no commission or
profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such
purchase, though not made on the open market, is part of a
plan of merger or consolidation;
(4) enter into repurchase agreements or purchase any securities
if, as a result thereof, more than 10% of the total assets of
the Fund (taken at market value) would be, in the aggregate,
subject to repurchase agreements maturing in more than seven
days and invested in restricted securities or securities which
are not readily marketable;
(5) participate on a joint or a joint and several basis in any
trading account in securities, but may for the purpose of
possibly achieving better net results on portfolio
transactions or lower brokerage commission rates join with
other investment company and client accounts advised by the
Adviser in the purchase or sale of debt obligations;
(6) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions;
(7) purchase securities of any issuer with a record of less than
three years continuous operation, including predecessors,
except (a) obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or (b)
municipal obligations of the State of Ohio (including
securities issued by state agencies, cities and towns) which
are rated by at least one nationally recognized municipal
obligations rating service, if such purchase would cause the
Fund's investments in all such issuers to exceed 5% of the
Fund's total assets taken at market value;
(8) purchase restricted securities (for these purposes restricted
security means a security with a legal or contractual
restriction on resale in the principal market in which the
security is traded), repurchase agreements maturing in more
than seven days and securities which are not readily
marketable if as a result more than 10% of the Fund's net
assets (valued at market at purchase) would be invested in
such securities;
(9) purchase restricted securities if, as a result thereof, more
than 5% of the value of the Fund's net assets would be
invested in restricted securities;
(10) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of the value of its net assets;
or sell put options on securities if, as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of the Fund's net assets; and
(11) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% of the fair
market value of the Fund's total assets; provided, however,
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.
The Trust, on behalf of Scudder Ohio Tax Free Fund, has no current
intention of engaging in any borrowing, lending of portfolio securities or
investing in closed-end investment companies.
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Investment Restrictions of Scudder Pennsylvania Tax Free Fund
Unless specified to the contrary, the following restrictions may not be
changed without the approval of a majority of the outstanding voting securities
of the 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 the Fund present at a meeting if the holders of more than 50% of the
outstanding shares of the 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, the Trust, on behalf of Scudder Pennsylvania
Tax Free Fund, may not:
(1) invest more than 25% of the value of its total assets in the securities
of any one issuer;
(2) borrow money except from banks or pursuant to reverse repurchase
agreements as a temporary measure for extraordinary or emergency
purposes (the Fund is required to maintain asset coverage (including
borrowings) of 300% for all borrowings) and no purchases of securities
will be made while such borrowings exceed 5% of the Fund's assets;
(3) purchase and sell real estate (though it may invest in securities of
companies which deal in real estate and in other permitted investments
secured by real estate) or commodities or commodities contracts;
(4) act as underwriter of the securities issued by others, except to the
extent that the purchase of securities in accordance with its
investment objective and policies directly from the issuer thereof and
the later disposition thereof may be deemed to be underwriting;
(5) make loans to other persons, except to the extent that the purchase of
debt obligations in accordance with its investment objective and
policies and the entry into repurchase agreements may be deemed to be
loans. (The purchase of all of a publicly offered issue of debt
obligations or all or a portion of non-publicly offered debt
obligations may be deemed the making of a loan for this purpose, but,
although not a policy which may be changed only by a vote of the
shareholders, management expects that such securities would seldom
exceed 25% of the net assets of the Fund.);
(6) issue senior securities, except as appropriate to evidence indebtedness
which the Fund is permitted to incur pursuant to investment restriction
(2) and except for shares of any additional series which may be
established by the Trustees;
(7) with respect to 50% of the total assets of the Fund, purchase the
securities of any issuer if such purchase would cause more than 10% of
the voting securities of such issuer to be held by the Fund;
(8) with respect to 50% of the total assets of the Fund, invest more than
5% of its total assets in securities of any one issuer, except U.S.
Government securities; and
(9) purchase (i) pollution control and industrial development bonds or (ii)
securities which are not municipal obligations if the purchase would
cause more than 25% in the aggregate of the market value of the total
assets of the Fund at the time of such purchase to be invested in the
securities of one or more issuers having their principal business
activities in the same industry.
As a matter of non-fundamental policy, the Trust, on behalf of Scudder
Pennsylvania Tax Free Fund, may not:
(1) purchase or sell interests in oil, gas or other mineral exploration or
development programs (although it may invest in municipal obligations
and other permitted investments of issuers which own or invest in such
interests);
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<PAGE>
(2) purchase warrants, unless attached to other securities in which it is
permitted to invest, or options (except Stand-by Commitments) on
securities;
(3) invest in the securities of other investment companies, or except by
purchase in the open market when no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made on the open
market, is part of a plan of merger or consolidation;
(4) enter into repurchase agreements or purchase any securities if, as a
result thereof, more than 10% of the total assets of the Fund (taken at
market value) would be, in the aggregate, subject to repurchase
agreements maturing in more than seven days and invested in restricted
securities or securities which are not readily marketable;
(5) participate on a joint or a joint and several basis in any trading
account in securities, but may for the purpose of possibly achieving
better net results on portfolio transactions or lower brokerage
commission rates join with other investment company and client accounts
advised by the Adviser in the purchase or sale of debt obligations;
(6) purchase securities on margin or make short sales unless, by virtue of
its ownership of other securities, it has the right to obtain
securities equivalent in kind and amount to the securities sold and, if
the right is conditional, the sale is made upon the same conditions;
(7) purchase securities of any issuer with a record of less than three
years continuous operation, including predecessors, except (a)
obligations issued or guaranteed by the U.S. Government or its agencies
or instrumentalities or (b) municipal obligations of the Commonwealth
of Pennsylvania which are rated by at least one nationally recognized
municipal obligations rating service, if such purchase would cause the
Fund's investments in all such issuers to exceed 5% of the Fund's total
assets taken at market value;
(8) purchase restricted securities (for these purposes restricted security
means a security with a legal or contractual restriction on resale in
the principal market in which the security is traded), repurchase
agreements maturing in more than seven days and securities which are
not readily marketable if as a result more than 10% of the Fund's net
assets (valued at market at purchase) would be invested in such
securities;
(9) purchase restricted securities if, as a result thereof, more than 5% of
the value of the Fund's net assets would be invested in restricted
securities;
(10) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund at any
time do not exceed 20% of its net assets; or sell put options on
securities if, as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of the Fund's net assets;
and
(11) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to all futures contracts entered into on behalf of
the Fund and the premiums paid for options on futures contracts does
not exceed 5% of the fair market value of the Fund's total assets;
provided, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in computing
the 5% limit.
The Trust, on behalf of Scudder Pennsylvania Tax Free Fund, has no
current intention of engaging in any borrowing, lending of portfolio securities
or investing in closed-end investment companies.
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<PAGE>
PURCHASES
(See "Purchases" and "Transaction information" in the Funds' prospectuses.)
Additional Information About Opening An Account
Shareholders of other Scudder funds who have submitted an account
application and have a certified taxpayer identification number, clients having
a regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the
National Association of Securities Dealers, Inc. ("NASD") and banks may open an
account by wire. These investors must call 1-800-225-5163 to get an account
number. During the call, the investor will be asked to indicate the Fund name,
amount to be wired ($1,000 minimum), name of bank or trust company from which
the wire will be sent, the exact registration of the new account, the taxpayer
identification number 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 02101, 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.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves 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 cancelation. If the purchaser is a
shareholder, the Trust shall have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from or restricted in placing future orders in any of the Scudder
funds.
Wire Transfer of Federal Funds
In the case of Scudder New York Tax Free Money Fund, to obtain net
asset value determined as of twelve o'clock noon and the same day dividend, your
bank must forward federal funds by wire transfer and provide the required
account information so as to be available to Scudder New York Tax Free Money
Fund prior to twelve o'clock noon eastern time on that day. If either the
federal funds or the account information is received after twelve o'clock noon
eastern time but both the funds and the information are made available before
the close of regular trading on the New York Stock Exchange (the "Exchange")
(normally 4 p.m. eastern time), on any business day, shares will be purchased at
net asset value determined as of the close of trading on that day but will not
receive the dividend; in such cases, dividends commence on the next business
day.
To purchase shares of Scudder New York Tax Free Fund, Scudder Ohio Tax
Free Fund and Scudder Pennsylvania Tax Free Fund and obtain the same day
dividend you must have your bank forward federal funds by wire transfer and
provide the required account information so as to be available to the Funds
prior to twelve o'clock noon eastern time on that day. If you wish to make a
purchase of $500,000 or more you should notify the Funds' transfer agent,
Scudder Service Corporation (the "Transfer Agent") of such a purchase by calling
1-800-225-5163. If either the federal funds or the account information is
received after twelve o'clock noon eastern time, but both the funds and the
information are made available before the close of regular trading on the
Exchange (normally 4 p.m. eastern time) on any business day, shares will be
purchased at net asset value determined on that day but will not receive the
dividend; in such cases, dividends commence on the next business day.
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently the Funds pay 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.
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<PAGE>
Boston banks are presently closed on certain holidays although the
Exchange may be open. These holidays include Martin Luther King, Jr. Day (the
3rd Monday in January), Columbus Day (the 2nd Monday in October) and Veterans
Day (November 11). Investors are not able to purchase shares by wiring federal
funds on such holidays because the Custodian is not open to receive such federal
funds on behalf of a Fund.
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
for Scudder New York Tax Free Money Fund normally will be computed twice a day,
as of twelve o'clock noon and the close of regular trading on each day when the
Exchange is open for trading. Net asset value for Scudder New York Tax Free
Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund normally
will be computed once a day, as of the close of regular trading on each day when
the Exchange is open for trading. Orders received after the close of regular
trading on the Exchange are executed at the next business day's net asset value.
If the order has been placed by a member of the NASD, other than the Funds'
principal underwriter, Scudder Investor Services, Inc., it is the responsibility
of that member broker, rather than a Fund, to forward the purchase order to the
Funds' transfer agent in Boston by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Funds' management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Funds.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancelation 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
If purchases or redemptions of Fund shares are arranged and settlement
is made at the investor's election through a member of the NASD, other than
Scudder Investor Services, Inc., that member may, at its discretion, charge a
fee for that service. The Trustees and Scudder Investor Services, Inc. each has
the right to limit the amount of purchases by, and to refuse to sell to any
person, and each may suspend or terminate the offering of shares of each Fund at
any time.
The "Tax Identification Number" section of the application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations a certification of exempt status) may be
returned to the investor.
A Fund 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 series thereof) or personal holding company, subject to the
requirements of the 1940 Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and redemptions" and "Transaction information"
in the Funds' prospectuses.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be 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 $1,000. When an exchange
represents an additional investment into an existing account, the account
receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
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<PAGE>
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 a signature guarantee as
described under "Transaction information--Redeeming shares--Signature
guarantees" in the Funds' prospectuses.
Exchange orders received before the close of regular trading on any
business day ordinarily will be executed at respective net asset values
determined on that day. Exchange orders received after the close of regular
trading 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 phone or in
writing to have the feature removed, or until the originating account is
depleted. The Corporation and the Transfer Agent each reserves the right to
suspend or terminate the privilege of the Automatic Exchange Program at any
time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder fund is a redemption of shares, and therefore
may result in tax consequences (gain or loss) to the shareholder and the
proceeds of such exchange may be subject to backup withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The 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 the Funds do not follow such
procedures, they 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. The Funds 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 Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated.
Redemption by Telephone
Shareholders currently receive the right to redeem up to $50,000 to
their address of record automatically, without having to elect it. Shareholders
may also request by telephone to have the proceeds mailed or wired to their
predesignated bank account. In order to request redemptions by telephone,
shareholders must have completed and returned to the Transfer Agent the
application, including the designation of a bank account to which the redemption
proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section
on the application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a designated bank account or who want to change
the bank account previously designated to receive redemption
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)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
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<PAGE>
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The 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 the Funds do not follow such procedures, they 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.
Redemption requests by telephone (technically a repurchase by agreement
between a Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days. Telephone redemption is not available with respect to shares
represented by share certificates.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signatures guaranteed as explained in the
Funds' prospectus.
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 share certificates or 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 business days
after receipt by the Transfer Agent of a request for redemption that complies
with the above requirements. Delays of more than seven days of payment for
shares tendered for repurchase or redemption may result but only until the
purchase check has cleared.
Redemption by Write-A-Check
All new investors and existing shareholders of Scudder New York Tax
Free Money Fund who apply 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 the
Fund's books for seven days. Shareholders who use this service may also use
other redemption procedures. No shareholder may write checks against
certificated shares. the Fund pays the bank charges for this service. However,
the Fund reviews the cost of operation periodically and reserves the right to
determine if direct charges to the persons who avail themselves of this service
would be appropriate.
Checks will be returned by the Custodian if there are insufficient
shares to meet the withdrawal amount. Possible fluctuations in the per share
value of the Fund should be considered in determining the amount of the check.
An investor should not attempt to close an account by check, because the exact
balance at the time the check clears will not be known when the check is
written. The Trust on behalf of Scudder New York Tax Free Money Fund, Scudder
Service Corporation and the Custodian each reserves the right at any time to
suspend or terminate the "Write-A-Check" procedure.
Other Information
If a shareholder redeems all shares in the account, 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
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<PAGE>
more or less than a shareholder's cost depending upon the net asset value at the
time of redemption or repurchase. The Trust does not impose a redemption or
repurchase charge, although a wire charge may be applicable for redemption
proceeds wired to an investor's bank account. Redemptions of shares, including
redemptions undertaken to effect an exchange for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and the
proceeds of such redemptions may be subject to backup withholding (see "TAXES").
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefore may be
suspended at times (a) during which the Exchange is closed, other than customary
weekend and holiday closings, (b) during which trading on the Exchange is
restricted for any reason, (c) during which an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practicable
or it is not reasonably practicable for a Fund fairly to determine the value of
its net assets, or (d) during which the SEC, by order, permits a suspension of
the right of redemption or a postponement of the date of payment or of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
If transactions at any time reduce a shareholder's account balance in a
Fund to below $1,000 in value, such Fund may notify the shareholder that, unless
the account balance is brought up to at least $1,000, the Trust will redeem all
shares, close the account and send redemption proceeds to the shareholder. The
shareholder has 60 days to bring the account balance up to $1,000 before any
action will be taken by the Trust. (This policy applies to accounts of new
shareholders, but does not apply to certain Special Plan Accounts.)
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "Shareholder benefits" in the Funds' prospectuses.)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its funds from the
vast majority of mutual funds available today. The primary distinction is
between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts.
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 Rules of Fair Practice, a mutual fund
can call itself a "no-load" fund only if the 12b-1 fee and/or service fee does
not exceed 0.25% of a fund's average annual net assets.
Because Scudder funds do not collect any asset-based 12b-1 fees or
service fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual funds. Scudder pioneered the
no-load concept when it created the nation's first no-load fund in 1928, and
later developed the nation's first family of no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart assume a
45
<PAGE>
constant 10% rate of return over the time periods indicated and reinvestment of
dividends and distributions.
<TABLE>
<CAPTION>
Load Fund with 0.75% No-Load Fund with
YEARS Pure No-Load(TM)Fund 8.50% Load Fund 12b-1 Fee 0.25% 12b-1 Fee
----- -------------------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
15 41,772 38,222 37,698 40,371
20 67,275 61,557 58,672 64,282
</TABLE>
Investors are encouraged to review the fee tables in the Funds'
prospectuses for more specific information about the rates at which management
fees and other expenses are assessed.
Dividend Reinvestment Plan
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 the 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 may change their dividend option by calling
1-800-225-5163 or by sending written instructions to the Transfer Agent. See
"How to contact Scudder" in the Funds' prospectuses for the address. 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 the Fund.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains.
Scudder Funds Centers
Investors may visit any of the Centers maintained by Scudder Investor
Services, Inc. listed in the Funds' prospectus. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or find assistance with opening an account, adding monies or special
options to existing accounts, making exchanges within the Scudder Family of
Funds, redeeming shares or opening retirement plans. Checks should not be mailed
to the Centers but should be mailed to "The Scudder Funds" at the address listed
under "How to contact Scudder" in the Funds' prospectuses.
Reports to Shareholders
Each Fund issues to shareholders semiannual financial statements
(audited annually by independent accountants), including a list of investments
held and statements of assets and liabilities, operations, changes in net assets
and supplementary information for the Fund.
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<PAGE>
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Fund's prospectuses.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.
MONEY MARKET
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital, and consistent therewith, to maintain the liquidity of
capital and to provide current income through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.
INCOME
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued in
emerging markets.
Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.
Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.
Scudder International Bond Fund seeks to provide income from a
portfolio of high-grade bonds denominated in foreign currencies. As a
secondary objective, the Fund seeks protection and possible enhancement
of principal value by actively managing currency, bond market and
maturity exposure and by security selection.
Scudder Short Term Bond Fund seeks to provide a higher and more stable
level of income than is normally provided by money market investments,
and more price stability than investments in intermediate-and long-term
bonds.
Scudder Short Term Global Income Fund seeks to provide high current
income from a portfolio of high-grade money market instruments and
short-term bonds denominated in foreign currencies and the U.S. dollar.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with the minimization of
reinvestment risks through investments primarily in zero coupon
securities.
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<PAGE>
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") is designed to provide investors
with income exempt from regular federal income tax while seeking
stability of principal. STFMF seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may
not be possible.
Scudder California Tax Free Money Fund* is designed to provide
California taxpayers income exempt from California state and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
Scudder New York Tax Free Money Fund* is designed to provide New York
taxpayers income exempt from New York state, New York City and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
TAX FREE
Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in investment-grade
municipal securities.
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Managed Municipal Bonds seeks to provide income which is exempt
from regular federal income tax primarily through investments in
long-term municipal securities with an emphasis on high quality.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.
Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.
Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.
Scudder New York Tax Free Fund* seeks to provide income exempt from New
York state, New York City and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
investments in New York state, municipal and local government
obligations.
Scudder Ohio Tax Free Fund* seeks to provide income exempt from both
Ohio and regular federal income taxes through the professional and
efficient management of a portfolio consisting of Ohio state, municipal
and local government obligations.
Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
both Pennsylvania and regular federal income taxes through a portfolio
consisting of Pennsylvania state, municipal and local government
obligations.
------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
GROWTH AND INCOME
Scudder Balanced Fund seeks to provide a balance of growth and income,
as well as long-term preservation of capital, from a diversified
portfolio of equity and fixed income securities.
Scudder Growth and Income Fund seeks to provide long-term growth of
capital, current income, and growth of income through a portfolio
invested primarily in common stocks and convertible securities by
companies which offer the prospect of growth of earnings while paying
current dividends.
GROWTH
Scudder Capital Growth Fund seeks to maximize long-term growth of
capital through a broad and flexible investment program emphasizing
common stocks.
Scudder Development Fund seeks to achieve long-term growth of capital
primarily through investments in marketable securities, principally
common stocks, of relatively small or little-known companies which in
the opinion of management have promise of expanding their size and
profitability or of gaining increased market recognition for their
securities, or both.
Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S. and
foreign issuers. Income is an incidental consideration.
Scudder Global Small Company 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 Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Quality Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.
The Japan Fund, Inc. seeks capital appreciation through investment in
Japanese securities, primarily in common stocks of Japanese companies.
The net asset values of most Scudder Funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder Funds. The
49
<PAGE>
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
Scudder Service Representative; easy telephone exchanges into Scudder money
market, tax free, income, and growth funds; shares redeemable at net asset value
at any time.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By
Automatic Investment Plan" and "Exchanges and redemptions--By Automatic
Withdrawal Plan" in the Fund's prospectuses.)
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. 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.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
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 the 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. Payments are mailed at the
end of each month. The check amounts may be based on the redemption of a fixed
dollar amount, fixed share amount, percent of account value or declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be reinvested in additional shares. Shares are then liquidated as
necessary to provide for withdrawal payments. Since the withdrawals are in
amounts selected by the investor and have no relationship to yield or income,
payments received cannot be considered as yield or income on the investment and
the resulting liquidations may deplete or possibly extinguish the initial
investment. Requests for increases in withdrawal amounts or to change payee must
be submitted in writing, signed exactly as the account is registered and contain
signature guarantee(s) as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Fund's prospectus. Any such requests must
be received by the Fund's transfer agent by the 15th of the month in which such
change is to take effect. An Automatic Withdrawal Plan may be terminated at any
time by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Cash Management System--Group Sub-Accounting Plan
for Trust Accounts, Nominees and Corporations
To minimize record-keeping by fiduciaries and corporations,
arrangements have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund or Portfolio.
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<PAGE>
In its discretion, a Fund may accept minimum initial investments of
less than $1,000 (per Portfolio) as part of a continuous group purchase plan by
fiduciaries and others (e.g., brokers, bank trust departments, employee benefit
plans) provided that the average single account in any one Fund or Portfolio in
the group purchase plan will be $1,000 or more. A Fund may also wire all
redemption proceeds where the group maintains a single designated bank account.
Shareholders who withdraw from the group purchase plan through which
they were permitted to initiate accounts under $1,000 will be subject to the
minimum account restrictions described under "EXCHANGES AND REDEMPTIONS--Other
Information."
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan ("AIP") involves an investment strategy
called dollar cost averaging. Dollar cost averaging is a method of investing
whereby a specific dollar amount is invested at regular intervals. Such a plan
involves continuous investment in securities regardless of fluctuating price
levels of such securities. By investing the same dollar amount each period, when
shares are priced low the investor will purchase more shares than when the share
price is higher. Over a period of time this investment approach may allow the
investor to reduce the average price of the shares purchased. However, this
investment approach does not assure a profit or protect against loss. This type
of 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
(See "Distribution and performance
information--Dividends and capital gains
distributions" in the Funds' prospectuses.)
Each Fund will follow the practice of distributing substantially all
and in no event less than 90% of its net investment income (defined under
"ADDITIONAL INFORMATION--Glossary"), which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. Each Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However, if
it appears to be in the best interest of a Fund and its shareholders, such Fund
may retain all or part of such gain for reinvestment.
Dividends will be declared daily and distributions of net investment
income will be made monthly. Any dividends or capital gains distributions
declared in October, November or December with a record date in such a month and
paid during the following January 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 of the
Funds' fiscal year end. An additional distribution may be made (or treated as
made) in November or December if necessary to prevent the application of the
excise tax described in "TAXES" below. Both types of distributions will be made
in shares of the Funds and confirmations will be mailed to each shareholder
unless a shareholder has elected to receive cash, in which case a check will be
sent.
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<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 such Fund has
designated as tax-exempt, and the percentage of such tax-exempt distributions
treated as a tax-preference item for purposes of the alternative minimum tax.
PERFORMANCE INFORMATION
(See "Distribution and performance
information--Performance information" in
the Funds' prospectuses.)
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for the periods of one year, five years and the life of the Fund each
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Funds' shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compound rates of return of a hypothetical investment over
such periods, according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)^(1/n) - 1
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Average Annual Total Return for periods ended March 31, 1995
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
<S> <C> <C> <C> <C>
Scudder New York Tax Free Money Fund 2.57% 2.95% -- 3.59%(1)
Scudder New York Tax Free Fund 6.39% 8.34% 8.64% --
Scudder Ohio Tax Free Fund 6.82% 8.03% -- 7.76%(1)
Scudder Pennsylvania Tax Free Fund 7.09% 8.19% -- 8.17%(1)
(1) For the period May 28, 1987 (commencement of operations) to March 31, 1995.
</TABLE>
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 periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
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<PAGE>
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Cumulative Total Return for periods ended March 31, 1995
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
<S> <C> <C> <C> <C>
Scudder New York Tax Free Money Fund 2.57% 15.64% -- 31.87%(1)
Scudder New York Tax Free Fund 6.39% 49.24% 128.93% --
Scudder Ohio Tax Free Fund 6.82% 47.12% -- 79.80%(1)
Scudder Pennsylvania Tax Free Fund 7.09% 48.25% -- 85.16%(1)
(1) For the period May 28, 1987 (commencement of operations) to March 31, 1995.
</TABLE>
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
Yield
Yield for Scudder New York Tax Free Money Fund is the net annualized
yield based on a specified seven calendar days calculated at simple interest
rates. Yield is calculated by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return. The yield is annualized by multiplying the base period return by
365/7. The yield figure is stated to the nearest hundredth of one percent. The
yield of the Fund for the seven-day period ended March 31, 1995 was 3.41%.
Yield for Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund
and Scudder Pennsylvania Tax Free Fund is the net annualized SEC yield based on
a specified 30-day (or one month) period assuming a semiannual compounding of
income. Yield is calculated by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last day
of the period, according to the following formula:
YIELD = 2[(a-b/cd + 1)^6-1]
Where:
a = dividends and interest earned during the period, including
the amortization of market premium or accretion of market
discount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
30-day net annualized SEC yield for the period ended March 31, 1995:
Scudder New York Tax Free Fund 4.96%
Scudder Ohio Tax Free Fund 5.22%
Scudder Pennsylvania Tax Free Fund 5.29%
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<PAGE>
Effective Yield
Effective yield for Scudder New York Tax Free Money Fund is the net
annualized yield for a specified seven calendar-days assuming a reinvestment of
the income or compounding. Effective yield is calculated by the same method as
yield except the yield figure is compounded by adding 1, raising the sum to a
power equal to 365 divided by 7, and subtracting one from the result, according
to the following formula:
Effective Yield = [(Base Period Return + 1)^(365/7)] - 1.
Effective yield for the seven day period ended March 31, 1995:
Scudder New York Tax Free Money Fund 3.41%
Tax-Equivalent Yield
Tax-equivalent yield for Scudder New York Tax Free Money Fund is the
net annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified seven day period assuming a reinvestment of
all dividends paid during such period. Tax-equivalent yield is calculated by
dividing that portion of the Fund's yield (as computed in the yield description
above) which is tax-exempt by one minus a stated income tax rate and adding the
product to that portion, if any, of the yield of the Fund that is not
tax-exempt. Thus, taxpayers with a federal tax rate of 36% and an effective
combined marginal income tax rate of 43.65% would need to earn a taxable yield
of 6.05% to receive after-tax income equal to the 3.41% tax-free effective yield
of Scudder New York Tax Free Money Fund for the seven day period ended March 31,
1995.
Tax-equivalent yield for Scudder New York Tax Free Fund is the net
annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified 30-day (or one month) period assuming
semiannual compounding of income. Tax-equivalent yield is calculated by dividing
that portion of the Fund's yield (as computed in the yield description above)
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt. Thus,
taxpayers with a federal tax rate of 36% and an effective combined marginal
income tax rate of 43.65% would need to earn a taxable yield of 8.80% to receive
after-tax income equal to the 4.96% tax-free yield of Scudder New York Tax Free
Fund for the thirty-day period ended March 31, 1995.
For Scudder Ohio Tax Free Fund, taxpayers with a federal tax rate of
36% and an effective combined marginal rate of 40.42% would need to earn a
taxable yield of 8.76% to receive after-tax income equal to the 5.22% tax-free
yield of Scudder Ohio Tax Free Fund for the 30-day period ended on March 31,
1995.
For Scudder Pennsylvania Tax Free Fund, taxpayers with a federal tax
rate of 36% and an effective combined marginal tax rate of 37.8%, would need to
earn a taxable yield of 8.50% to receive after-tax income equal to the 5.29%
tax-free yield of Scudder Pennsylvania Tax Free Fund for the 30-day period ended
on March 31, 1995.
Quotations of a Fund's performance are historical, show the performance
of a hypothetical investment and are not intended to indicate future
performance. Performance of the Fund will vary based on changes in market
conditions and the level of the Fund's expenses. An investor's shares when
redeemed, may be worth more or less than their original cost.
Investors should be aware that the principal of each Fund is not
insured.
Comparison of Portfolio Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
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<PAGE>
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
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
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that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
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Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic, and
business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national business 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. national 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.
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Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectuses.)
The Funds are series of Scudder State Tax Free Trust (the "Trust"). The
Trust is a Massachusetts business trust established under a Declaration of Trust
dated May 25, 1983. Such Declaration of Trust was amended and restated on
December 8, 1987. Its authorized capital consists of an unlimited number of
shares of beneficial interest of $0.01 par value. The shares are currently
divided into six series. The series of the Trust are Scudder Massachusetts
Limited Term Tax Free Fund, Scudder Massachusetts Tax Free Fund, Scudder Ohio
Tax Free Fund, Scudder Pennsylvania Tax Free Fund, Scudder New York Tax Free
Money Fund and Scudder New York Tax Free Fund. 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' prospectuses.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with its equitable share of the
general liabilities of the Trust, as determined by the Trustees. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust or any
series, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such shares available for distribution to
shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Trustees have the authority to issue more series of shares and to
designate the relative rights and preferences as between the different series.
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 Fund's prospectus.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the 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 the Trust except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
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INVESTMENT ADVISER
(See "Fund organization-Investment adviser" in the Funds' prospectuses.)
Scudder, Stevens & Clark, Inc., an investment counsel firm, acts as
investment adviser to the Funds. This organization is one of the most
experienced investment management firms in the United States. It was established
as a partnership in 1919 and pioneered the practice of providing investment
counsel to individual clients on a fee basis. In 1928 it introduced the first
no-load mutual fund to the public. In 1953 the Adviser introduced Scudder
International Fund, the first mutual fund registered with the SEC in the U.S.
investing internationally in several foreign countries. The firm reorganized
from a partnership to a corporation on June 28, 1985.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder Institutional Fund,
Inc., Scudder International Fund, Inc., Scudder Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Securities Trust, Scudder State Tax Free
Trust, Scudder Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S.
Treasury Money Fund, Scudder Variable Life Investment Fund, Scudder World Income
Opportunities Fund, Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The
First Iberian Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The
Latin America Dollar Income Fund, Inc. Some of the foregoing companies or trusts
have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets of over $11 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.
In selecting the securities in which the Funds may invest, the
conclusions and investment decisions of the Adviser with respect to the Funds
are based primarily on the analyses of its own research department. The Adviser
receives published reports and statistical compilations of the issuers
themselves, as well as analyses from 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 the Funds and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions 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.
Scudder New York Tax Free Fund
The Investment Management Agreement (the "Agreement") between Scudder
New York Tax Free Fund and the Adviser is dated December 12, 1990, and will
remain in effect until September 30, 1994. The Agreement was last approved by
the Trustees on August 9, 1994 and by the Fund's shareholders on December 11,
1990. The Agreement will continue in effect thereafter by its terms from year to
year only so long as its continuance is specifically approved at least annually
by the vote of a majority of those Trustees who are not parties to such
Agreements or "interested persons" of the Adviser or the Trust cast in person at
a meeting called for the purpose of voting on such approval and either by vote
of the majority of the Trustees or a majority of the outstanding voting
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securities of the Fund. The Agreement may be terminated at any time without
payment of penalty by either party on sixty days' written notice, and
automatically terminates in the event of its assignment.
Under its Agreement the Adviser regularly provides Scudder New York Tax
Free Fund with continuing investment management consistent with the Fund's
investment objectives and policies and restrictions and 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 each Fund's assets shall be held
uninvested, subject always to the provisions of the Trust's Declaration of Trust
and By-Laws, the Investment Company Act of 1940, the Internal Revenue Code of
1986 and the Fund's investment objectives, policies and restrictions and subject
further to such policies and instructions as the Trustees of the Trust may from
time to time establish. The Adviser also advises and assists the officers of the
Trust in taking such steps as are necessary or appropriate to carry out the
decisions of its Trustees and the appropriate committees of the Trustees
regarding the conduct of business of the Trust.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Trust's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Fund's transfer agent, pricing
agents, custodian, accountants and others); preparing and making filings with
the SEC and other regulatory agencies; assisting in the preparation and filing
of the Fund's federal, state and local tax returns; preparing and filing the
Fund's federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
The Adviser pays the compensation and expenses (except those for
attending Board and Committee meetings outside New York, New York and Boston,
Massachusetts) of all officers and executive employees of the Fund affiliated
with the Adviser and makes available, without expense to the Fund, the services
of such 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 Trust's office rent and provides
investment advisory, research and statistical facilities and all clerical
services relating to research, statistical and investment work.
For these services Scudder New York Tax Free Fund 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, 1993, 1994 and 1995 the investment
management fees incurred by Scudder New York Tax Free Fund were $1,117,169
$1,367,695 and 1,251,453, respectively.
Under its Agreement Scudder New York Tax Free Fund is responsible for
all of its other expenses, including fees and expenses incurred in connection
with membership in investment company organizations; brokers' commissions;
legal, auditing and accounting expenses; taxes and governmental fees; the fees
and expenses of the Transfer Agent; and any other expenses, including clerical
expenses, of issue, sale, underwriting, distribution, redemption or repurchase
of shares; the expenses of and fees for registering or qualifying securities for
sale; the fees and expenses of the Trustees, officers and employees of the Trust
who are not affiliated with the Adviser; the cost of printing and distributing
reports and notices to shareholders; and the fees and disbursements of
custodians. The Fund may arrange to have third parties assume all or part of the
expenses of sale, underwriting and distribution of shares of the Fund. The Fund
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. The Custodian Agreement provides
that the custodian shall compute the net asset value.
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Scudder New York Tax Free Money Fund
The Investment Advisory Agreement (the "Agreement") between Scudder New
York Tax Free Money Fund is dated June 1, 1987. The Agreement for Scudder New
York Tax Free Money Fund was most recently approved by the Trustees on August 9,
1994, and by shareholders of that Fund on December 8, 1987. The Agreement will
remain in effect until September 30, 1995 and will continue in effect from year
to year thereafter only if its continuance is approved annually by the vote of a
majority of the Trustees who are not parties to the Agreement 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 vote of a majority of the
Trustees or a majority of the outstanding voting securities of the Fund. The
Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice, and automatically terminates in the event
of its assignment.
Under its Agreement the Adviser regularly provides Scudder New York Tax
Free Money Fund with investment research, advice and supervision and furnishes
continuously an investment program consistent with the Fund's investment
objectives and policies and determines what securities shall be purchased for
each 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, and of the
Investment Company Act of 1940, as amended, and to the Fund's investment
objectives, policies and restrictions, and subject further to such policies and
instructions as the Trustees of the Trust may from time to time establish. The
Adviser also advises and assists the officers of the Trust in taking such steps
as are necessary or appropriate to carry out the decisions of its Trustees and
the appropriate committees of the Trustees regarding the conduct of the business
of the Trust.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Trust and makes available, without
expense to the Fund, the services of the Adviser's 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
pays the Trust's office rent and provides investment advisory, research and
statistical facilities and all clerical services relating to research,
statistical and investment work.
For these services Scudder New York Tax Free Money Fund 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, 1993, 1994
and 1995, investment management fees incurred by Scudder New York Tax Free Money
Fund were $49,504, $50,984 and 107,615, 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,
1996. For the fiscal year ended March 31, 1995, the Adviser did not impose a
portion of its fee which would have amounted to $151,719 and the portion imposed
amounted to $107,615.
Under the Agreement Scudder New York Tax Free Money 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 or any other expenses, including clerical
expenses, 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 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.
Since the Adviser absorbed Scudder New York Tax Free Money Fund's
expenses as described above, the expense ratios for the fiscal years ended March
31, 1993, 1994 and 1995 were 0.60%, 0.60% and 0.60%, respectively. The expense
ratios for Scudder New York Tax Free Fund for the fiscal years ended March 31,
1993, 1994 and 1995 were 0.82% , 0.82% and 0.82% respectively.
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Scudder Ohio Tax Free Fund
The Investment Advisory Agreement (the "Agreement"), is dated June 1,
1987. The Agreement will remain in effect until September 30, 1995, and will
continue in effect from year to year thereafter only if its continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to such Agreement 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 vote of a majority of the Trustees or a majority of the
outstanding voting securities of the Fund. The Agreement was approved by such
Trustees (including a majority of the Trustees who are not such "interested
persons") on August 9, 1994 and by the Fund's shareholders on December 8, 1987.
The Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice, and automatically terminates in the event
of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the Fund's investment objectives and policies
and 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 Investment Company Act of 1940, 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 the 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. 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, 1993, 1994 and 1995, the investment management fees incurred by the
Fund were $89,880, $158,146, and $150,790 respectively. Had the Adviser imposed
a full investment management fee for the fiscal years ended March 31, 1993, 1994
and 1995, the investment management fees would have equaled $356,862 , $480,674,
and $317,609 respectively.
The Adviser has agreed to maintain the annualized expenses of the Fund
at not more than 0.50% of average daily net assets of the Fund until July 31,
1996.
Under the Agreement the 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 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.
Scudder Pennsylvania Tax Free Fund
The Investment Advisory Agreement (the "Agreement"), is dated June 1,
1987. The Agreement will remain in effect until September 30, 1995, and will
continue in effect from year to year thereafter only if its continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to such Agreement 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 vote of a majority of the Trustees or a majority of the
outstanding voting securities of the Fund. The Agreement was approved by such
Trustees (including a majority of the Trustees who are not such "interested
persons") on August 9, 1994 and by the Fund's shareholders on December 8, 1987.
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The Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice, and automatically terminates in the event
of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the Fund's investment objectives and policies
and 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 Investment Company Act of 1940, 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 the 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. 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, 1993, 1994 and 1995, the Adviser did not impose a portion of its
management fees amounting to $256,379, $319,172 and $312,807, respectively; the
portion imposed amounted to $38,277, $108,861 and $114,361 respectively. The
Adviser has agreed to maintain the annualized expenses of the Fund at not more
than 0.50% of average daily net assets of the Fund until July 31, 1996.
Under the Agreement the 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 or any other expenses, including clerical expenses 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 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.
The Agreements further provide that as between the Trust and the
Adviser, the Trust will be responsible for all expenses, including clerical
expense of offer, sale, underwriting and distribution of the Funds' shares only
so long as the Trust employs a principal underwriter to act as the distributor
of the Funds' 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 the Funds' 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 the Trust. In the event that the Trust ceases to employ a
principal underwriter to act as the distributor of the Funds' shares, the
expenses of distributing the Funds' shares will be borne by the Adviser unless
the Trust shall have adopted a plan or plans pursuant to Rule 12b-1 under the
1940 Act providing that the Funds shall be responsible for some or all of such
distribution expenses.
Each Agreement requires the Adviser to return to each Fund all or a
portion of advances of its management fee to the extent annual expenses of such
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which such Fund's shares are offered for sale.
Management has been advised that, while most states have eliminated expense
limitations, the lowest limitation is currently 2 1/2% of average daily net
assets up to $30 million, 2% of the next $70 million of average daily net assets
and 1 1/2% of average daily net assets in excess of that amount. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitations. Any such fee advance required to be
returned to the Fund will be returned as promptly as practicable after the end
of the 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
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amortization of organization costs is described herein under "ADDITIONAL
INFORMATION--Other Information."
Each Agreement also provides that each Fund may use any name derived
from the name "Scudder, Stevens & Clark" only as long as such Agreement remains
in effect.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning the Agreements, Trustees who are not "interested persons" of
the Adviser are represented by independent counsel at the Trust's expense.
Each Agreement provides that the Adviser 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 Trust's 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.
None of the Trustees or officers of the Trust may have dealings with
the Trust as principals in the purchase or sale of securities, except as
individual subscribers to or holders of shares of the Funds.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Principal Occupation** Underwriter, Scudder
Name and Address Position with Trust and Affiliations Investor Services, Inc.
---------------- ------------------- ---------------- -----------------------
<S> <C> <C> <C>
David S. Lee*#++ President and Trustee Managing Director of Scudder, President, Assistant
Stevens & Clark, Inc. Treasurer and Director
Henry P. Becton, Jr. Trustee President and General --
WGBH Manager, WGBH Educational
125 Western Avenue Foundation
Allston, MA
Dawn-Marie Driscoll Trustee Attorney and Corporate --
5760 Flamingo Drive Director; Partner, Palmer &
Cape Coral, FL Dodge from 1988 to 1990
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<PAGE>
Position with
Principal Occupation** Underwriter, Scudder
Name and Address Position with Trust and Affiliations Investor Services, Inc.
---------------- ------------------- ---------------- -----------------------
Peter B. Freeman++ Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI
Dudley H. Ladd*# Trustee Managing Director of Scudder, Senior Vice President
Stevens & Clark, Inc. and Director
Wesley W. Marple, Jr.++ Trustee Professor of Business --
413 Hayden Hall Administration, Northeastern
360 Huntington Avenue University College of
Boston, MA Business Administration
Daniel Pierce*#++ Trustee Chairman of the Board and Vice President,
Managing Director of Scudder, Director and
Stevens & Clark, Inc. Assistant Director
Jean C. Tempel Trustee General Partner, TL Ventures --
Ten Post Office Square
Suite 1325
Boston, MA
Donald C. Carleton# Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Jerard K. Hartman+ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Thomas W. Joseph# Vice President Principal of Scudder, Stevens Vice President,
& Clark, Inc. Director, Treasurer
and Assistant Clerk
Thomas F. McDonough# Vice President and Principal of Scudder, Stevens Clerk
Secretary & Clark, Inc.
Pamela A. McGrath# Vice President and Principal of Scudder, Stevens --
Treasurer & Clark, Inc.
Edward J. O'Connell+ Vice President and Principal of Scudder, Stevens Assistant Treasurer
Assistant Treasurer & Clark, Inc.
Coleen Downs Dinneen# Assistant Secretary Vice President of Scudder, Assistant Clerk
Stevens & Clark, Inc.
</TABLE>
* Messrs. Lee, Ladd, Padegs and Pierce are considered by the Trust and
its counsel to be Trustees who are "interested persons" of the Adviser
or of the Trust within the meaning of the Investment Company Act of
1940, as amended.
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** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
++ Messrs. Freeman, Lee, Marple and Pierce are members of the Executive
Committee, which has the power to declare dividends from ordinary
income and distributions of realized capital gains to the same extent
as the Board is so empowered.
# Address: Two International Place, Boston, Massachusetts 02110
+ Address: 345 Park Avenue, New York, New York 10154
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of June 30, 1995 all Trustees and officers of the 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 shares of each Fund
outstanding on such date.
As of June 30, 1995 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
1,063,241 shares of Scudder New York Tax Free Fund or 5.81% of the outstanding
shares of such Fund. Scudder, Stevens & Clark, Inc. may be deemed to be the
beneficial owner of such shares but disclaims any beneficial ownership in such
shares.
As of June 30, 1995 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
379,064 shares of Scudder Ohio Tax Free Fund or 6.20% of the outstanding shares
of such Fund. Scudder, Stevens & Clark, Inc. may be deemed to be the beneficial
owner of such shares but disclaims any beneficial ownership in such shares.
As of June 30, 1995 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
551,571 shares of Scudder Pennsylvania Tax Free Fund or 9.75% of the outstanding
shares of such Fund. Scudder, Stevens & Clark, Inc. may be deemed to be the
beneficial owner of such shares but disclaims any beneficial ownership in such
shares.
To the best of the Trust's knowledge, as of June 30, 1995 no person
owned beneficially more than 5% of each Fund's outstanding shares, except as
noted above.
REMUNERATION
Several of the officers and Trustees of the Trust may be officers of
the Adviser, Scudder Investor Services, Inc., Scudder Service Corporation,
Scudder Trust Company or Scudder Fund Accounting Corporation from whom they
receive compensation, as a result of which they may be deemed to participate in
fees paid to the Adviser. The Trust pays no direct remuneration to any officer
of the Trust. However, each of the Trust's Trustees who is not affiliated with
the Adviser will be paid by the Trust. Each of these unaffiliated Trustees
receives an annual Trustee's fee of $12,000 from the Trust, allocated equally
among the series of the Trust and fees of $300 from the Trust, allocated equally
among the series of the Trust, for each attended Trustees' meeting, audit
committee meeting or meeting held for the purpose of considering arrangements
between the Trust and the Adviser or any of its affiliates. Each unaffiliated
Trustee also receives $100 per committee meeting, other than those set forth
above or contract meeting, attended. For the fiscal year ended March 31, 1995,
such fees totaled $15,138 for Scudder New York Tax Free Fund, $15,138 for
Scudder New York Tax Free Money Fund, $14,930 for Scudder Ohio Tax Free Fund and
$14,900 for Scudder Pennsylvania Tax Free Fund, respectively.
The following Compensation Table provides, in tabular form, the following data:
Column (1): all Trustees who receive compensation from the Trust.
Column (2): aggregate compensation received by a Trustee from all the series of
the Trust.
Columns (3) and (4): pension or retirement benefits accrued or proposed be paid
by the Trust. Scudder State Tax Free Trust does not pay its Trustees such
benefits.
Column (5): total compensation received by a Trustee from the Trust, plus
compensation received from all funds for which a Trustee serves in a fund
complex. The total number of funds from which a Trustee receives such
compensation is also provided.
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<PAGE>
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1994
===================== ============================== ==================== ===================== =========================
(1) (2) (3) (4) (5)
Pension or
Retirement Total Compensation From
Benefits Accrued Estimated Annual Scudder State Tax Free
Name of Person, Aggregate Compensation from As Part of Fund Benefits Upon Trust and Fund Complex
Position Scudder State Tax Free Trust* Expenses Retirement Paid to Trustee
===================== ============================== ==================== ===================== =========================
<S> <C> <C> <C> <C>
Henry P. Becton, Jr., $17,097.83 N/A N/A $90,597
Trustee (15 funds)
Dawn-Marie Driscoll, $17,097.83 N/A N/A $99,193
Trustee (16 funds)
Peter B. Freeman, $17,097.83 N/A N/A $146,243
Trustee (31 funds)
Wesley W. Marple, Jr., $17,097.83 N/A N/A $100,093
Trustee (15 funds)
Jean C. Tempel, $3,600 N/A N/A $15,965
Trustee (15 funds)
</TABLE>
* 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 Fund and Scudder Pennsylvania Tax Free Fund.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a Massachusetts corporation, which is a wholly-owned
subsidiary of the Adviser, a Delaware corporation. The Trust's underwriting
agreement dated June 1, 1987 will remain in effect until September 30, 1995 and
from year to year thereafter only if its continuance is approved annually by a
majority of the members of the Board of Trustees who are not parties to such
agreement or interested persons of any such party and either by vote of a
majority of the Board of Trustees or a majority of the outstanding voting
securities of the Trust. The underwriting agreement was last approved by the
Trustees on August 9, 1994.
Under the underwriting agreement, the Trust is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Trust as a broker 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 Fund; the cost of printing and mailing confirmations of
purchases of shares and the prospectuses accompanying such confirmations; any
issuance taxes and/or any initial transfer taxes; a portion of shareholder
toll-free telephone charges and expenses of shareholder service representatives;
the cost of wiring funds for share purchases and redemptions (unless paid by the
shareholder who initiates the transaction); the cost of printing and postage of
business reply envelopes; and a portion of the cost of computer terminals used
by both the Trust and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of a Fund to the public.
The Distributor 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
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<PAGE>
the sale of shares issued by each Fund, unless a Rule 12b-1 Plan is in effect
which provides that the Fund shall bear some or all of such expenses.
Note: Although the Trust does not currently have a 12b-1 Plan and the Trustees
have no current intention of adopting one, the Trust would also pay those fees
and expenses permitted to be paid or assumed by the Trust pursuant to a 12b-1
Plan, if any, were such a plan adopted by the Trust, notwithstanding any other
provision to the contrary in the underwriting agreement.
As agent the Distributor currently offers shares of each Fund on a
continuous basis to investors in all states in which shares of each Fund may
from time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of either Fund.
TAXES
(See "Distribution and performance information--Dividends and capital
gains distributions" and "Transaction information--Tax
information, Tax identification number" in
the Funds' prospectuses.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situation.
Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in the Funds.
Federal Taxation
Each Fund within the Trust 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, and intends to continue
to so 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 and must also derive less than 30% of its gross
income in each taxable year from certain types of investments (such as
securities, options and financial futures) held for less than three months. The
30 percent of gross income limitation may restrict Scudder New York Tax Free
Fund's activities involving Strategic Transactions. Legislation currently
pending before the U.S. Congress would repeal this requirement. However, it is
impossible to predict whether this legislation will become law and, if it is so
enacted, what form it will eventually take.
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 which includes net short-term
capital gain in excess of long-term capital loss and at least 90 percent of its
tax-exempt net investment income and generally is not subject to federal income
tax to the extent that it distributes annually all of its taxable net investment
income and net realized long-term and short-term 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 percent, 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.
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<PAGE>
Each Fund is subject to a 4 percent nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98 percent of a Fund's taxable ordinary income for the
calendar year and at least 98% of the excess of its capital gains over capital
losses realized during the one-year period ending October 31 during such year,
together with any undistributed, untaxed amounts of ordinary income and capital
gains from the previous calendar year. Each Fund has adjusted its distribution
policies to minimize any adverse impact from this tax or eliminate its
application.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of a Fund. New York Tax Free Fund and
New York Tax Free Money Fund intend to offset realized capital gains by using
their capital loss carryforwards before distributing any gains. As of March 31,
1995, New York Tax Free Fund had a net capital loss carryforward of
approximately $6,106,146, which may be applied against realized capital gains of
each succeeding year until fully utilized or until March 31, 2003. New York Tax
Free Money Fund had a capital loss carryforward of approximately $12,653, which
may be applied against realized capital gains of each succeeding year until
fully utilized or until March 31, 2000 ($763), March 31, 2001 ($1,718), March
31, 2002 ($3,510) and March 31, 2003 ($5,991), the respective expiration dates,
whichever occurs first.
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations the interest on which is excluded from gross
income under Section 103(a) of the Code. Each Fund intends to satisfy this 50
percent requirement in order to permit its distributions of tax-exempt interest
to be treated as such for federal income tax purposes in the hands of its
shareholders. Distributions to shareholders of tax-exempt interest earned by the
Fund for the taxable year are therefore not subject to 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.
The Revenue Reconciliation Act of 1993 requires that any market
discount recognized on a tax-exempt bond is taxable as ordinary income. This
rule applies only for disposals of bonds purchased after April 30, 1993. A
market discount bond is a bond acquired in the secondary market at a price below
its redemption value. Under prior law, the treatment of market discount as
ordinary income did not apply to tax-exempt obligations. Instead, realized
market discount on tax-exempt obligations was treated as capital gain. Under the
new law, gain on the disposition of a tax-exempt obligation or any other market
discount bond that is acquired for a price less than its principal amount will
be treated as ordinary income (instead of capital gain) to the extent of accrued
market discount. This rule is effective only for bonds purchased after April 30,
1993.
Since no portion of a 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.
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 with respect to such shares. Any loss
realized upon the redemption of shares within six months from the date of their
purchase will be disallowed to the extent of any tax-exempt dividends received
with respect to such shares. All or a portion of a loss realized on the
redemption of shares of Scudder New York Tax Free Fund, Scudder Ohio Tax Free
Fund and Scudder Pennsylvania Tax Free Fund may be disallowed if shares of the
Fund are purchased (including shares purchased under the dividend reinvestment
plan or the automatic investment plan) within 30 days before or after such
redemption.
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<PAGE>
Distributions derived from interest which is exempt from regular
federal income tax may subject corporate shareholders to or increase their
liability under the 20 percent 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 24
percent individual alternative minimum tax, but normally no more than 20 percent
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 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.
Shareholders are also required to report tax-exempt interest. Redemptions of
shares of Scudder New York Tax Free Fund, including exchanges for shares of
another Scudder Fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
Interest which is tax-exempt for federal income tax purposes is
included as income for purposes of determining the amount of Social Security or
railroad retirement benefits subject to tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Fund will not be deductible for federal income tax purposes. Under
rules applied 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 held by persons who are
"substantial users" (or persons related thereto) of facilities financed by such
obligations. The Funds have not undertaken any investigation as to the users of
the facilities financed by bonds in their portfolios.
Distributions by Scudder New York Tax Free Fund, Scudder Ohio Tax Free
Fund and Scudder Pennsylvania Tax Free Fund result in a reduction in the net
asset value of the Fund's shares. Should a distribution reduce the net asset
value below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder, to the extent it is derived from other than
tax-exempt interest, as ordinary income or capital 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 Scudder New York Tax Free Fund,
Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund and all listed
nonequity options written or purchased by a Fund (including options on futures
contracts and options on securities indexes) 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 percent long-term and 40 percent short-term, and on the last
trading day of the Funds' 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 percent long-term and 40 percent short-term. Under certain circumstances,
entry into a futures contract to sell a security may constitute a short sale for
federal income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in each Fund's
portfolio.
Positions of Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund
and Scudder Pennsylvania Tax Free Fund which consist of at least one debt
security not governed by Section 1256 and at least one futures contract or
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<PAGE>
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. The Trust
will monitor each Fund's transactions in options and futures and may make
certain tax elections in order to mitigate the operation of these rules and
prevent disqualification of 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, in
the case of New York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund, gross proceeds from the redemption or exchange of
Fund shares, except in the case of certain exempt shareholders. Under the backup
withholding provisions of Section 3406 of the Code, distributions of taxable
income and capital gains and proceeds from the redemption or exchange of the
shares of a regulated investment company are generally subject to withholding of
federal income tax at the rate of 31 percent in the case of non-exempt
shareholders who fail to furnish the investment company with their taxpayer
identification numbers and with their 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 the Fund reasonably estimates that at least 95 percent
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. Under another special exception, proceeds from the
redemption or exchange of Fund shares are exempt from withholding if the Fund
maintains a constant net asset value per share. Withholding may also be required
if a Fund is notified by the IRS or a broker that the taxpayer identification
number furnished by the shareholder is incorrect or that the shareholder has
previously failed to report interest or dividend income. If the withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in additional shares, 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 a Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30
percent (or at a lower rate under an applicable income tax treaty) on amounts
constituting any ordinary income received.
State Taxation
The Trust is organized as a Massachusetts business trust, and neither
the Trust nor the Funds are liable for any income or franchise tax in the
Commonwealth of Massachusetts provided that each Fund qualifies as a regulated
investment company.
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.
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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 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.
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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 the
Funds 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 the issuer or a primary market maker for these
securities on a net basis, without any brokerage commission being paid by the
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Transaction costs may also include fees paid to third parties for
information as to potential purchasers or sellers of securities but only for the
purpose of seeking for the Fund the most favorable net results, including such
fee, on a particular transaction. Purchases of underwritten issues may be made
which will include an underwriting fee paid to the underwriter.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund's portfolio is to obtain the most favorable
net results taking into account such factors as price, commission where
applicable (negotiable in the case of U.S. national securities exchange
transactions), size of order, difficulty of execution and skill required of the
executing broker/dealer. The Adviser seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of the Distributor with commissions charged on comparable
transactions, as well as by comparing commissions paid by a Fund to reported
commissions paid by others. The Adviser reviews on a routine basis commission
rates, execution and settlement services performed, making internal and external
comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply market quotations to the Custodian of a Fund for
appraisal purposes, or who supply research, market and statistical information
to the Trust or the Adviser. The term "research, market and statistical
information" includes advice as to the value of securities, the advisability of
investing in, purchasing or selling securities; the availability of securities
or purchasers or sellers of securities; and analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The Adviser is not authorized when placing
portfolio transactions for a Fund to pay a brokerage commission in excess of
that which another broker might have charged for effecting the same transaction
solely on account of the receipt of research, market or statistical information.
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 will be placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available otherwise.
The Adviser may place brokerage transactions through the Custodian and
a credit against the custodian fee due to State Street Bank and Trust Company
equal to one-half of the commission on any such transaction will be given.
Except for implementing the policy stated above, there is no intention to place
portfolio transactions with particular brokers or dealers or groups thereof.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Trust 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 the Trust and not all such
information is used by the Adviser in connection with the Funds. Conversely,
such information provided to the Adviser by brokers and dealers through whom
other clients of the Adviser effect securities transactions may be useful to the
Adviser in providing services to the Trust.
The Trustees 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 the Fund on portfolio transactions is legally permissible
and advisable.
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Portfolio Turnover
Each Fund's portfolio will experience turnover. The portfolio turnover
rates of Scudder New York Tax Free Fund (defined by the SEC as the ratio of the
lesser of sales or purchases of securities to the monthly average value of the
portfolio, excluding all securities with remaining maturities of less than one
year) for the fiscal years ended March 31, 1993, 1994 and 1995 were 201.4% ,
158.0% and 83.8%, respectively.
The portfolio turnover rates for Scudder Ohio Tax Free Fund for the
fiscal periods ended March 31, 1993, 1994 and 1995 were 34.7%, 12.2% and 19.9%,
respectively. The portfolio turnover rates for Scudder Pennsylvania Tax Free
Fund for the fiscal periods ended March 31, 1993, 1994 and 1995 were 29.2%,
17.4% and 26.2%, respectively.
NET ASSET VALUE
Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund. The net asset value of shares of the Fund is
computed as of the close of regular trading on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading (the "Value Time"). The
Exchange is scheduled to be closed on the following holidays: New Year's Day,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share is determined by dividing
the value of the total assets of a Fund, less all liabilities, by the total
number of shares outstanding.
An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
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Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
Scudder New York Tax Free Money Fund. The net asset value per share of Scudder
New York Tax Free Money Fund is determined by the Custodian (twice daily as of
twelve o'clock noon and the close of trading on the Exchange), on each day when
the Exchange is open for trading (as noted above). Net asset value per share is
determined by dividing the total assets of the Fund, less all of its
liabilities, by the total number of shares of the Fund outstanding. The
valuation of the Fund's portfolio securities is based upon their amortized cost
which does not take into account unrealized securities gains or losses. This
method involves initially valuing an instrument at its cost and thereafter
amortizing to maturity any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. During periods of declining
interest rates, the quoted yield on shares of the Fund may tend to be higher
than a like computation made by a fund with identical investments utilizing a
method of valuation based upon market prices and estimates of market prices for
all of its portfolio instruments. Thus, if the use of amortized cost by the Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Fund would be able to obtain a somewhat higher yield if shares
of the Fund were purchased on that day, than would result from investment in a
fund utilizing solely market values, and existing investors in the Fund would
receive less investment income. The converse would apply in a period of rising
interest rates. Other assets for which market quotations are not readily
available are valued in good faith at fair value using methods determined by the
Trustees and applied on a consistent basis. For example, securities with
remaining maturities of more than 60 days for which market quotations are not
readily available are valued on the basis of market quotations for securities of
comparable maturity, quality and type. The Trustees review the valuation of the
Fund's securities through receipt of regular reports from the Adviser at each
regular Trustees' meeting. Determinations of net asset value made other than as
of the close of the Exchange may employ adjustments for changes in interest
rates and other market factors.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Funds in this combined Statement of
Additional Information have been audited by Coopers & Lybrand L.L.P., One Post
Office Square, Boston, Massachusetts 02109, independent accountants, and is
included in this Statement of Additional Information in reliance upon the
accompanying report of said firm, which report is given upon their authority as
experts in accounting and auditing.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Trust property or the
acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the respective Fund's property of any
shareholder held personally liable for the claims and liabilities to which a
shareholder may become subject by reason of being or having been a shareholder.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself would
be unable to meet its obligations.
Ratings of Municipal Obligations
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A,
Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be of the best quality.
Bonds rated Aa are judged to be of high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high quality bonds.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
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suggest a susceptibility to impairment sometime in the future. Securities rated
Baa are considered medium grade, with factors giving security to principal and
interest adequate at present but may be unreliable over any period of time. Such
bonds have speculative elements as well as investment-grade characteristics.
Securities rated Ba or below by Moody's are considered below investment grade,
with factors giving security to principal and interest inadequate and
potentially unreliable over any period of time. Such securities are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG-1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-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 so large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High-grade), A (Good-grade), BBB (Investment-grade) and BB 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 giving security to principal and interest inadequate and potentially
unreliable over any period of time. Such securities are commonly referred to as
"junk" bonds and as such they carry a high margin of risk.
S&P's top ratings for municipal notes issued are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A,
BBB, BB and B. Bonds rated AAA are considered to be investment-grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+. Bonds rated A are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher rates.
Bonds rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with 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
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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 or 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
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 semiannually 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 regular federal
income tax.
6. Net Asset Value Per Share
The value of each share of a Fund for purposes of sales and
redemptions.
7. Net Investment Income
The net investment income of each Fund is comprised of its interest
income, including amortizations of original issue discounts, less
amortizations of premiums and expenses paid or accrued computed under
GAAP.
8. Unit Investment Trust
An investment company organized under a trust or similar agreement
which does not have a board of trustees and which issues only
redeemable securities each of which represents an undivided interest in
a portfolio of specified securities.
Other Information
Each Fund has a fiscal year ending on March 31.
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Portfolio securities of each Fund are held separately, pursuant to a
custodian agreement, by the Fund's custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02101.
The firm of Willkie Farr & Gallagher of New York is counsel for the
Trust.
The CUSIP number of the New York Tax Free Money Fund is 811184-20-9.
The CUSIP number of the New York Tax Free Fund is 811184-10-0. The CUSIP number
of Scudder Ohio Tax Free Fund is 811184-40-7.
The CUSIP number of Scudder Pennsylvania Tax Free Fund is 811184-50-6.
The name "Scudder State Tax Free Trust" is the designation of the
Trustees for the time being under an Amended and Restated Declaration of Trust
dated December 8, 1987, as amended from time to time, and all persons dealing
with a Fund must look solely to the property of that Fund for the enforcement of
any claims against 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 Trust is liable for the obligations of any
other Fund. Upon the initial purchase of shares, the shareholder agrees to be
bound by the Trust's Declaration of Trust, as amended from time to time. The
Declaration of Trust of the Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts. All persons dealing with a Fund must
look only to the assets of that Fund for the enforcement of any claims against
such Fund as no other series of the Trust assumes any liabilities for
obligations entered into on behalf of a Fund.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a wholly-owned 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
fees incurred by Scudder New York Tax Free Money Fund and Scudder New York Tax
Free Fund for the year ended March 31, 1995 amounted to $15,833 and $16,530,
respectively. For the year ended March 31, 1995, the amount charged to Scudder
Ohio Tax Free Fund by SFAC amounted to $13,011, of which $3,000 was unpaid at
March 31, 1995. For the year ended March 31, 1995, the amount charged to Scudder
Pennsylvania Tax Free Fund by SFAC amounted to $13,429, of which $3,000 was
unpaid at March 31, 1995.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a wholly-owned subsidiary of Scudder, Stevens
& Clark, Inc., is the transfer and dividend-disbursing agent for the Funds.
Service Corporation also serves as shareholder service agent. Scudder New York
Tax Free Fund pays Service Corporation an annual fee of $25.00 for each account
maintained for a shareholder, which is $13.25 for its services as transfer and
dividend-paying agent and $11.75 for its services as shareholder service agent.
Scudder New York Tax Free Money Fund pays Service Corporation an annual fee of
$28.90, which is $12.40 for its services as transfer and dividend-paying agent
and $16.50 for its services as shareholder service agent, for each account
maintained for a shareholder. The Service Corporation fees incurred by Scudder
New York Tax Free Fund, Scudder New York Tax Free Money Fund, Scudder Ohio Tax
Free Fund and Scudder Pennsylvania Tax Free Fund for the year ended March 31,
1995 amounted to $137,282, $65,424, $63,737 and $67,137, respectively, of which
$10,695, $5,052, $4,978 and $5,286, respectively, were unpaid at March 31, 1995.
The Funds' prospectuses and this Statement of Additional Information
omit certain information contained in the Registration Statement which the Trust
has filed with the SEC under the Securities Act of 1933 and reference is hereby
made to the Registration Statement for further information with respect to the
Funds and the securities offered hereby. This Registration Statement is
available for inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder 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, are
incorporated by reference and attached hereto in the Annual Report to the
shareholders of the Fund dated March 31, 1995, and are deemed to be a part of
this Statement of Additional Information.
78
<PAGE>
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, are
incorporated by reference and attached in the Annual Report to the shareholders
of the Fund dated March 31, 1995, and are 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, are incorporated by
reference and attached hereto in the Annual Report to the shareholders of the
Fund dated March 31, 1995, and are 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, are
incorporated by reference and attached hereto in the Annual Report to the
shareholders of the Fund dated March 31, 1995, and are deemed to be a part of
this Statement of Additional Information.
79
<PAGE>
Shares of Scudder New York Tax Free Money Fund are not insured or guaranteed by
the U.S. government. Scudder New York Tax Free Money Fund seeks to maintain a
constant net asset value of $1.00 per share, but there can be no assurance that
the stable net asset value will be maintained.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
Scudder New York
Tax Free Money Fund
-------------------------------------
Scudder New York
Tax Free Fund
Annual Report
March 31, 1995
* For investors seeking triple tax-free income exempt from New York City,
state, and regular federal income taxes.
* Pure no-load(TM) funds with no commissions to buy, sell, or exchange shares.
<PAGE>
SCUDDER NEW YORK TAX FREE FUND
SCUDDER NEW YORK TAX FREE MONEY FUND
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
2 Highlights
3 Letter from the Funds' President
4 Scudder New York Tax Free Fund Performance Update
5 Scudder New York Tax Free Fund Portfolio Summary
6 Scudder New York Tax Free Money Fund
Portfolio Management Discussion
7 Scudder New York Tax Free Fund Portfolio Management Discussion
10 Scudder New York Tax Free Money Fund Investment Portfolio
13 Scudder New York Tax Free Money Fund
Financial Statements
16 Scudder New York Tax Free Money Fund
Financial Highlights
17 Scudder New York Tax Free Fund Investment Portfolio
22 Scudder New York Tax Free Fund Financial Statements
25 Scudder New York Tax Free Fund Financial Highlights
26 Notes to Financial Statements
31 Report of Independent Accountants
32 Tax Information
33 Officers and Trustees
34 Investment Products and Services
35 How to Contact Scudder
--------------------------------------------------------------------------------
HIGHLIGHTS
--------------------------------------------------------------------------------
Scudder New York Tax Free Money Fund
* Scudder New York Tax Free Money Fund offered a 7-day effective yield of
3.41% on March 31, 1995, equivalent to a 6.44% taxable yield for investors
in the top federal, state and local income tax brackets.
(bar chart title)
7-Day Effective Yields on March 31, 1995
(bar chart data)
Scudder New York Tax Free Money Fund Taxable Equivalent Yield
------------------------------------ ------------------------
3.41% 6.44%
Scudder New York Tax Free Fund
* Scudder New York Tax Free Fund provided a 4.96% 30-day net annualized SEC
yield on March 31, 1995.
* For shareholders subject to the 47.05% maximum combined federal, state and
local income tax rate, the Fund's yield was equal to a 9.37% taxable yield.
(bar chart title)
30-Day Yield on March 31, 1995
(bar chart data)
Scudder New York Tax Free Fund Taxable Equivalent Yield
------------------------------ ------------------------
4.96% 9.37%
2
<PAGE>
LETTER FROM THE FUNDS' PRESIDENT
--------------------------------------------------------------------------------
Dear Shareholders,
Investors' concerns about inflationary economic growth have abated in
recent months, after creating much turmoil for the world's investment markets in
1994. Indications of continued low inflation and weakness in certain segments of
the economy, combined with the Federal Reserve's most recent interest-rate
increases in November and February, have reassured many investors. Yields have
declined from their November highs, and municipal bond prices have made a
substantial recovery. Year-to-date through March 31, long-term municipal bonds,
as measured by the unmanaged Lehman Brothers Municipal Bond Index, returned
7.07% on average, more than making up for the -5.17% return reported for all of
1994.
Given the swings in interest rates over the past year and a half, the
question for municipal bond investors is, can the recent positive shift in
interest rates be sustained? We believe rates will remain relatively stable if
economic growth continues to slacken in the United States. Nevertheless,
additional interest-rate increases are not out of the question given some
lingering inflationary concerns: Commodity prices continue to rise, factory
production is pushing the limits of capacity, and the dollar has fallen to
record lows against the Japanese yen and German mark.
Your portfolio managers will continue to concentrate their efforts on
fundamental investment research and security selection as a means to generate
high current tax-free income and attractive total returns for the New York bond
portfolio. For the money market portfolio, your Fund managers will continue to
focus on a combination of competitive yields and price stability. As always,
please call a Scudder Investor Relations representative at 1-800-225-2470 if you
have questions about your Fund. Page 35 provides more information on how to
contact Scudder. Thank you for choosing Scudder New York Tax Free Funds to help
meet your investment needs.
Sincerely,
/s/ David S. Lee
David S. Lee
President,
Scudder New York Tax Free Fund
Scudder New York Tax Free Money Fund
3
<PAGE>
Scudder New York Tax Free Fund
Performance Update as of March 31, 1995
-----------------------------------------------------------------
Growth of a $10,000 Investment
-----------------------------------------------------------------
Scudder New York Tax Free Fund
----------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,639 6.39% 6.39%
5 Year $14,924 49.24% 8.34%
10 Year $22,893 128.93% 8.64%
Lehman Brothers Municipal Bond Index
--------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,743 7.43% 7.43%
5 Year $14,859 48.59% 8.24%
10 Year $25,456 154.56% 9.79%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended March 31
Scudder New York Tax Free Fund
Year Amount
----------------------
85 10000
86 11871
87 13143
88 13063
89 14180
90 15340
91 16536
92 18374
93 21240
94 21518
95 22893
Lehman Brothers Municipal Bond Index
Year Amount
----------------------
85 10000
86 12707
87 14100
88 14455
89 15496
90 17131
91 18712
92 20581
93 23158
94 23695
95 25456
The unmanaged Lehman Brothers Municipal Bond Index is a market
value-weighted measure of municipal bonds issued across the United
States. Index issues have a credit rating of at least Baa and a
maturity of at least two years. Index returns assume reinvestment
of dividends and, unlike Fund returns, do not reflect any fees or
expenses.
-----------------------------------------------------------------
Returns and Per Share Information
-----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended March 31
-----------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------------------------------------------------------------------------------
Net Asset Value... $11.19 $11.43 $10.39 $10.53 $10.60 $10.73 $10.98 $11.40 $10.32 $10.38
Income Dividends.. $ .75 $ .75 $ .73 $ .72 $ .69 $ .67 $ .65 $ .61 $ .54 $ .52
Capital Gains
Distributions..... $ -- $ .15 $ .20 $ -- $ .09 $ -- $ .25 $ .61 $ .73 $ .05
Fund Total
Return (%)........ 18.71 10.71 -.61 8.55 8.18 7.79 11.11 15.60 1.31 6.39
Index Total
Return (%)........ 27.07 10.97 2.52 7.21 10.56 9.22 10.02 12.52 2.32 7.43
</TABLE>
Performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
4
<PAGE>
Portfolio Summary as of March 31, 1995
---------------------------------------------------------------------------
Diversification
---------------------------------------------------------------------------
Lease Rentals 34%
General Obligation 10%
Housing Finance Authority 10% We continue to emphasize broad
Electric Utility Revenue 5% portfolio diversification, although
Higher Education 5% we have reduced our exposure to New
Water/Sewer Revenue 5% York City bonds.
Hospital/Health 3%
Port/Airport Revenue 2%
Pollution Control Revenue 1%
Miscellaneous Municipal 25%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Quality
--------------------------------------------------------------------------
AAA 37%
AA 20% Portfolio quality remains high,
A 19% with over 75% of the Fund's
BBB 20% portfolio rated A or better.
Not Rated 4%
----
100%
====
Weighted average quality: AA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Effective Maturity
--------------------------------------------------------------------------
Less than 1 year 9%
1 < 5 years 12% Bonds with effective maturities
5 < 10 years 15% of five to less than 20 years --
10 < 20 years 34% 49% of the portfolio -- currently
Greater than 20 years 30% offer good value and attractive
---- yields.
100%
====
Weighted average effective maturity: 14 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
For more complete details about the Fund's Investment Portfolio,
see page 17.
5
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------
Dear Shareholders,
The effects of the Federal Reserve's 1994-95 monetary policy have been felt
everywhere, including the tax-exempt money markets. Interest rates of tax-exempt
money market instruments have risen substantially over the past 12 months.
Scudder New York Tax Free Money Fund's 7-day effective yield rose to 3.41% on
March 31, 1995, from 1.65% a year earlier. For investors in the highest combined
federal, state and local income tax bracket, this yield equaled a 6.44%
compounded taxable yield, well above the 5.53% average for taxable money funds,
according to IBC/Donoghue, Inc., an independent firm that tracks money fund
performance.
Our strategy is to seek to maximize Scudder New York Tax Free Money Fund's
yield while preserving high portfolio quality and a stable $1.00 share price.
With this in mind, and in an environment of uncertainty about future Federal
Reserve actions, we have spread out maturities in the portfolio to reduce risk
and maintain a competitive return. This strategy allows the Fund to remain
flexible by providing regular opportunities to extend the average maturity. As
of March 31, 1995, the Fund's average maturity was 47 days, compared with 57
days 12 months earlier. For its fiscal year ended March 31, 1995, the Fund
provided a total return of 2.57%, assuming reinvestment of all income
distributions, which totaled $0.025 during the period.
As always, we will continue to search for high-quality, short-term
municipal money-market securities for Scudder New York Tax Free Money Fund while
actively managing the Fund's average maturity to provide an attractive tax-free
yield.
Sincerely,
Your Portfolio Management Team
/s/Rebecca Wilson /s/K. Sue Cote
Rebecca Wilson K. Sue Cote
Scudder New York Tax Free Money Fund:
A Team Approach to Investing
Rebecca Wilson is Lead Portfolio Manager for New York Tax Free Money Fund
and contributes nine years of experience in municipal investing and research.
Rebecca assumed responsibility for the Fund in 1987 after joining Scudder in
1986. K. Sue Cote, Portfolio Manager, joined the Fund's team in 1987 and has
spent 11 years working with short-term fixed-income investments.
6
<PAGE>
SCUDDER NEW YORK TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------
Dear Shareholders,
On March 31, 1995, Scudder New York Tax Free Fund provided a 30-day net
annualized SEC yield of 4.96%. For shareholders subject to the 39.6% maximum
federal income tax rate and the 12.34% maximum New York state and local income
tax rate, the Fund's yield is equivalent to a 9.37% taxable yield, higher than
yields provided by taxable investments of comparable credit quality. During the
12-month period ended March 31, 1995, shareholders received $0.52 per share of
income exempt from federal, state, and New York City income taxes, and capital
gains of $0.05 per share.
Despite wide fluctuations in New York municipal bond prices, the Fund's
share price increased $0.06 to $10.38 per share over the 12-month period. The
Fund posted a positive total return of 6.39% for the year through a combination
of interest income, capital gain distributions, and share price appreciation.
This return compares favorably with the 5.20% average total return of the 70 New
York municipal bond funds tracked by Lipper Analytical Services for the same
period.
New York State Upbeat For Now
For the time being, New York State's economy remains on solid financial
ground. The state ended fiscal year 1994 with a $1 billion surplus in its
general fund, which was appropriated into the fiscal year 1995 budget. Fiscal
year 1995 revenue estimates were reduced by approximately $1 billion, but
expenditures were also lower than projected. The resulting budget gap of $259
million was quickly eliminated with expenditure cuts. In fact, the state expects
fiscal year 1995 to end with a general fund surplus of $157 million.
New York State's economy began to slow in July 1994. Both its job growth
and personal income growth continue to lag the nation's and are projected to do
so throughout 1995. The state is at an economic and political crossroads. While
it is one of the wealthiest states in the country, New York is no longer able to
sustain its large public sector--state taxes are already among the highest in
the nation and its mature economy is unlikely to boom anytime soon. Key sectors
of the state's economy such as defense, manufacturing, and financial services
have already experienced downsizing and restructuring. New York's budget must
adapt to current conditions: If Governor Pataki can cut taxes and expenditures,
both the state's economy and finances will benefit. In order to avoid financial
shortfalls in the future, New York needs to deal with both sides of the
financial equation.
7
<PAGE>
Municipal Bonds Rally
Most of 1994 stood in marked contrast to performance in the last five
months of the Fund's fiscal year. The Federal Reserve repeatedly raised
short-term interest rates to try to slow the pace of economic growth, which led
to falling bond prices and rising yields across the maturity spectrum. All told,
yields of Treasury bonds rose almost 2 1/2 percentage points during the 12
months ended November 1994. Bond prices dropped 20% during the same time period,
amounting to their worst 12-month total return in history. Yields on long-term
municipal bonds rose almost as much as Treasury yields during the period. As the
environment for bond investments grew more challenging, we took a defensive
stance to help reduce price erosion, maintaining a shorter average effective
maturity and higher cash position than we had during the preceding three years.
In recent months, the municipal bond market has enjoyed a significant
rally. Concerns over the possible overheating of the U.S. economy eased
considerably in late 1994 as economic statistics pointed to weakness in several
sectors. Retail sales and job growth plateaued, while demand for housing and new
cars slackened. The steady decline in the supply of tax-free bonds also helped
municipal bond prices. During this period, we increased the Fund's average
effective maturity and reduced our cash position to help the Fund regain ground
lost during 1994.
The Fund's Four-Point Strategy
Currently, the Fund's investment strategy continues to focus on four basic
elements: (1) purchasing bonds with effective maturities of less than 20 years;
(2) purchasing noncallable bonds at yields close to those of callable bonds with
comparable maturities; (3) purchasing high-yielding callable bonds; and (4)
diversifying investments based on careful credit selection.
Bonds with effective maturities of at least five but less than 20 years
represented 49% of the portfolio on March 31, 1995, compared with approximately
47% on March 31, 1994. Bonds in this maturity range generally offer good value
and provide attractive yields with less price volatility than longer-term bonds.
8
<PAGE>
While shorter-maturity bonds and noncallable bonds offer a relative degree
of price stability, they also typically yield less than longer-maturity,
callable debt instruments. In order to enhance the portfolio's overall yield, we
selectively purchased higher-coupon bonds that can be called by their issuer in
a relatively short time. Typically, these bonds provide yields three quarters to
one percentage point higher than bonds maturing on similar call dates.
Scudder New York Tax Free Fund continues to emphasize careful credit
selection and portfolio diversification, investing in a variety of issues,
including general obligation, revenue, water district, hospital, single family
housing, multi-family housing, school district, lease, and tax allocation bonds
as of March 31, 1995. However, we have reduced our exposure to New York City
general obligation bonds to 1.7% of the portfolio (considerably lower than in
the past) because of concerns over the city's $2.7 billion projected budget
deficit for its upcoming fiscal year. The average weighted credit quality of the
Fund's portfolio at the end of March was AA.
Our Near-Term Outlook
Recent signs point to a slowing growth rate for the U.S. economy. Even
export sales are moderating, partly due to the economic problems in Mexico, our
largest trading partner. Still, we cannot rule out additional rate hikes. It is
unclear, for example, whether consumer spending will remain restrained or
increase and add to inflationary pressures. Despite economic uncertainties, we
expect a calmer municipal marketplace for the near term relative to last year,
with firm prices due to the limited supply of tax-free bonds. Another potential
concern is recent congressional discussions regarding possible alterations of
U.S. tax law. We believe that when all is said and done, municipal bonds will
remain attractive investments for investors who need tax-free income.
As we pursue Scudder New York Tax Free Fund's objectives, we intend to
continue to emphasize noncallable bonds with effective maturities between five
and 20 years. As always, we will pay close attention to credit quality as we
position the Fund to seek high tax-free income and a competitive total return.
Sincerely,
Your Portfolio Management Team
/s/Jeremy L. Ragus /s/Donald C. Carleton
Jeremy L. Ragus Donald C. Carleton
Scudder New York
Tax Free Fund:
A Team Approach to Investing
Scudder New York Tax Free Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Scudder New York Tax Free Fund's Lead Portfolio Manager Jeremy L. Ragus has
had responsibility for the Fund's day-to-day operations since he joined Scudder
in 1990. Jeremy has 14 years of experience in municipal investing. Donald C.
Carleton, Portfolio Manager, has over 25 years of investment management
experience and has worked on the Fund since he arrived at Scudder in 1983.
9
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE MONEY FUND
INVESTMENT PORTFOLIO as of March 31, 1995
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
100.0% MUNICIPAL INVESTMENTS
--------------------------------------------------------------------------------------------------
NEW YORK Cold Spring Harbor, NY, Central School District,
Tax and Revenue Anticipation Notes,
4.25%, 6/29/95....................................... 1,190,000 SS&C 1,190,558
Dormitory Authority of the State of New York,
Memorial Sloan-Kettering Cancer Center, Tax
Exempt Commercial Paper, Series C,
4.05%, 4/11/95....................................... 750,000 A1 750,000
Erie County, NY, Revenue Anticipation Notes,
4.75%, 8/15/95....................................... 1,000,000 MIG1 1,002,686
Erie County, NY, Water Authority, Waterworks
Revenue, Weekly Demand Bonds, 3.95%, 12/1/16*........ 2,000,000 A1+ 2,000,000
Freeport Union Free School District, NY,
Tax Anticipation Notes, 4.5%, 6/29/95................ 2,000,000 SS&C 2,001,896
Monroe County, NY, Industrial Development Agency,
Office Building Associates, Series 1992, Weekly
Demand Note, 3.85%, 10/1/00*......................... 1,624,000 P1 1,624,000
Municipal Assistance Corporation of New York City,
Prerefunded, 9.875%, 7/1/95**........................ 1,565,000 AAA 1,616,775
Nassau County, NY, Bond Anticipation Notes:
4.75%, 8/15/95....................................... 1,000,000 MIG1 1,002,227
5%, 8/15/95.......................................... 500,000 MIG1 501,617
New York City, Tax Exempt Commercial Paper,
4.05%, 5/19/95....................................... 1,100,000 MIG1 1,100,000
New York City, Weekly Demand Bonds,
4.05%, 8/15/24*...................................... 1,000,000 MIG1 1,000,000
New York City, Revenue Anticipation Notes,
4.5%, 4/12/95 ....................................... 2,000,000 MIG1 2,000,366
New York State Energy Research and
Development Authority, New York State Electric and
Gas, Tax Exempt Commercial Paper, 4%, 4/10/95........ 1,000,000 A1+ 1,000,000
New York State Energy Research and
Development Authority, Pollution Control Revenue,
Niagara Mohawk Company, Daily Demand Note,
4.3%, 7/1/15* ....................................... 1,100,000 A1+ 1,100,000
New York State Energy Research and
Development Authority, Rochester Gas and Electric
Company, Monthly Reset Bonds, 3.75%, 10/1/14*........ 1,000,000 P1 1,000,000
New York State Environmental Facilities Corp.,
Solid Waste Revenue, General Electric Corp.,
Commercial Paper:
3.8%, 6/13/95 ..................................... 1,000,000 A1+ 1,000,000
4%, 4/12/95 ....................................... 1,000,000 A1+ 1,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Housing Finance Agency,
Memorial Sloan-Kettering Cancer Center,
Housing Revenue Bonds, Variable Rate
Demand Bonds, Series 1985 A, 3.85%, 11/1/15*......... 2,800,000 A1+ 2,800,000
New York State Housing Finance Agency, Normandie
Court 1 Housing Revenue, Variable Rate Demand
Bonds, 4.05%, 5/15/15*............................... 1,900,000 MIG1 1,900,000
New York State Housing Finance Agency, Hospital
for Special Surgery, Variable Rate Demand Bonds,
3.8%, 11/1/10*....................................... 2,400,000 MIG1 2,400,000
New York State Housing Finance Agency, Housing
Revenue Bonds, Liberty View Apartments Project,
Weekly Demand Bonds, 3.8%, 11/1/05*.................. 1,200,000 MIG1 1,200,000
New York State Job Development Authority:
Monthly Reset Bonds, Series 1985 C,
3.80%, 3/1/00*..................................... 1,100,000 A1+ 1,100,000
Monthly Reset Bonds, Series F, 3.85%, 3/1/99*........ 800,000 A1+ 800,000
New York State Local Government Assistance
Corporation:
Series 1993 A, Weekly Demand Note,
3.85%, 4/1/22*................................... 1,000,000 MIG1 1,000,000
Series 1994 B, Variable Interest Rate Bonds,
3.85%, 4/1/23*................................... 500,000 MIG1 500,000
New York State Medical Care Facilities Financing
Agency, Mount Sinai Hospital, prerefunded,
8.875%, 1/15/96** ................................... 1,000,000 AAA 1,053,529
New York State Medical Care Facilities Financing
Agency, Children's Hospital of Buffalo,
Weekly Demand Bonds, 3.95%, 11/1/05*................. 1,900,000 MIG1 1,900,000
New York State Pollution Control Revenue,
Orange and Rockland Energy Research and
Development Project, Weekly Demand Notes,
3.9%, 10/1/14*....................................... 1,000,000 MIG1 1,000,000
New York State Power Authority, Optional Tender
Bonds, 4.4%, 3/1/16.................................. 1,000,000 MIG1 1,000,000
North Hempstead, NY, Solid Waste
Management Revenue Refunding, Series 1993 A,
Weekly Demand Note, 3.8%, 2/1/12*.................... 700,000 MIG1 700,000
Patchogue-Medford Union Free School
District, NY, Tax Anticipation Notes, 4.75%, 6/30/95. 1,000,000 SS&C 1,001,381
Port Authority of New York and New Jersey,
Tax Exempt Commercial Paper:
3.8%, 4/10/95...................................... 1,000,000 A1+ 1,000,000
3.9%, 4/10/95...................................... 1,960,000 A1+ 1,960,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE MONEY FUND
-------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rockland County, NY, Bond Anticipation Notes,
5.5%, 3/8/96......................................... 1,500,000 SS&C 1,512,639
Seneca County, NY, Industrial Development Agency,
1991 Civic Facility, New York Chiropractic College,
Weekly Demand Bond, 3.95%, 10/1/21* ................. 500,000 A1+ 500,000
South County Central School District, NY,
Tax Anticipation Notes, 4.5%, 6/29/95................ 1,000,000 MIG1 1,000,819
State of New York, Tax Exempt Commercial Paper:
Series P, 3.95%, 4/25/95............................. 500,000 P1 500,000
Series P, 3.7%, 5/25/95.............................. 800,000 P1 800,000
Series Q, 3.85%, 4/11/95............................. 1,000,000 P1 1,000,000
Suffolk County, NY, Tax Anticipation Notes,
5.25%, 8/15/95....................................... 1,000,000 MIG1 1,002,124
Triborough Bridge and Tunnel Authority, NY,
Special Obligation, Variable Rate Demand Bonds,
3.8%, 1/1/24 (c)* ................................... 2,800,000 MIG1 2,800,000
Trust for the Cultural Resources of the
City of New York, Museum of Natural History:
Weekly Demand Note, Series 1993 A,
3.9%, 4/1/21* ................................... 500,000 MIG1 500,000
Weekly Demand Note, 3.9%, 4/1/21 (c)*.............. 1,600,000 MIG1 1,600,000
PUERTO RICO Puerto Rico Maritime Shipping Authority,
Tax Exempt Commercial Paper, 3.9%, 4/21/95........... 1,000,000 A1+ 1,000,000
----------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $54,420,617) (a)............................... 54,420,617
==========
-------------------------------------------------------------------------------------------------------------------
<FN>
(a) The cost for federal income tax purposes was $54,420,617.
(b) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings shown
are assigned by either Standard & Poor's Ratings Group, Moody's Investors Service,
Inc. or Fitch Investors Service, Inc. Securities rated by Scudder (SS&C) have
been determined to be of comparable quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities whose
yields vary with a designated market index or market rate, such as the coupon-equivalent
of the Treasury bill rate. Variable rate demand notes are securities whose
yields are periodically reset at levels that are generally comparable to tax-exempt
commercial paper. These securities are payable on demand within seven calendar
days and normally incorporate an irrevocable letter of credit from a major
bank. These notes are carried, for purposes of calculating average weighted
maturity, at the longer of the period remaining until the next rate change
or to the extent of the demand period.
** Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and interest
on the tax-exempt issue and to retire the bonds in full at the earliest refunding
date.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
-------------------------------------------------------------------------------------------
MARCH 31, 1995
-------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at value (identified cost $54,420,617)
(Note A)................................................. $54,420,617
Receivables:
Interest................................................. 510,398
Fund shares sold......................................... 327,654
-----------
Total assets.......................................... 55,258,669
LIABILITIES
Payables:
Due to custodian bank.................................... $ 15,657
Fund shares redeemed..................................... 226,709
Dividends................................................ 20,660
Accrued management fee (Note C).......................... 15,531
Other accrued expenses (Note C).......................... 30,416
--------
Total liabilities..................................... 308,973
-----------
Net assets, at value ....................................... $54,949,696
===========
NET ASSETS
Net assets consist of:
Accumulated net realized loss............................ $ (12,653)
Shares of beneficial interest............................ 549,501
Additional paid-in capital .............................. 54,412,848
-----------
Net assets, at value........................................ $54,949,696
===========
NET ASSET VALUE, offering and redemption price per share
($54,949,696 / 54,950,056 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized).................................... $1.00
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE MONEY FUND
---------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
---------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1995
---------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest.............................................. $1,638,734
Expenses:
Management fee (Note C) .............................. $107,615
Services to shareholders (Note C)..................... 81,993
Custodian and accounting fees (Note C)................ 50,011
Trustees' fees (Note C) .............................. 15,138
Auditing.............................................. 23,850
State registration.................................... 8,377
Reports to shareholders............................... 9,804
Legal................................................. 4,015
Other................................................. 10,192 310,995
-------------------------
Net investment income................................. 1,327,739
NET REALIZED LOSS ON INVESTMENTS
Net realized loss from investment transactions........ (6,662)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.. $1,321,077
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income............................... $ 1,327,739 $ 681,427
Net realized loss from investment
transactions .................................... (6,662) (3,510)
------------ ------------
Net increase in net assets resulting from
operations....................................... 1,321,077 677,917
------------ ------------
Distributions to shareholders from net investment
income ($.025 and $.017 per share,
respectively).................................... (1,327,739) (681,427)
------------ ------------
Fund share transactions at net asset value of
$1.00 per share:
Shares sold......................................... 66,783,648 54,562,935
Net asset value of shares issued to
shareholders in reinvestment of
distributions.................................... 1,176,765 619,158
Shares redeemed .................................... (60,149,789) (47,923,906)
------------ ------------
Net increase in net assets
from Fund share transactions..................... 7,810,624 7,258,187
------------ ------------
INCREASE IN NET ASSETS.............................. 7,803,962 7,254,677
Net assets at beginning of period................... 47,145,734 39,891,057
------------ ------------
NET ASSETS AT END OF PERIOD......................... $ 54,949,696 $ 47,145,734
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE MONEY FUND
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
------------------------------------------------------- TO MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period............ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------
Net investment income (a)......... .025 .017 .022 .035 .046 .052 .047 .033
Distributions from net
investment income.............. (.025) (.017) (.022) (.035) (.046) (.052) (.047) (.033)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period.... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (b).............. 2.57 1.75 2.22 3.55 4.69 5.33 4.78 3.33**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)................... 55 47 40 36 40 36 41 30
Ratio of operating expenses, net
to average daily net
assets (%) (a)................. .60 .60 .60 .60 .60 .60 .53 .50*
Ratio of net investment income to
average daily net assets (%)... 2.56 1.73 2.19 3.46 4.57 5.21 4.76 4.08*
<FN>
(a) Reflects a per share amount
of expenses, exclusive of
management fees,
reimbursed by the
Adviser of................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ .002
Reflects a per share amount
of management fee not
imposed by the Adviser of.. $ .003 $ .004 $ .004 $ .004 $ .004 $ .004 $ .004 $ .004
Operating expense ratio
including expenses
reimbursed, management
fee and other expenses
not imposed (%)............ .89 .97 .97 1.01 1.08 1.08 .98 1.19*
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
16
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1995
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7.0% SHORT-TERM MUNICIPAL INVESTMENTS
--------------------------------------------------------------------------------------------------
NEW YORK New York State Energy Research and Development
Authority, Pollution Control Revenue, Niagara
Mohawk Power Company, Daily Demand Note,
4.3%, 7/1/15*............................................ 700,000 A1+ 700,000
New York State Energy, Research and Development,
Brooklyn Union Gas, Select Auction Variable Rate
Securities, 4.259%, 4/1/20*.............................. 1,000,000 A 1,000,000
New York State Job Development Authority,
Special Purpose, Daily Demand Note:
Subject to AMT, Series A1-13, 4.65%, 3/1/02*........... 1,075,000 A1 1,075,000
Subject to AMT, Series A1-42, 4.65%, 3/1/05*........... 10,500,000 A1 10,500,000
----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $13,275,000)....................................... 13,275,000
----------
93.0% LONG-TERM MUNICIPAL INVESTMENTS
--------------------------------------------------------------------------------------------------
NEW YORK 34th Street Partnership Inc., NY, Capital Improvement,
5.5%, 1/1/14 ............................................ 1,900,000 A 1,730,026
Albany, NY, General Obligation, 7%, 1/15/08 (c)............ 485,000 AAA 532,802
Battery Park City Authority, NY, Revenue Refunding,
Series A:
5%, 11/1/08............................................ 1,950,000 AA 1,743,749
5%, 11/1/13............................................ 3,350,000 AA 2,880,096
5.25%, 11/1/17......................................... 6,525,000 AA 5,648,693
4.75%, 11/1/19......................................... 11,665,000 AA 9,235,530
Battery Park City Project, NY, Housing Corporation,
Senior Revenue Refunding:
Series 1993, 5.1%, 11/1/05............................. 2,375,000 AA 2,200,366
5.2%, 11/1/06.......................................... 4,505,000 AA 4,153,835
5%, 11/1/13............................................ 5,865,000 AA 5,002,200
5%, 11/1/18............................................ 4,500,000 AA 3,705,075
Chautauqua County, NY:
7.3%, 4/1/08 (c)....................................... 575,000 AAA 669,059
7.3%, 4/1/09 (c)....................................... 575,000 AAA 668,984
Development Authority of The North Country, NY,
Solid Waste Management Authority, Series A:
6%, 7/1/97 ............................................ 400,000 BBB 402,208
6.15%, 7/1/98.......................................... 1,000,000 BBB 1,013,090
5.75%, 7/1/96.......................................... 700,000 BBB 696,794
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE FUND
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inverse Variable Rate Certificate Trust, Metropolitan
Transit Authority, Series 1993 B, 5.718%, 6/30/02** ..... 8,000,000 NR 7,670,000
Metropolitan Transportation Authority, NY, Service
Contract, Transit Facilities, Series 7, 5.4%, 7/1/06..... 2,215,000 BBB 2,065,953
Monroe County, NY, Airport Authority, Greater
Rochester International Airport, 5.375%, 1/1/19 (c)...... 6,550,000 AAA 5,815,287
Nassau County Industrial Development Agency, NY,
Adelphi University, 5.5%, 6/1/03......................... 1,000,000 A 985,070
Nassau County, NY, Combined Sewer District,
Refunding, 5.1%, 7/1/05 (c).............................. 2,850,000 AAA 2,767,835
New York City , NY, Municipal Water Finance Authority,
Water and Sewer System Revenue, Series B:
5.375%, 6/15/19 (c).................................... 1,000,000 AAA 915,870
5.5%, 6/15/19 (c)...................................... 8,970,000 AAA 8,357,080
New York City, NY, General Obligation:
Series B, 7.5%, 2/1/05................................... 2,500,000 A 2,660,050
Series E, 8%, 8/1/05 (c) ................................ 330,000 AAA 396,650
Series F, 8.25%,11/15/16 ................................ 200,000 A 219,398
New York City, NY, Industrial Development Agency:
Civil Facilities, USTA National Tennis Center,
FSA insured:
6.1%, 11/15/04 ........................................ 1,215,000 AAA 1,274,365
6.25%, 11/15/06........................................ 3,000,000 AAA 3,188,430
Terminal One Group Association Project,
5.15%, 1/1/99.......................................... 4,370,000 A 4,282,250
New York State Dormitory Authority Revenue:
City University Revenue:
Series A, 9.25%, 7/1/00................................ 2,000,000 BBB 2,327,780
Consolidated Revenue, Series A, 5.75%, 7/1/09.......... 4,000,000 BBB 3,830,800
Series B, 8.125%, 7/1/08............................... 1,200,000 BBB 1,325,388
Series D, 8.2%, 7/1/12 ................................ 2,000,000 BBB 2,213,420
New York College and University Lease, Pooled
Capital Program, 7.8%, 12/1/05 (c)..................... 4,305,000 AAA 4,739,030
Columbia University, 5%, 7/1/15.......................... 2,500,000 AAA 2,171,950
Crouse Irving Memorial Hospital, Insured Mortgage
Revenue, HIBI insured, 10.5%, 7/1/17................... 2,600,000 A 2,663,570
Department of Health, 5.5%, 7/1/06....................... 2,295,000 BBB 2,160,697
New Hope Community, Inc., 5.7%, 7/1/17................... 1,500,000 AA 1,391,220
New Rochelle Hospital Medical Center Project,
GNMA Collateralized, 10%, 1/1/10....................... 970,000 AAA 976,858
State University Educational Facility, Series A:
5.5%, 5/15/06 (c)...................................... 2,245,000 AAA 2,261,568
5.25%, 5/15/15 (c)..................................... 6,300,000 AAA 5,779,179
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (b) Value ($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Environmental Facilities Corporation:
Spring Valley Water Company, Subject to AMT,
5.65%, 11/1/23 (c)..................................... 1,000,000 AAA 916,750
State Water Revolving Fund, Series D,
6.9%, 5/15/15.......................................... 2,465,000 AAA 2,659,291
New York State Housing Finance Agency, Service
Contract, Series F, 5.25%, 9/15/06....................... 1,500,000 BBB 1,384,305
New York State Local Government Assistance
Corporation:
Series A, 6%, 4/1/16................................... 4,150,000 A 4,115,763
Series A, 6%, 4/1/24................................... 6,080,000 A 5,933,168
Series B, 5.375%, 4/1/16 .............................. 400,000 A 366,356
New York State Medical Care Facilities Finance
Agency, Mental Health Center:
Series A, 8.25%, 2/15/99 .............................. 3,415,000 BBB 3,679,287
Series A, 8.875%, 8/15/07.............................. 395,000 BBB 429,420
Series F, 5.25%, 2/15/08 (c)........................... 2,000,000 AAA 1,920,280
Series F, 5.25%, 8/15/08 (c)........................... 1,000,000 AAA 959,100
Series F, 5.375%, 2/15/14 (c).......................... 2,200,000 AAA 2,052,798
North Shore University, Glen Cove, Series A,
5.125%, 11/1/12 (c) ................................... 1,450,000 AAA 1,317,630
St. Luke's-Roosevelt Hospital, Series A,
FHA insured, 5.625%, 8/15/18........................... 2,500,000 AAA 2,314,875
New York State Mortgage Agency Revenue,
Homeowner Mortgage:
Series FF, 7.95%, 10/1/14.............................. 250,000 AA 263,683
Subject to AMT, Series 30-C-1, 5.85%, 10/1/25.......... 2,000,000 AA 1,798,080
Series 00, 7.9%, 10/1/10 .............................. 85,000 AA 85,000
New York State Thruway Authority, Service Contract
Revenue, Local Highway and Bridge Building:
5.125%, 4/1/07 (c)..................................... 900,000 AAA 863,001
5.125%, 4/1/07......................................... 3,000,000 BBB 2,680,650
5.75%, 4/1/08.......................................... 1,000,000 BBB 946,580
New York State, General Obligation:
7.5%, 11/15/01 (c) ...................................... 2,200,000 AAA 2,492,072
7%, 11/15/02 (c)......................................... 2,555,000 AAA 2,844,533
New York State, Urban Development Corporation
Revenue, Correctional Capital Facilities:
Series A, 5.45%, 1/1/07................................ 2,000,000 BBB 1,912,860
Series A, 5.5%, 1/1/14................................. 3,000,000 BBB 2,704,230
5.25%, 1/1/04 ......................................... 2,370,000 BBB 2,207,323
5.5%, 1/1/15 .......................................... 2,000,000 BBB 1,797,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE FUND
--------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York State, Urban Development Corporation
Revenue, Onondaga County Convention Center,
7.875%, 1/1/10 .......................................... 1,000,000 BBB 1,086,320
Niagara County, NY, General Obligation,
7.1%, 2/15/11 (c)........................................ 500,000 AAA 569,605
Niagara Falls, NY, Water Treatment Plant:
Subject to AMT, 7%, 11/1/03 (c).......................... 2,260,000 AAA 2,495,808
Subject to AMT, 8.5%, 11/1/05 (c)........................ 2,140,000 AAA 2,640,011
Subject to AMT, 8.5%, 11/1/06 (c)........................ 1,240,000 AAA 1,540,328
Schenectady, NY, Industrial Development Agency,
Broadway Center Project, Series A, 5%, 9/1/09 (c)........ 1,250,000 AAA 1,140,575
Shenendehowa Central School District, NY,
Clifton Park:
6.85%, 6/15/08 (c)..................................... 350,000 AAA 392,147
6.85%, 6/15/09 (c)..................................... 350,000 AAA 392,431
Suffolk County, NY, General Obligation, Refunding,
Series F, 4.6%, 7/15/02 (c).............................. 2,345,000 AAA 2,243,884
Suffolk County, NY, Water Authority Revenue,
Series 1993, Sub Lien, 4.8%, 6/1/99 (c).................. 395,000 AAA 393,061
Valley Central School District, Montgomery, NY,
7.15%, 6/15/08 (c)....................................... 625,000 AAA 724,038
PUERTO RICO Puerto Rico Commonwealth Infrastructure Finance
Authority, Series A:
7.9%, 7/1/07 .......................................... 1,000,000 BBB 1,092,810
7.75%, 7/1/08.......................................... 920,000 BBB 1,001,313
VIRGIN ISLANDS Virgin Islands, General Obligation, Public Finance
Authority, Matching Fund Loan Notes, Series A,
7%, 10/1/02.............................................. 500,000 BBB 523,700
-----------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $178,919,657)...................................... 177,602,771
-----------
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $192,194,657) (a)................................... 190,877,771
===========
<FN>
(a) The cost for federal income tax purposes was $192,521,642. At March 31, 1995,
net unrealized depreciation for all securities based on tax cost was $1,643,871.
This consisted of aggregate gross unrealized appreciation for all securities
in which there was an excess of market value over tax cost of $4,044,959 and
aggregate gross unrealized depreciation for all securities in which there was
an excess of tax cost over market value of $5,688,830.
(b) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings shown
are assigned by either Standard & Poor's Ratings Group, Moody's Investors Service,
Inc. or Fitch Investors Service, Inc. Unrated securities (NR) have been determined
to be of comparable quality to rated eligible securities.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(c) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC
or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand
notes are securities whose yields are periodically reset at levels that
are generally comparable to tax-exempt commercial paper. These securities
are payable on demand within seven calendar days and normally incorporate
an irrevocable letter of credit from a major bank. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.
** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of March 31, 1995.
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE FUND
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------------------
MARCH 31, 1995
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $192,194,657)
(Note A)................................................... $190,877,771
Cash.......................................................... 85,330
Receivables:
Investments sold........................................... 35,000
Interest................................................... 3,335,866
Fund shares sold........................................... 127,695
------------
Total assets............................................ 194,461,662
LIABILITIES
Payables:
Investments purchased...................................... $489,833
Dividends.................................................. 278,439
Fund shares redeemed....................................... 12,005
Accrued management fee (Note C)............................ 100,294
Other accrued expenses (Note C)............................ 48,195
--------
Total liabilities....................................... 928,766
------------
Net assets, at market value................................... $193,532,896
============
NET ASSETS
Net assets consist of:
Unrealized depreciation on investments..................... $ (1,316,886)
Accumulated net realized loss.............................. (7,390,499)
Shares of beneficial interest.............................. 186,459
Additional paid-in capital................................. 202,053,822
------------
Net assets, at market value................................... $193,532,896
============
NET ASSET VALUE, offering and redemption price per share
($193,532,896 / 18,645,871 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized)...................................... $10.38
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
-----------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-----------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1995
-----------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest................................................ $11,950,480
Expenses:
Management fee (Note C)................................. $ 1,251,453
Services to shareholders (Note C)....................... 181,386
Custodian and accounting fees (Note C).................. 91,161
Trustees' fees (Note C)................................. 15,138
Auditing ............................................... 37,406
Reports to shareholders................................. 35,762
Legal................................................... 6,935
State registration...................................... 6,872
Other................................................... 24,389 1,650,502
------------------------
Net investment income................................... 10,299,978
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENT TRANSACTIONS
Net realized loss from:
Investments.......................................... (5,278,675)
Futures.............................................. (64,727)
Options.............................................. (189,187) (5,532,589)
-----------
Net unrealized appreciation during
the period on:
Investments.......................................... 6,360,150
Futures.............................................. 38,500 6,398,650
------------------------
Net gain on investments................................. 866,061
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.... $11,166,039
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE FUND
------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income........................... $ 10,299,978 $ 10,534,053
Net realized gain (loss) from investment
transactions................................. (5,532,589) 7,302,852
Net unrealized appreciation (depreciation)
on investment transactions................... 6,398,650 (15,181,966)
------------ ------------
Net increase in net assets resulting from
operations................................... 11,166,039 2,654,939
------------ ------------
Distributions to shareholders:
From net investment income ($.52 and
$.54 per share, respectively).............. (10,299,978) (10,534,053)
------------ ------------
From net realized gains from investment
transactions ($.67 per share).............. -- (13,077,205)
------------ ------------
In excess of net realized
gains ($.05 and $.06 per share,
respectively).............................. (1,028,717) (829,193)
------------ ------------
Fund share transactions:
Proceeds from shares sold....................... 34,151,916 58,805,379
Net asset value of shares issued to
shareholders in reinvestment
of distributions............................. 7,668,354 19,138,980
Cost of shares redeemed......................... (55,402,814) (49,831,679)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions ..................... (13,582,544) 28,112,680
------------ ------------
INCREASE (DECREASE) IN NET ASSETS............... (13,745,200) 6,327,168
Net assets at beginning of period............... 207,278,096 200,950,928
------------ ------------
NET ASSETS AT END OF PERIOD..................... $193,532,896 $207,278,096
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period....... 20,085,899 17,626,244
------------ ------------
Shares sold..................................... 3,366,073 5,182,618
Shares issued to shareholders in
reinvestment of distributions................ 754,635 1,709,514
Shares redeemed................................. (5,560,736) (4,432,477)
------------ ------------
Net increase (decrease) in Fund shares.......... (1,440,028) 2,459,655
------------ ------------
Shares outstanding at end of period............. 18,645,871 20,085,899
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period......... $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39 $11.43 $11.19 $10.11
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income.................... .52 .54 .61 .65 .67 .69 .72 .73 .75 .75
Net realized and
unrealized gain
(loss) on investment
transactions.............. .11 (.35) 1.03 .50 .13 .16 .14 (.84) .39 1.08
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. .63 .19 1.64 1.15 .80 .85 .86 (.11) 1.14 1.83
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income ................... (.52) (.54) (.61) (.65) (.67) (.69) (.72) (.73) (.75) (.75)
From paid-in
capital................... -- -- -- -- -- (.08) -- -- -- --
From net realized
gains..................... -- (.67) (.61) (.25) -- (.01) -- (.20) (.15) --
In excess of net
realized gains............ (.05) (.06) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions............ (.57) (1.27) (1.22) (.90) (.67) (.78) (.72) (.93) (.90) (.75)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period............... $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39 $11.43 $11.19
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) 6.39 1.31 15.60 11.11 7.79 8.18 8.55 (.61) 10.71 18.71
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)......... 194 207 201 159 142 132 123 116 154 102
Ratio of operating
expenses, net to
average daily net
assets (%).................. .82 .82 .82 .87 .91 .89 .89 .95 .88 .88
Ratio of net investment
income to average
daily net assets (%)........ 5.13 4.80 5.36 5.96 6.29 6.39 6.89 7.05 6.70 7.01
Portfolio turnover
rate (%).................... 83.8 158.0 201.4 168.2 224.9 114.3 132.1 44.2 71.9 40.4
</TABLE>
25
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
SCUDDER NEW YORK TAX FREE FUND
--------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Scudder New York Tax Free Money Fund ("Tax Free Money Fund"), a nondiversified
fund, and Scudder New York Tax Free Fund ("Tax Free Fund"), a diversified fund,
are two series of Scudder State Tax Free Trust (the "Trust"). The Trust,
currently consisting of six separate series, is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company. The
policies described below are followed consistently by the Funds in the
preparation of their financial statements in conformity with generally accepted
accounting principles.
SECURITY VALUATION. Tax Free Money Fund values all portfolio securities
utilizing the amortized cost method permitted in accordance with Rule 2a-7 under
the 1940 Act and pursuant to which Tax Free Money Fund must adhere to certain
conditions. Under this method, which does not take into account unrealized gains
and losses on securities, an instrument is initially valued at its cost and
thereafter assumes a constant accretion/amortization to maturity of any
discount/premium.
Tax Free Fund's portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which quotations reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost. All other debt securities are valued at their
fair value as determined in good faith by the Valuation Committee of the
Trustees.
OPTIONS. The Tax Free Fund may write (sell) exchange-listed and over-the-counter
call and put options on securities and other financial instruments. When the
Fund writes a call, it gives the purchaser of the call option the right to
buy the underlying security at the price specified in the option (the "exercise
price") at any time during the option period, generally ranging up to nine
months. When the Fund writes a put option, it gives the purchaser of the put
option the right to sell the underlying security to the Fund at the exercise
price at any time during the option period, generally ranging up to nine months.
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
If the option expires unexercised, the Fund will realize income, in the form of
a capital gain, to the extent of the amount received for the option (the
"premium"). If the option is exercised, a decision over which the Fund has no
control, the Fund must sell the underlying security to the option holder or
purchase the underlying security from the option holder at the exercise
price. Certain options, including options on indices will require cash
settlement by the Fund if the option is exercised. By writing a call option,
the Fund foregoes, in exchange for the premium less the commission ("net
premium"), the opportunity to profit during the option period from an increase
in the market value of the underlying security above the exercise price. By
writing a put option, the Fund, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price.
The liability representing the Fund's obligation under an exchange traded
written options is valued at the last sale price or, in the absence of a sale,
the mean between the closing bid and asked quotations or at the most recent
asked quotation if no bid and asked quotations are available. Over-the-counter
written options are valued at the most recent asked quotation.
In addition, the Fund may purchase, singly and in combination, call and put
options on securities and other financial instruments. Exchange traded purchased
options are valued at the last sales price or, in the absence of a sale, the
mean between the closing bid and asked quotations or at the most recent bid
quotation if no bid and asked quotations are available. Over-the-counter
purchased options are valued at the most recent bid quotation.
FUTURES CONTRACTS. The Tax Free Fund may enter into interest rate and securities
index futures contracts for bona fide hedging purposes. Upon entering into a
futures contract, the Tax Free Fund is required to deposit with a broker an
amount ("initial margin") equal to a certain percentage of the purchase price
indicated in the futures contract. Subsequent payments ("variation margin") are
made or received by the Tax Free Fund each day, dependent on the daily
fluctuations in the value of the underlying security, and are recorded for
financial reporting purposes as unrealized gains or losses by the Tax Free
Fund. When entering into a closing transaction, the Tax Free Fund will realize,
for book purposes, a gain or loss equal to the difference between the value of
the futures contract to sell and the futures contract to buy.
27
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
SCUDDER NEW YORK TAX FREE FUND
--------------------------------------------------------------------------------
Futures contracts are valued at the most recent settlement price. Certain risks
may arise upon entering into futures contracts from the contingency of imperfect
market conditions.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
FEDERAL INCOME TAXES. The Funds' policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment companies
and to distribute all of their taxable and tax-exempt income to their
shareholders. Accordingly, the Funds paid no federal income taxes and no
provisions for federal income taxes were required.
At March 31, 1995, the Tax Free Money Fund had a net tax basis capital loss
carryforward of approximately $12,700 which may be applied against any realized
net taxable capital gains of each succeeding year until fully utilized or until
March 31, 2000 ($800), March 31, 2001 ($1,700), March 31, 2002 ($3,500) and
March 31, 2003 ($6,700), the respective expiration dates, whichever occurs
first.
At March 31, 1995, the Tax Free Fund had a net tax basis capital loss
carryforward of approximately $3,937,000 which may be applied against any
realized net taxable capital gains of each succeeding year until fully
utilized or until March 31, 2003, the expiration date.
In addition, from November 1, 1994 through March 31, 1995, the Tax Free Fund
incurred approximately $2,170,000 of net realized capital losses. As permitted
by tax regulations, the Fund intends to elect to defer these losses and treat
them as arising in the fiscal year ended March 31, 1996.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Funds
is declared as dividends to shareholders of record as of the close of business
each day and is paid to shareholders monthly.
During any particular year, net realized gains from investment transactions,
in excess of available capital loss carryforwards, would be taxable to the
Funds if not distributed and, therefore, will be distributed to shareholders.
An additional distribution may be made to the extent necessary to avoid the
payment of a four percent federal excise tax.
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
relate primarily to investments in futures contracts.
As a result, net investment income and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Funds may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Funds.
The Funds use the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
OTHER. Investment transactions are accounted for on a trade date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of the
call or maturity date.
B. PURCHASES AND SALES OF SECURITIES
--------------------------------------------------------------------------------
During the year ended March 31, 1995, purchases and sales of long-term municipal
securities aggregated $153,608,725 and $156,789,199, respectively, for Tax Free
Fund.
The aggregate face value of futures contracts opened and closed during the year
ended March 31, 1995 amounted to $512,073,999 and $522,660,499, respectively,
for Tax Free Fund.
C. RELATED PARTIES
--------------------------------------------------------------------------------
Each Fund has entered into an Investment Advisory Agreement (each an "Agreement"
and collectively the "Agreements") with Scudder, Stevens & Clark, Inc. (the
"Adviser"), under which each Fund agrees to pay the Adviser a fee computed and
accrued daily and paid monthly. The annual rate is 0.50% of the average daily
net assets of Tax Free Money Fund and 0.625% of the first $200,000,000 of the
average daily net assets, and 0.60% of such net assets in excess of
$200,000,000 for Tax Free Fund.
As manager of the assets of Tax Free Money Fund and Tax Free Fund, the Adviser
directs the investments of Tax Free Money Fund and Tax Free Fund in accordance
with the investment objectives, policies, and restrictions of each Fund. The
Adviser determines the securities, instruments, and other contracts relating
to investments to be
29
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
SCUDDER NEW YORK TAX FREE FUND
--------------------------------------------------------------------------------
purchased, sold or entered into by each Fund. In addition to portfolio
management services, the Adviser provides certain administrative services
in accordance with the Agreements.
The Agreements also provide that if the Funds' expenses, exclusive of taxes,
interest and certain other expenses exceed specified limits, such excess, up to
the amount of the management fee, will be paid by the Adviser. For the year
ended March 31, 1995, the fee for Tax Free Fund pursuant to the Agreement
amounted to $1,251,453, which was equivalent to an annual effective rate
of .624% of the Fund's average daily net assets.
With respect to Tax Free Money Fund, the Adviser has agreed not to impose all
or a portion of its management fee until July 31, 1995 and during such period
to maintain the annualized expenses of Tax Free Money Fund at not more than
0.60% of average daily net assets. For the year ended March 31, 1995, the
Adviser did not impose a portion of its fee amounting to $151,719, and the
portion imposed amounted to $107,615.
Effective September 22, 1994 and December 7, 1994, Scudder Fund Accounting
Corporation ("SFAC") a wholly-owned subsidiary of the Adviser, assumed
responsibility for determining the net asset value per share and maintaining
the portfolio and general accounting records of the New York Tax Free Money
Fund and New York Tax Free Fund, respectively. For the year ended March 31,
1995, SFAC imposed fees amounting to $15,833 for the New York Tax Free Money
Fund. For the year ended March 31, 1995, SFAC imposed fees amounting to $16,530
for the New York Tax Free Fund.
Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend-paying and shareholder service agent for the Funds.
For the year ended March 31, 1995, $65,424 and $137,282 were charged by SSC
to Tax Free Money Fund and Tax Free Fund, of which $5,052 and $10,695 were
unpaid at March 31, 1995, respectively.
The Trust pays each Trustee not affiliated with the Adviser $12,000 annually,
allocated equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1995,
Trustees' fees aggregated $15,138 each for both the Tax Free Money Fund and Tax
Free Fund.
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER STATE TAX FREE TRUST AND THE SHAREHOLDERS OF SCUDDER
NEW YORK TAX FREE MONEY FUND AND SCUDDER NEW YORK TAX FREE FUND:
We have audited the accompanying statements of assets and liabilities of Scudder
New York Tax Free Money Fund and Scudder New York Tax Free Fund, including the
investment portfolios, as of March 31, 1995 and the related statements of
operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund as
of March 31, 1995, the results of their operations for the year then ended,
the changes in their net assets for each of the two years in the period then
ended, and their financial highlights for each of the periods indicated therein
in conformity with generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 8, 1995
31
<PAGE>
TAX INFORMATION
--------------------------------------------------------------------------------
Of the dividends paid by the New York Tax Free Money Fund and New York Tax
Free Fund from net investment income for the taxable year ended March 31, 1995,
100% constituted exempt interest dividends for regular federal income tax and
New York State and New York City income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
32
<PAGE>
OFFICERS AND TRUSTEES
--------------------------------------------------------------------------------
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; Director, Executive Vice President and Manager, Safeguard
Scientifics, Inc.
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
33
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
--------------------------------------------------------------------------------
<TABLE>
<C> <C>
The Scudder Family of Funds
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax Free Money Market+ Scudder Income Fund
Scudder Tax Free Money Fund Scudder International Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Global Income Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Value Fund
Scudder Growth and Income Fund The Japan Fund
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(TM)++
For complete information on any of the above Scudder funds, including management fees and expenses, call or
write for a free prospectus. Read it carefully before you invest or send money. +A portion of the income
from the tax-free funds may be subject to federal, state, and local taxes. *Not available in all states. +++A
no-load variable annuity contract provided by Charter National Life Insurance Company and its affiliate,
offered by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark,
Inc. are traded on various stock exchanges. ++For information on Scudder Treasurers Trust,(TM) an institutional
cash management service that utilizes certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call
1-800-541-7703.
</TABLE>
34
<PAGE>
HOW TO CONTACT SCUDDER
--------------------------------------------------------------------------------
<TABLE>
<C> <C>
Account Service and Information
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For account updates, prices, yields, exchanges, and redemptions
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder For information on Scudder
Treasurers Trust,(TM) an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
Scudder Investor Relations and Scudder Funds Centers are services provided through Scudder
Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a prospectus with more complete
information, including management fees and expenses. Please read it carefully before you invest or send money.
</TABLE>
35
<PAGE>
Celebrating 75 Years of Serving Investors
--------------------------------------------------------------------------------
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 36 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
<PAGE>
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
Scudder Ohio
Tax Free Fund
Annual Report
March 31, 1995
* For investors seeking double tax-free income exempt from both Ohio and
regular federal income taxes.
* A pure no-load(TM) fund with no commissions to buy, sell, or exchange
shares.
<PAGE>
SCUDDER OHIO TAX FREE FUND
CONTENTS
2 Highlights
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
14 Financial Statements
17 Financial Highlights
18 Notes to Financial Statements
21 Report of Independent Accountants
22 Tax Information
25 Officers and Trustees
26 Investment Products and Services
27 How to Contact Scudder
HIGHLIGHTS
* Scudder Ohio Tax Free Fund generated a 6.82% total return for the 12 months
ended March 31, 1995, in spite of the generally negative market conditions
that prevailed for much of the fiscal year. A declining supply of municipal
bonds and improving bond prices in 1995 worked to the Fund's advantage in
the final months of the Fund's fiscal year.
Bar Chart - Fund Yield vs. Taxable Equivalent Yield
Chart Data:
30-Day Taxable
SEC Yield Equivalent Yield
--------- ----------------
5.16% 9.24%
5.99% 10.72%
5.22% 9.34%
* The chart above shows your Fund's 30-day net annualized SEC yield at key
points during the year along with yields that would be required of
comparable taxable investments to match the Fund's yield for Ohio residents
in the highest combined federal and state tax bracket of 44.13%.
* Throughout the period, the Fund continued to seek a high relative degree of
price stability, tax-free income, and credit quality.
2
<PAGE>
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Investors' concerns over inflationary economic growth have abated in recent
months, after creating so much turmoil for the world's investment markets in
1994. Continued low inflation and indications of weakness in certain segments of
the economy, combined with the Federal Reserve's most recent interest-rate
increases, have reassured many investors. Bond prices have begun to recover,
yields have declined from their November highs, and bond mutual funds have
enjoyed positive net subscriptions after several months of redemptions. For the
three months ended March 31, municipal bonds, as measured by the unmanaged
Lehman Brothers Municipal Bond Index, returned 7.07% on average, more than
making up for the -5.17% return reported for all of 1994.
The rise in interest rates over the past year and a half has highlighted a
challenge for income funds: to provide shareholders with the higher income
available from bonds while protecting against price erosion. The question is,
have interest rates shifted direction once again? Unfortunately, the answer is
unclear. Rates should remain relatively stable if economic growth continues to
slacken in the United States. Nevertheless, additional interest-rate increases
cannot be ruled out, given some lingering inflationary concerns: Commodity
prices continue to rise, factory production is still pushing the limits of
capacity, and the dollar has fallen to record lows against the Japanese yen and
German mark.
Additional uncertainty regarding interest rates may, of course, spark
episodes of volatility in fixed-income markets. Your portfolio managers will
continue to focus on fundamental investment research and security selection as a
means to generate high current double tax-free income and attractive total
returns.
As of April 1995 the portfolio's management team consists of Lead Portfolio
Manager Donald C. Carleton and Philip G. Condon. Kimberley Manning, who had
served as the Fund's lead manager, has left Scudder. Please call a Scudder
Investor Relations representative at 1-800-225-2470 if you have questions about
your Fund. Page 27 provides more information on how to contact Scudder. Thank
you for choosing Scudder Ohio Tax Free Fund to help meet your investment needs.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Ohio Tax Free Fund
3
<PAGE>
Scudder Ohio Tax Free Fund
Performance Update as of March 31, 1995
-----------------------------------------------------------------
Growth of a $10,000 Investment
-----------------------------------------------------------------
Scudder Ohio Tax Free Fund
----------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,682 6.82% 6.82%
5 Year $14,712 47.12% 8.03%
Life of
Fund* $17,980 79.80% 7.76%
Lehman Brothers Municipal Bond Index
--------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,743 7.43% 7.43%
5 Year $14,859 48.59% 8.24%
Life of
Fund* $19,102 91.02% 8.61%
*The Fund commenced operations on May 28, 1987.
Index comparisons begin May 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended March 31
Scudder Ohio Tax Free Fund
Year Amount
----------------------
5/31/87 10000
88 10230
89 11337
90 12221
91 13291
92 14530
93 16425
94 16832
95 17980
Lehman Brothers Municipal Bond Index
Year Amount
----------------------
5/31/87 10000
88 10847
89 11628
90 12855
91 14041
92 15444
93 17378
94 17781
95 19102
The unmanaged Lehman Brothers Municipal Bond Index is a market value-
weighted measure of municipal bonds issued across the United States.
Index issues have a credit rating of at least Baa and a maturity of at
least two years. Index returns assume reinvestment of dividends, and,
unlike Fund returns, do not reflect any fees or expenses.
-----------------------------------------------------------------
Returns and Per Share Information
-----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended March 31
-----------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988* 1989 1990 1991 1992 1993 1994 1995
--------------------------------------------------------------
Net Asset Value... $11.65 $11.94 $11.97 $12.14 $12.47 $13.13 $12.68 $12.77
Income Dividends.. $ .61 $ .84 $ .82 $ .78 $ .75 $ .72 $ .70 $ .70
Capital Gains
Distributions..... $ -- $ .02 $ .07 $ .06 $ .03 $ .19 $ .10 $ .04
Fund Total
Return (%)........ 2.30 10.83 7.80 8.75 9.33 13.04 2.48 6.82
Index Total
Return (%)........ 8.48 7.21 10.56 9.22 10.02 12.52 2.32 7.43
</TABLE>
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
If the Adviser had not temporarily capped the Fund's expenses, the
average annual total returns for the Fund for the one year, five year,
and life of Fund periods would have been lower.
4
<PAGE>
Portfolio Summary as of March 31, 1995
---------------------------------------------------------------------------
Diversification
---------------------------------------------------------------------------
General Obligation 23%
Hospital/Health 20% During the year, the Fund invested
Escrow & Collateral 10% in a diverse selection of revenue
Higher Education 9% bonds and held a sizable position in
Pollution Control Revenue 7% general obligation bonds.
Water/Sewer Revenue 5%
Electric Utility Revenue 4%
Lease Rentals 4%
Sales and Special Tax 3%
Miscellaneous Municipal 15%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Quality
--------------------------------------------------------------------------
AAA 55%
AA 14% With turbulent conditions pervading
A 16% all bond markets, high credit quality
BBB 12% was especially important.
Not Rated 3%
----
100%
====
Weighted average quality: AA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Effective Maturity
--------------------------------------------------------------------------
Less than 1 year 7%
1 < 5 years 6% The Fund focused on bonds maturing
5 < 10 years 33% between five and 15 years, which
10 < 20 years 49% we believed offered the most
Greater than 20 years 5% attractive price and yield
---- characteristics.
100%
====
Weighted average effective maturity: 11 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 10.
5
<PAGE>
SCUDDER OHIO TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Scudder Ohio Tax Free Fund wrapped up its fiscal year ended March 31, 1995,
with a flourish. In a challenging 12-month period for most bond investors, your
Fund's performance was particularly heartening. The Fund generated a one-year
total return of 6.82%, reflecting a $0.09 increase in share price to $12.77 on
March 31, 1995, $0.70 in reinvested income distributions, and $0.04 in
reinvested capital gain distributions. The Fund's return beat the 6.45% average
return of the 38 Ohio tax-free funds tracked by Lipper Analytical Services.
Put in context, the Fund's performance reflects two distinct stages. From
the start of the fiscal year through the market's turning point last November,
the Fund generated a total return of -2.60%. By contrast, the total return for
the period's final four months was 9.67%. Although declining bond prices pushed
the Fund's return into negative terrain during the first stage, the income
earnings of the Fund helped to protect it from larger declines. The Fund's
30-day net annualized SEC yield as of March 31, 1994, was 5.16%. By November 30,
it had risen to 5.99%, reflecting the rise in overall interest rates. The Fund's
yield as of March 31, 1995, was 5.22%. Investors in Ohio's top combined federal
and state tax bracket would have had to earn 9.34% from a taxable investment to
match the Fund's 5.22% tax-free yield. Bond price volatility, which had been a
negative factor for much of the fiscal year, worked to the Fund's advantage
toward the end of the period as prices began to rise, more than offsetting the
decline in yield from its November high.
All in all, investors who stayed with their fixed-income investments
despite the sharp fall in prices in 1994 were rewarded as prices recovered in
1995. Had they redeemed their shares last fall, they would have done so at
prices substantially lower than share prices today. When investing for long-term
goals, it is generally wise to avoid the temptation to trade in and out of the
market as prices rise and fall.
A Year of Extremes
In early 1994, the Federal Reserve began raising short-term interest rates
in an effort to slow what it considered unsustainable economic growth. Despite
the Fed's efforts, inflationary concerns persisted, creating an overwhelmingly
negative sentiment among investors. (Bond investors dislike inflation because it
weakens the purchasing power of future income payments from their fixed-income
investments.) Bond prices fell while yields rose across all maturities for
6
<PAGE>
taxable and tax-free bonds alike. In late fall, the highly publicized bankruptcy
of Orange County, California, delivered a temporary blow to an already skittish
market. Again investor sentiment was tested, but the municipal market had
already begun turning the corner.
Since that time, preliminary evidence has surfaced suggesting that economic
growth has begun to slow as a result of the Fed's efforts to tame inflationary
pressures. With inflation no longer an immediate concern, fixed-income investors
have pushed up bond prices, yields on long-term instruments have declined, and
municipal bond funds have received net new investment dollars after months of
net redemptions.
Meanwhile, as discussed in our September report, the dynamics of supply and
demand continued to work to the Fund's advantage. Rising interest rates in 1994
put an end to the previous year's record pace of municipal refundings. The
supply of new issues fell sharply -- and is falling still. March's supply of new
issues was the lowest of any previous March for the last five years. Although
the demand for municipal securities has remained essentially the same, the
scanty volume of municipal bonds helped to support bond prices.
A Focus on Fundamentals
Throughout the market's ups and downs, Scudder Ohio Tax Free Fund sought to
maintain relative price stability and high tax-free income by emphasizing
high-quality, noncallable, and call-protected bonds with maturities of less than
20 years.
Noncallable and call-protected bonds -- respectively, those bonds that
cannot be retired before maturity and those that would be very expensive for the
issuers to retire before maturity -- continued to constitute a large segment of
the portfolio. We took advantage of opportunities to purchase these bonds
because of their favorable performance characteristics (versus callable bonds
with similar maturities) in an environment of rising bond prices. Moreover,
noncallable and call-protected bonds typically fare no worse than their callable
counterparts when prices decline. The reason: During periods of rising bond
prices (and falling yields) the incidence of calls increases, and callable bonds
behave more like short-term securities. Meanwhile, noncallable bonds respond to
interest rate movements based on their actual maturities. On the other hand,
during periods of falling bond prices, the behavior of callable bonds reflects
their actual maturities; hence, they perform similarly to noncallable bonds of
like maturities. All told, noncallable bonds afforded the Fund a dose of price
stability and an attractive stream of tax-free income during the year.
7
<PAGE>
As bond prices declined during 1994, we continued to emphasize bonds in the
intermediate-maturity range. Currently, over 70% of the portfolio is invested in
bonds with maturities of between five and 15 years, and only 5% is invested in
bonds maturing in over 20 years. Given last year's market conditions, there was
little yield advantage in extending into longer-maturity bonds, since the yield
differential among shorter- and longer-maturity securities was negligible.
Further, because longer-maturity securities tend to be subject to greater
fluctuations in price due to changes in interest rates, the risk/reward tradeoff
for long-term bonds during the year wasn't compelling. By structuring the
portfolio in the intermediate range, we were able to capture most of the yield
of longer-term bonds without the added price volatility.
Line Chart - Yields Across the Maturity Spectrum:
AAA-Rated Municipal Bonds on 3/31/95
(1 year to 30 years, in five-year increments)
Chart Data:
1 4.35
2 4.60
3 4.75
4 4.85
5 4.95
6 5.05
7 5.15
8 5.20
9 5.25
10 5.30
11 5.40
12 5.50
13 5.60
14 5.65
15 5.70
16 5.70
17 5.80
18 5.85
19 5.87
20 5.90
21 5.91
22 5.92
23 5.93
24 5.94
25 5.95
26 5.96
27 5.97
28 5.98
29 5.99
30 6.00
Footnote to chart: During the year, the Fund focused on the five- to 15-year
maturity range, which offered relative price stability and
attractive yields.
As a precautionary measure in an unsettled bond environment, we remained
attentive to credit quality throughout the fiscal year. Lower-quality bonds
offered little additional reward over high-quality bonds during the period. As a
result, we increased the Fund's holdings in bonds rated AA or better to 69% of
the portfolio on March 31. Further, nearly half of the bonds in the portfolio
were insured against municipal defaults by various bond insurance companies.
Strong Fiscal and Economic Conditions in Ohio
Ohio's well-managed finances and moderate debt levels should continue to
benefit the state's municipal bond market. While other states accumulated
8
<PAGE>
deficits during the recession of the early 1990s, Ohio acted promptly and
responsibly to curtail the recession's strain on its finances. A combination of
tax increases and budget cuts resulted in balanced budgets throughout this
difficult economic period. The trend is continuing in fiscal year 1995, with
expenditures running 5% below estimates. Ohio expects to end the fiscal year
with record levels of reserves.
Meanwhile, Ohio's highly developed economy remains strong. Manufacturing
has long been the mainstay of the economy and still accounts for 21.7% of the
state's workforce versus the national average of 16.2%. After declining for the
past two decades, manufacturing employment has increased with the nation's
economic recovery. While still the most important component of Ohio's economy,
manufacturing has seen its prominence diminish somewhat. A shift from
manufacturing to the service and trade sectors likely will mitigate Ohio's
cyclical economic swings, but could dampen the state's wealth levels since
manufacturing jobs have tended to pay better. While it is an industrialized
state, Ohio also has a large agricultural sector that contributes about $5.7
billion to its economy every year. Unemployment in Ohio remains lower than the
country's as a whole -- 3.8% versus 5.5% for the United States.
Outlook
Looking ahead, we believe the combination of slower economic growth, stable
inflation, and a relatively sparse supply of municipal issues will result in
favorable conditions overall for municipal bonds. While the possibility of
income tax cuts -- increasingly popular in Washington -- may reduce investors'
interest in tax-free investments, history has shown that the short-term
correlation between tax levels and municipal bond demand is low. Another
potential market drawback would be additional rate hikes. But we believe the
likelihood is slim for further increases in interest rates, unless the economy
turns in a stronger-than-expected performance. In conclusion, we believe our
total-return approach to investing will continue to help us strike an attractive
price/yield balance against an ever-changing market backdrop.
Sincerely,
Your Portfolio Management Team
/s/Donald C. Carleton /s/Philip G. Condon
Donald C. Carleton Philip G. Condon
Scudder Ohio Tax Free Fund:
A Team Approach to Investing
Scudder Ohio Tax Free Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund. They are supported by Scudder's large staff of
economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Lead Portfolio Manager Donald C. Carleton assumed responsibilities for the
Fund's day-to-day management and investment strategies in January 1995. Don has
over 25 years of investment management experience and has worked at Scudder
since 1983. Philip G. Condon, portfolio manager, became a member of the team in
1987 and has worked at Scudder since 1983. Phil has 15 years of experience in
municipal investing and portfolio management.
9
<PAGE>
<PAGE>
<TABLE>
SCUDDER OHIO TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1995
-------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3.9% SHORT-TERM MUNICIPAL INVESTMENTS
OHIO Cuyahoga County, OH, Health & Education,
University Hospital of Cleveland, Daily Demand Note,
4.55%, 1/1/16*......................................... 900,000 MIG1 900,000
Franklin County, OH, Health Systems, St. Anthony's
Medical Center, Daily Demand Note,
4.55%, 7/1/15*......................................... 100,000 MIG1 100,000
Student Loan Fund, OH, Auction Reset Security:
4.15%, 12/1/05 (c)*.................................... 1,000,000 AAA 1,000,000
4.2%, 12/1/05 (c)*..................................... 1,000,000 AAA 1,000,000
---------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $3,000,000)...................................... 3,000,000
---------
96.1% LONG-TERM MUNICIPAL INVESTMENTS
OHIO Canton, OH, General Obligation, 5.375%, 12/1/07 (c)..... 1,000,000 AAA 986,820
Cleveland, OH:
General Obligation:
Series A, 6.3%, 7/1/06 (c)........................... 1,000,000 AAA 1,063,990
5.3%, 9/1/08 (c)..................................... 2,000,000 AAA 1,975,320
Series 1993, 5.375%, 9/1/09 (c)...................... 1,700,000 AAA 1,673,956
Cleveland, OH:
Public Power System Improvement Revenue,
Series B, 7%, 11/15/17............................... 750,000 BBB 779,888
Urban Renewal Tax Increment Rock & Roll Hall of
Fame and Museum Project, 6.75%, 3/15/18.............. 1,000,000 NR 1,008,600
Waterworks Improvement, First Mortgage Revenue,
Series 1992 F, 6.25%, 1/1/07 (c)..................... 1,000,000 AAA 1,047,890
Columbus, OH:
General Obligation:
Limited Tax, Various Purpose, Series 1993,
5.25%, 9/15/11...................................... 1,000,000 AA 937,100
Unlimited Tax, Sewer Improvement, 6%, 5/1/13......... 1,000,000 AA 1,008,970
Water System Refunding Revenue, Series 1991,
6.375%, 11/1/10..................................... 1,000,000 AA 1,027,500
Cuyahoga County, OH:
General Obligation:
Series 1993 B, 5%, 10/1/08 (c)....................... 4,180,000 AAA 3,907,004
Jail Facilities, Series 1991, ETM, Zero Coupon,
10/1/02***.......................................... 1,500,000 AA 1,003,650
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hospital Facilities Revenue, Health Cleveland Inc.,
Series 1993, 6.25%, 8/15/10................................ 1,000,000 A 1,004,290
Fairfield, OH, City School District, 7.2%, 12/1/09 (c)......... 1,000,000 AAA 1,130,690
Franklin County, OH:
General Obligation, County Courthouse,
prerefunded, 6.375%, 12/1/01**............................... 1,250,000 AAA 1,362,062
Riverside Hospital, 5.75%, 5/15/12............................ 1,950,000 AA 1,869,914
Gateway Economic Development Corporation of
Cleveland, OH, Stadium Revenue, 6.5%, 9/15/14................. 2,000,000 BBB 1,920,100
Hamilton County, OH:
Health System Revenue, Franciscan Sisters of the
Poor Health System, Providence Hospital,
Series 1992, 6.8%, 7/1/08.................................... 2,000,000 BBB 1,994,500
Hospital Facilities Revenue, Children's Hospital
Medical Center:
Series E Refunding, 5%, 5/15/06 (c)......................... 2,000,000 AAA 1,932,000
Series F Refunding, 5%, 5/15/06 (c)......................... 1,800,000 AAA 1,738,800
Hospital Facilities Revenue, Christ Hospital,
Series 1991 B, 6.625%, 1/1/06 (c)............................ 1,000,000 AAA 1,059,230
Sewer System Revenue, Improvement and
Refunding:
Series A, 6.4%, 12/1/05..................................... 750,000 AA 797,400
5.45%, 12/1/09 (c).......................................... 1,000,000 AAA 988,970
Logan-Hocking, OH, School District, General
Obligation, Unlimited Tax, Series B, prerefunded,
7.1%, 12/1/02 (c)**........................................... 1,000,000 AAA 1,122,500
Lorain County, OH, Hospital Refunding Revenue,
Humility of Mary Health Care System, Series A,
5.9%, 12/15/08................................................ 1,000,000 A 986,040
Lorain, OH, Hospital Authority Refunding Revenue,
Lakeland Community Hospital Inc., 6.5%, 11/15/12.............. 1,000,000 A 1,005,570
Lucas County, OH:
Hospital Revenue:
Flower Hospital, Series 1993, 6.125%, 12/1/13................ 1,375,000 BBB 1,255,856
St. Vincent Medical Center, 5.25%, 8/15/20 (c)............... 1,900,000 AAA 1,724,516
Mahoning County, OH, General Obligation,
Limited Tax, 6.6%, 12/1/06 (c)................................ 1,100,000 AAA 1,185,822
Marysville, OH, Water System Revenue, Series 1991,
prerefunded, 6.5%, 12/1/01 (c)**.............................. 750,000 AAA 804,765
Newark, OH, General Obligation, Limited Tax,
Water Improvement, 6%, 12/1/18 (c)............................ 1,000,000 AAA 1,000,670
North Olmsted, OH, General Obligation,
6.25%, 12/15/12 (c)........................................... 1,500,000 AAA 1,555,005
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
SCUDDER OHIO TAX FREE FUND
------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio Air Quality Development Authority:
Pollution Control Revenue, Cleveland Electric
Company, 8%, 12/1/13 (c)..................................... 1,250,000 AAA 1,446,962
Pollution Control Revenue, Dayton Power and
Light Company Project, 9.5%, 12/1/15......................... 1,010,000 AA 1,060,641
Ohio State Building Authority:
Correctional Facilities Revenue, Series 1991 A,
6.5%, 10/1/04................................................ 1,000,000 A 1,072,060
Juvenile Correction Facilities, 6%, 10/1/06................... 1,555,000 A 1,608,539
State Facility Revenue, Columbus State Office
Building, Series 1985 C, prerefunded,
7.35%, 10/1/99**............................................. 1,250,000 A 1,401,413
Toledo Government Office Building, Series A,
prerefunded, 8%, 4/1/03**.................................. 500,000 AAA 591,395
Worker's Compensation Facilities, William Green
Building, Series 1993 A, 4.75%, 4/1/14....................... 1,000,000 A 833,560
Ohio General Obligation, 6%, 8/1/10............................ 1,000,000 AA 1,027,210
Ohio Higher Education Facilities Revenue:
Case Western Reserve University, Series B,
6.5%, 10/1/20................................................ 2,250,000 AA 2,433,105
John Carroll University, Series B, 5.3%, 11/15/14............. 1,000,000 A 894,380
Oberlin College Project, prerefunded,
7.1%, 10/1/99**.............................................. 500,000 NR 549,420
University of Dayton Project:
7.25%, 12/1/12 (c)........................................... 1,000,000 AAA 1,095,720
1994 Project, 5.8%, 12/1/14 (c).............................. 500,000 AAA 494,175
Ohio Housing Finance Agency, Single-Family
Mortgage Revenue, Series 1990 F, 7.6%, 9/1/16................. 1,705,000 AAA 1,796,439
Ohio Liquor Profits Refunding Bonds, Economic
Development Revenue, Series 1989,
6.85%, 3/1/00 (c)............................................. 1,000,000 AAA 1,077,000
Ohio Mortgage Revenue, International Order of Odd
Fellows Home, FHA Insured, 8.15%, 8/1/17...................... 150,000 AAA 163,670
Ohio Public Facilities Commission, Higher Educational
Capital Facilities Revenue, Series 2B,
5.4%, 11/1/07 (c)............................................. 2,000,000 AAA 1,972,980
Ohio Water Development Authority, Pollution Control
Revenue, Ohio Edison Company Project:
10.625%, 7/1/15.............................................. 1,350,000 BBB 1,408,982
Series 1989 A, 7.625%, 7/1/23................................ 1,140,000 BBB 1,160,987
Olmsted Falls, OH, City School District, General
Obligation, Series 1991, 7.05%, 12/15/11 (c).................. 1,000,000 AAA 1,094,420
Stark County, OH, Hospital Revenue Refunding,
Timken Mercy Medical Center, Series B,
5%, 12/1/07 (c)............................................... 1,140,000 AAA 1,082,396
Summit County, OH, General Obligation,
6.4%, 12/1/14 (c)............................................. 1,000,000 AAA 1,043,350
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PUERTO RICO Puerto Rico Electric Power Authority,
Power Revenue, Series S, 6.125%, 7/1/09.......... 2,000,000 A 2,050,500
Puerto Rico, General Obligation:
Public Improvement Refunding, 5.4%, 7/1/07....... 1,500,000 A 1,449,030
Public Improvement, prerefunded,
6.6%, 7/1/02 (c)**.............................. 1,000,000 AAA 1,102,180
VIRGIN ISLANDS Virgin Islands Public Finance Authority:
General Obligation, Matching Fund Loan Note,
Series A, 7.25%, 10/1/18........................ 500,000 NR 517,320
Highway Revenue, Series 1989, 7.7%, 10/1/04...... 1,000,000 BBB 1,075,350
TOTAL LONG-TERM MUNICIPAL INVESTMENTS ----------
(Cost $72,415,988)............................... 74,362,572
----------
============================================================================================================
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $75,415,988) (a)........................... 77,362,572
==========
<FN>
(a) The cost for federal income tax purposes was $75,415,988. At March 31,
1995, net unrealized appreciation for all securities based on tax cost
was $1,946,584. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $2,762,324 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax
cost over market value of $815,740.
(b) All of the securities held have been determined to be of appropriate
credit quality as required by the Fund's investment objectives. Credit
ratings shown are assigned by either Standard & Poor's Ratings Group,
Moody's Investors Service, Inc. or Fitch Investors Service, Inc.
Unrated securities (NR) have been determined to be of comparable
quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such
as the coupon-equivalent of the Treasury bill rate. Variable rate
demand notes are securities whose yields are periodically reset at
levels that are generally comparable to tax-exempt commercial paper.
These securities are payable on demand within seven calendar days and
normally incorporate an irrevocable letter of credit from a major bank.
These notes are carried, for purposes of calculating average weighted
maturity, at the longer of the period remaining until the next rate
change or to the extent of the demand period.
** Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay
principal and interest on the tax-exempt issue and to retire the bonds
in full at the earliest refunding date.
*** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by
trustee and used to pay principal and interest on bonds so designated.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
SCUDDER OHIO TAX FREE FUND
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1995
--------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $75,415,988)
(Note A)........................................... $77,362,572
Receivables:
Interest........................................... 1,403,199
Fund shares sold................................... 2,692
-----------
Total assets.................................... 78,768,463
LIABILITIES
Payables:
Due to custodian................................... $101,017
Dividends.......................................... 123,529
Fund shares redeemed............................... 114,930
Accrued management fee (Note C).................... 9,009
Other accrued expenses (Note C).................... 34,050
--------
Total liabilities............................... 382,535
-----------
Net assets, at market value........................... $78,385,928
===========
NET ASSETS
Net assets consist of:
Unrealized appreciation on investments............ $ 1,946,584
Accumulated distributions in excess
of net realized gains.......................... (255,981)
Shares of beneficial interest..................... 61,403
Additional paid-in capital........................ 76,633,922
-----------
Net assets, at market value........................... $78,385,928
===========
NET ASSET VALUE, offering and redemption price per
share ($78,385,928 / 6,140,345 outstanding
shares of beneficial interest, $.01 par value,
unlimited number of shares authorized)............ $12.77
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
-----------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest..................................................... $4,733,509
Expenses:
Management fee (Note C)...................................... $ 150,790
Services to shareholders (Note C)............................ 84,261
Custodian and accounting fees (Note C)....................... 70,596
Trustees' fees (Note C)...................................... 14,930
Auditing..................................................... 30,762
Reports to shareholders...................................... 18,957
Legal........................................................ 6,055
State registration........................................... 4,276
Other........................................................ 8,165 388,792
-------------------------
Net investment income........................................ 4,344,717
----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investment transactions.............................. 319,255
Futures contracts.................................... (310,337) 8,918
---------
Net unrealized appreciation on investments
during the period.................................... 526,733
----------
Net gain on investments...................................... 535,651
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......... $4,880,368
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
SCUDDER OHIO TAX FREE FUND
---------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED MARCH 31,
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income.......................................... $ 4,344,717 $ 4,187,400
Net realized gain from investment
transactions................................................. 8,918 443,702
Net unrealized appreciation (depreciation)
on investments during the period............................. 526,733 (3,092,222)
------------ ------------
Net increase in net assets resulting from
operations................................................... 4,880,368 1,538,880
------------ ------------
Distributions to shareholders:
From net investment income ($.70 and $.70
per share, respectively)..................................... (4,344,717) (4,187,400)
------------ ------------
From net realized gains from investment
transactions ($.08 per share)................................ -- (449,316)
------------ ------------
In excess of net realized gains ($.04 and
$.02 per share, respectively) (252,478) (113,213)
------------ ------------
Fund share transactions:
Proceeds from shares sold...................................... 10,714,541 26,512,400
Net asset value of shares issued to
shareholders in reinvestment of distributions................ 3,306,000 3,066,158
Cost of shares redeemed........................................ (16,250,379) (14,629,985)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions...................................... (2,229,838) 14,948,573
------------ ------------
INCREASE (DECREASE) IN NET ASSETS.............................. (1,946,665) 11,737,524
Net assets at beginning of period.............................. 80,332,593 68,595,069
------------ ------------
NET ASSETS AT END OF PERIOD.................................... $ 78,385,928 $ 80,332,593
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period...................... 6,334,774 5,223,439
------------ ------------
Shares sold.................................................... 855,533 1,976,097
Shares issued to shareholders in
reinvestment of distributions................................ 264,552 228,892
Shares redeemed................................................ (1,314,514) (1,093,654)
------------ ------------
Net increase (decrease) in Fund shares......................... (194,429) 1,111,335
------------ ------------
Shares outstanding at end of period............................ 6,140,345 6,334,774
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout each period and other performance information
derived from the financial statements.
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS) TO
------------------------------------------------------------- MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period......................... $12.68 $13.13 $12.47 $12.14 $11.97 $11.94 $11.65 $12.00
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a)................................. .70 .70 .72 .75 .78 .82 .79 .66
Net realized and
unrealized gain
(loss) on investment
transactions............................... .13 (.35) .85 .36 .23 .10 .36 (.40)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................................. .83 .35 1.57 1.11 1.01 .92 1.15 .26
------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income...................... (.70) (.70) (.72) (.75) (.78) (.82) (.84) (.61)
Net realized gains on
investment transactions................... -- (.08) (.19) (.03) (.06) (.07) (.02) --
In excess of net realized gains............ (.04) (.02) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions.......................... (.74) (.80) (.91) (.78) (.84) (.89) (.86) (.61)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period............... $12.77 $12.68 $13.13 $12.47 $12.14 $11.97 $11.94 $11.65
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (b)......................... 6.82 2.48 13.04 9.33 8.75 7.80 10.83 2.30**
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of period
($ millions)................................ 78 80 69 51 37 25 12 6
Ratio of operating expenses,
net to average daily
net assets (%) (a).......................... .50 .50 .50 .50 .50 .50 .50 .50*
Ratio of net investment income to
average daily net assets (%)................ 5.59 5.23 5.61 6.05 6.50 6.74 7.13 7.17*
Portfolio turnover rate (%).................. 19.9 12.2 34.7 13.2 22.6 15.9 35.7 105.5*
(a) Reflects a per share amount of expenses,
exclusive of management fees, reimbursed
by the Adviser of....................... $ -- $ -- $ -- $ -- $ -- $ .03 $ .11 $ .31
Reflects a per share amount of management
fee not imposed of...................... $ .05 $ .05 $ .06 $ .07 $ .07 $ .07 $ .07 $ .05
Operating expense ratio including
expenses reimbursed, management fee and
other expenses not imposed (%).......... .91 .90 .95 1.03 1.21 1.62 2.14 4.51*
<FN>
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
17
<PAGE>
SCUDDER OHIO TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Scudder Ohio Tax Free Fund (the "Fund") is a non-diversified series of Scudder
State Tax Free Trust (the "Trust"). The Trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. There are currently six
series in the Trust. The policies described below are followed consistently by
the Fund in the preparation of its financial statements in conformity with
generally accepted accounting principles.
SECURITY VALUATION. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which quotations reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost. All other debt securities are valued at their fair
value as determined in good faith by the Valuation Committee of the Board of
Trustees.
FUTURES CONTRACTS. The Fund may enter into interest rate and securities index
futures contracts for bona fide hedging purposes. During the year ended March
31, 1995, to hedge against the negative effects of rising interest rates, the
Fund sold municipal bond futures contracts. Upon entering into a futures
contract, the Fund is required to deposit with a broker an amount ("initial
margin") equal to a certain percentage of the purchase price indicated in the
futures contract. Subsequent payments ("variation margin") are made or received
by the Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial reporting purposes as
unrealized gains or losses by the Fund. When entering into a closing
transaction, the Fund will realize, for book purposes, a gain or loss equal to
the difference between the value of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at the most recent settlement
price. Certain risks may arise upon entering into futures contracts from the
contingency of imperfect market conditions.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment companies
and to distribute all of its taxable and tax-exempt income to its shareholders.
Accordingly, the Fund paid no federal income taxes and no provision for federal
income taxes was required.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
relate primarily to investments in futures contracts. As a result, net
investment income and net realized gain (loss) on investment transactions for a
reporting period may differ significantly from distributions during such period.
Accordingly, the Fund may periodically make reclassifications among certain of
its capital accounts without impacting the net asset value of the Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
OTHER. Investment security transactions are accounted for on a trade date
basis. Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to maturity.
B. PURCHASES AND SALES OF SECURITIES
--------------------------------------------------------------------------------
During the year ended March 31, 1995, purchases and sales of municipal
securities (excluding short-term investments) aggregated $14,696,827 and
$18,196,157, respectively.
The aggregate face value of futures contracts opened and closed during the year
ended March 31, 1995 amounted to $10,030,706, respectively.
19
<PAGE>
SCUDDER OHIO TAX FREE FUND
--------------------------------------------------------------------------------
C. RELATED PARTIES
--------------------------------------------------------------------------------
Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a fee
equal to an annual rate of approximately 0.60% of the Fund's average daily net
assets, computed and accrued daily and payable monthly. The Adviser has agreed
not to impose all or a portion of its management fee until July 31, 1995 and
during such period to maintain the annualized expenses of the Fund at not more
than 0.50% of average daily net assets. For the year ended March 31, 1995, the
Adviser did not impose a portion of its fee amounting to $317,609, and the
portion imposed amounted to $150,790, of which $9,009 was unpaid at March 31,
1995.
Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend-paying and shareholder service agent for the Fund.
Included in services to shareholders is $63,737 charged to the Fund by SSC for
the year ended March 31, 1995, of which $4,978 was unpaid at March 31, 1995.
Effective November 21, 1994, Scudder Fund Accounting Corporation ("SFAC"), a
wholly-owned subsidiary of the Adviser, assumed responsibility for determining
the daily net asset value per share and maintaining the portfolio and general
accounting records of the Fund. For the year ended March 31, 1995, the amount
charged to the Fund by SFAC aggregated $13,011, of which $3,000 was unpaid at
March 31, 1995.
The Trust pays each Trustee not affiliated with the Adviser $12,000 annually,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1995,
Trustees' fees charged to the Fund aggregated $14,930.
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER STATE TAX FREE TRUST AND THE SHAREHOLDERS OF SCUDDER
OHIO TAX FREE FUND:
We have audited the accompanying statement of assets and liabilities of Scudder
Ohio Tax Free Fund, including the investment portfolio, as of March 31, 1995,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the seven years in the period then ended,
and for the period May 28, 1987 (commencement of operations) to March 31, 1988.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1995, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Ohio Tax Free Fund as of March 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the seven
years in the period then ended, and for the period May 28, 1987 (commencement of
operations) to March 31, 1988, in conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 8, 1995
21
<PAGE>
SCUDDER OHIO TAX FREE FUND
TAX INFORMATION
--------------------------------------------------------------------------------
The Fund paid distributions of $.04 per share from net long-term capital gains
during its fiscal year ended March 31, 1995. Pursuant to Section 852 of the
Internal Revenue Code, the Fund designates $155,771 as capital gain dividends
for its fiscal year ended March 31, 1995.
Of the dividends paid by the Fund from net investment income for the fiscal year
ended March 31, 1995, 100% constituted exempt interest dividends for regular
federal income tax and Ohio personal income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
22
(Pages 23 and 24 were intentionally left blank.)
<PAGE>
OFFICERS AND TRUSTEES
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; Director, Executive Vice President and Manager, Safeguard
Scientifics, Inc.
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
* Scudder, Stevens & Clark, Inc.
25
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
The Scudder Family of Funds
-----------------------------------------------------------------------------------------------------------------
<S> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax Free Money Market+ Scudder Income Fund
Scudder Tax Free Money Fund Scudder International Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Global Income Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Value Fund
Scudder Growth and Income Fund The Japan Fund
Retirement Plans and Tax-Advantaged Investments
-----------------------------------------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
-----------------------------------------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
-----------------------------------------------------------------------------------------------------------------
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(TM)++
For complete information on any of the above Scudder funds, including management fees and expenses, call or
write for a free prospectus. Read it carefully before you invest or send money. +A portion of the income
from the tax-free funds may be subject to federal, state, and local taxes. *Not available in all states.
+++A no-load variable annuity contract provided by Charter National Life Insurance Company and its
affiliate, offered by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by Scudder,
Stevens & Clark, Inc. are traded on various stock exchanges. ++For information on Scudder Treasurers
Trust,(TM) an institutional cash management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.
26
<PAGE>
HOW TO CONTACT SCUDDER
Account Service and Information
-------------------------------------------------------------------------------------------------------------
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For account updates, prices, yields, exchanges, and redemptions
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
-------------------------------------------------------------------------------------------------------------
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
-------------------------------------------------------------------------------------------------------------
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
-------------------------------------------------------------------------------------------------------------
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
-------------------------------------------------------------------------------------------------------------
For information on Scudder For information on Scudder
Treasurers Trust,(TM) an Institutional Funds,* funds
institutional cash management designed to meet the broad
service for corporations, investment management and
non-profit organizations and trusts service needs of banks and
that uses certain portfolios of other institutions, call
Scudder Fund, Inc.* ($100,000 1-800-854-8525.
minimum), call 1-800-541-7703.
-------------------------------------------------------------------------------------------------------------
Scudder Investor Relations and Scudder Funds Centers are services provided through Scudder Investor
Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a prospectus with more complete
information, including management fees and expenses. Please read it carefully before you invest or send
money.
</TABLE>
27
<PAGE>
Celebrating 75 Years of Serving Investors
--------------------------------------------------------------------------------
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 36 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
<PAGE>
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
Scudder
Pennsylvania
Tax Free Fund
Annual Report
March 31, 1995
* For investors seeking double tax-free income exempt from both Pennsylvania
and regular federal income taxes
* A pure no-load(TM) fund with no commissions to buy, sell, or exchange
shares.
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
CONTENTS
2 Highlights
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
15 Financial Statements
18 Financial Highlights
19 Notes to Financial Statements
22 Report of Independent Accountants
23 Tax Information
25 Officers and Trustees
26 Investment Products and Services
27 How to Contact Scudder
HIGHLIGHTS
* Scudder Pennsylvania Tax Free Fund generated a 7.09% total return for the
12 months ended March 31, 1995, in spite of the generally negative market
conditions that prevailed for much of the fiscal year. A declining supply
of municipal bonds and improving bond prices in 1995 worked to the Fund's
advantage in the final months of the Fund's fiscal year.
(Bar Chart Title)
Fund Yield vs. Taxable Equivalent Yield
(Bar Chart Data)
30-Day SEC Yield Taxable Equivalent Yield
3/31/94 5.37% 9.15%
11/30/94 5.99% 10.20%
3/31/95 5.29% 9.01%
* The chart above shows your Fund's 30-day net annualized SEC yield at key
points during the year along with yields that would be required of
comparable taxable investments to match the Fund's yield for Pennsylvania
residents in the highest combined federal and state tax bracket of 41.29%.
* Throughout the period, the Fund continued to seek a high relative degree of
price stability, tax-free income, and credit quality.
2
<PAGE>
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Investors' concerns over inflationary economic growth have abated in recent
months, after creating so much turmoil for the world's investment markets in
1994. Continued low inflation and indications of weakness in certain segments of
the economy, combined with the Federal Reserve's most recent interest-rate
increases, have reassured many investors. Bond prices have begun to recover,
yields have declined from their November highs, and bond mutual funds have
enjoyed positive net subscriptions after several months of redemptions. For the
three months ended March 31, municipal bonds, as measured by the unmanaged
Lehman Brothers Municipal Bond Index, returned 7.07% on average, more than
making up for the -5.17% return reported for all of 1994.
The rise in interest rates over the past year and a half has highlighted a
challenge for income funds: to provide shareholders with the higher income
available from bonds while protecting against price erosion. The question is,
have interest rates shifted direction once again? Unfortunately the answer is
unclear. Rates should remain relatively stable if economic growth continues to
slacken in the United States. Nevertheless, additional interest-rate increases
cannot be ruled out, given some lingering inflationary concerns: Commodity
prices continue to rise, factory production is still pushing the limits of
capacity, and the dollar has fallen to record lows against the Japanese yen and
German mark.
Additional uncertainty regarding interest rates may, of course, spark
episodes of volatility in fixed-income markets. Your portfolio managers will
continue to focus on fundamental investment research and security selection as a
means to generate high current double tax-free income and attractive total
returns.
As of April 1995 the portfolio's management team consists of Lead Portfolio
Manager Donald C. Carleton and Philip G. Condon. Kimberley Manning, who had
served as the Fund's lead manager, has left Scudder. Please call a Scudder
Investor Relations representative at 1-800-225-2470 if you have questions about
your Fund. Page 27 provides more information on how to contact Scudder. Thank
you for choosing Scudder Pennsylvania Tax Free Fund to help meet your investment
needs.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Pennsylvania Tax Free Fund
3
<PAGE>
Scudder Pennsylvania Tax Free Fund
Performance Update as of March 31, 1995
-----------------------------------------------------------------
Growth of a $10,000 Investment
-----------------------------------------------------------------
Scudder Pennsylvania Tax Free Fund
----------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,709 7.09% 7.09%
5 Year $14,825 48.25% 8.19%
Life of
Fund* $18,516 85.16% 8.17%
Lehman Brothers Municipal Bond Index
--------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,743 7.43% 7.43%
5 Year $14,859 48.59% 8.24%
Life of
Fund* $19,102 91.02% 8.61%
*The Fund commenced operations on May 28, 1987.
Index comparisons begin May 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Scudder Pennsylvania Tax Free Fund
Year Amount
----------------------
5/31/87 10000
88 10399
89 11484
90 12489
91 13436
92 14874
93 16835
94 17289
95 18516
Lehman Brothers Municipal Bond Index
Year Amount
----------------------
5/31/87 10000
88 10847
89 11628
90 12855
91 14041
92 15444
93 17378
94 17781
95 19102
The unmanaged Lehman Brothers Municipal Bond Index is a market value-
weighted measure of municipal bonds issued across the United States.
Index issues have a credit rating of at least Baa and a maturity
of at least two years. Index returns assume reinvestment of dividends
and, unlike Fund returns, do not reflect any fees or expenses.
-----------------------------------------------------------------
Returns and Per Share Information
-------------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended March 31
----------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988* 1989 1990 1991 1992 1993 1994 1995
----------------------------------------------------------------
Net Asset Value... $11.80 $12.08 $12.27 $12.35 $12.80 $13.46 $13.01 $13.13
Income Dividends.. $ .59 $ .85 .84 .82 .77 .76 .75 .73
Capital Gains
Distributions..... $ -- $ .06 .01 -- .07 .21 .09 .03
Fund Total
Return (%)........ 3.39 11.00 8.75 7.58 10.70 13.19 2.70 7.09
Index Total
Return (%)........ 8.48 7.21 10.56 9.22 10.02 12.52 2.32 7.43
</TABLE>
Performance is historical and assumes reinvestment of all dividends and capital
gains and is not indicative of future results. Investment return and principal
value will fluctuate, so an investor's shares, when redeemed, may be worth more
or less than when purchased. If the Adviser had not temporarily capped expenses,
the average annual total returns for the Fund for the one year, five year, and
life of Fund periods would have been lower.
4
<PAGE>
Scudder Pennsylvania Tax Free Fund
Portfolio Summary as of March 31, 1995
---------------------------------------------------------------------------
Diversification
---------------------------------------------------------------------------
Hospital/Health 24% During the year, the Fund
General Obligation 20% invested in a broad selection
Escrow & Collateral 15% of revenue bonds and held a
Lease Rentals 13% sizable position in general
Water/Sewer Revenue 10% obligation bonds.
Higher Education 6%
Housing Finance Authority 5%
Port/Airport Authority 2%
Electric Utility Revenue 1%
Miscellaneous Municipal 4%
-------
100%
=======
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Quality
--------------------------------------------------------------------------
AAA 60% In a generally negative bond
AA 9% market environment, high credit
A 8% quality proved especially important.
BBB 17%
Not Rated 6%
-------
100%
=======
Weighted average quality: AA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Effective Maturity
--------------------------------------------------------------------------
Less than 1 year 10% The Fund focused on bonds with
1 < 5 years 12% maturities of between five and
5 < 10 years 22% 15 years, which we believed offered
10 < 20 years 41% the most attractive price and yield
Greater than 20 years 15% characteristics.
-------
100%
=======
Weighted average effective maturity: 12 years
5
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Scudder Pennsylvania Tax Free Fund wrapped up its fiscal year ended March
31, 1995, with a flourish. In a challenging 12-month period for most bond
investors, your Fund's performance was particularly heartening. The Fund
produced a one-year total return of 7.09%, reflecting a $0.12 increase in share
price to $13.13 on March 31, 1995, $0.73 in reinvested income distributions, and
$0.03 in reinvested capital gain distributions. This return was nearly three
quarters of a percentage point better than the average total return of 6.39%
generated by the 47 Pennsylvania tax-free funds tracked by Lipper Analytical
Services.
Put in context, the Fund's performance reflects two distinct stages. From
the start of the fiscal year through the market's turning point last November,
the Fund generated a total return of -2.43%. By contrast, the total return for
the period's final four months was 9.77%. Although declining bond prices pushed
the Fund's return into negative terrain during the first stage, the income
earnings of the Fund helped to protect it from larger declines. The Fund's
30-day net annualized SEC yield as of March 31, 1994, was 5.37%. By November 30,
it had risen to 5.99%, reflecting the rise in overall interest rates. The Fund's
yield as of March 31, 1995, was 5.29%. Investors in Pennsylvania's top combined
federal and state tax bracket would have had to earn 9.01% from a comparable
taxable investment to match the Fund's 5.29% tax-free yield. Bond price
volatility, which had been a negative factor for much of the fiscal year, worked
to the Fund's advantage toward the end of the period as prices began to rise,
more than offsetting the decline in yield from its November high.
All in all, investors who stayed with their fixed-income investments
despite the sharp fall in prices in 1994 were rewarded as prices recovered in
1995. Had they redeemed their shares last fall, they would have done so at
prices substantially lower than share prices today. When investing for long-term
goals, it is generally wise to avoid the temptation to trade in and out of the
market as prices rise and fall.
A Year of Extremes
In early 1994, the Federal Reserve began raising short-term interest rates
in an effort to slow what it considered unsustainable economic growth. Despite
the Fed's efforts, inflationary concerns persisted, creating an overwhelmingly
negative sentiment among investors. (Bond investors dislike inflation because it
weakens the purchasing power of future income payments from their fixed-income
investments.) Bond prices fell while yields rose across all maturities for
6
<PAGE>
taxable and tax-free bonds alike. In late fall, the highly publicized bankruptcy
of Orange County, California, delivered a temporary blow to an already skittish
market. Again investor sentiment was tested, but the municipal market had
already begun turning the corner.
Since that time, preliminary evidence has surfaced suggesting that economic
growth has begun to slow as a result of the Fed's efforts to tame inflationary
pressures. With inflation no longer an immediate concern, fixed-income investors
have pushed up bond prices, yields on long-term instruments have declined, and
municipal bond funds have received new investment dollars after months of
redemptions.
Meanwhile, as discussed in our September report, the dynamics of supply and
demand continued to work to the Fund's advantage. Rising interest rates in 1994
put an end to the previous year's record pace of municipal refundings. The
supply of new issues fell sharply--and is falling still. March's supply of new
issues was the lowest of any previous March for the last five years. Although
the demand for municipal securities has remained essentially the same, the
scanty volume of municipal bonds helped to support bond prices.
A Focus on Fundamentals
Throughout the market's ups and downs, Scudder Pennsylvania Tax Free Fund
sought to maintain relative price stability and high tax-free income by
emphasizing high-quality, noncallable, and call-protected bonds with maturities
of less than 20 years.
Noncallable and call-protected bonds--respectively, those bonds that cannot
be retired before maturity and those that would be very expensive for the
issuers to retire before maturity--continued to constitute a large segment of
the portfolio. We took advantage of opportunities to purchase these bonds
because of their favorable performance characteristics (versus callable bonds
with similar maturities) in an environment of rising bond prices. Moreover,
noncallable and call-protected bonds typically fare no worse than their callable
counterparts when prices decline. The reason: During periods of rising bond
prices (and falling yields) the incidence of calls increases, and callable bonds
behave more like short-term securities. Meanwhile, noncallable bonds respond to
interest rate movements based on their actual maturities. On the other hand,
during periods of falling bond prices, the behavior of callable bonds reflects
7
<PAGE>
their actual maturities hence, they perform similarly to noncallable bonds of
like maturities. All told, noncallable bonds afforded the Fund a dose of price
stability and an attractive stream of tax-free income during the year.
As bond prices declined during 1994, we continued to emphasize bonds in the
intermediate-maturity range. Currently, over 60% of the portfolio is invested in
bonds with maturities of between five and 20 years, and only 14% is invested in
bonds maturing in over 15 years. Given last year's market conditions, there was
little yield advantage in extending into longer-maturity bonds, since the yield
differential between shorter- and longer-maturity securities was negligible.
Further, because longer-maturity securities tend to be subject to greater
fluctuations in price due to changes in interest rates, the risk/reward tradeoff
for long-term bonds during the year wasn't compelling. By structuring the
portfolio in the intermediate range, we were able to capture most of the yield
of longer-term bonds without the added price volatility.
(Line Chart Title)
Yields Across the Maturity Spectrum: AAA-Rated Municipal Bonds on 3/31/95
(Line Chart Data)
Years Yield
1 4.35%
2 4.6
3 4.75
4 4.85
5 4.95
6 5.05
7 5.15
8 5.20
9 5.25
10 5.30
11 5.40
12 5.5
13 5.6
14 5.65
15 5.7
16 5.75
17 5.8
18 5.85
19 5.87
20 5.90
21 5.91
22 5.92
23 5.93
24 5.94
25 5.95
26 5.96
27 5.97
28 5.98
29 5.99
30 6
During the year, the Fund focused on the five- to 15-year maturity range,
which offered relative price stability and attractive yields.
As a precautionary measure in an unsettled bond environment, we remained
attentive to credit quality throughout the fiscal year. Lower-quality bonds
offered little additional reward over high-quality bonds during the period. As a
result, we increased the Fund's holdings in bonds rated AA or better to 69% of
the portfolio on March 31. Further, nearly half of the bonds in the portfolio
were insured against municipal defaults by various bond insurance companies.
8
<PAGE>
Improving Economic and Fiscal Conditions in Pennsylvania
The climate for Pennsylvania's municipal market is good. The state's
economic recovery continues, although employment growth in Pennsylvania lags
that of the nation's. Reflecting positive conditions that first emerged during
fiscal year 1994, Pennsylvania's finances have continued to improve. The state's
estimated total revenues of $16.1 billion for fiscal year 1995 are now higher
than originally expected and above estimated expenditures for the year. A
balanced budget for fiscal year 1996 is expected to pass on schedule, although
the governor's proposed school reform plan could cause a delay. In any case,
Pennsylvania is committed to controlling its finances and balancing its budget.
The state's debt levels are moderate and well within its means, which bodes well
for Pennsylvania municipal bonds.
Outlook
Looking ahead, we believe the combination of slower economic growth, stable
inflation, and a relatively sparse supply of municipal issues will result in
favorable conditions for municipal bonds. While the possibility of income tax
cuts--increasingly popular in Washington--may reduce investors' interest in
tax-free investments, history has shown that the short-term correlation between
tax levels and municipal bond demand is low. Another potential market drawback
would be additional rate hikes. But we believe the likelihood is slim for
further increases in interest rates, unless the economy turns in a
stronger-than-expected performance. In conclusion, we believe our total-return
approach to investing will continue to help us strike an attractive price/yield
balance against an ever-changing market backdrop.
Sincerely,
Your Portfolio Management Team
/s/Donald C. Carleton /s/Philip G. Condon
Donald C. Carleton Philip G. Condon
Scudder Pennsylvania Tax Free Fund: A Team Approach to Investing
Scudder Pennsylvania Tax Free Fund is managed by a team of Scudder
investment professionals who each play an important role in the Fund's
management process. Team members work together to develop investment strategies
and select securities for the Fund. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Lead Portfolio Manager Donald C. Carleton assumed responsibilities for the
Fund's day-to-day management and investment strategies in January 1995. Don has
over 25 years of investment management experience and has worked at Scudder
since 1983. Philip G. Condon, portfolio manager, became a member of the team in
1987 and has worked at Scudder since 1983. Phil has 15 years of experience in
municipal investing and portfolio management.
9
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
<TABLE>
INVESTMENT PORTFOLIO as of March 31, 1995
---------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
---------------------------------------------------------------------------------------------------------------
10.4% SHORT-TERM MUNICIPAL INVESTMENTS
<S> <C> <C> <C> <C>
Pennsylvania Bucks County, PA, Oxford Falls Plaza, Series 1984,
Weekly Demand Note, 4.5%, 10/1/14*............... 100,000 MIG1 100,000
Delaware County, PA, Airport Facilities Revenue,
United Parcel Service, Daily Demand Note,
4.6%, 12/1/15*.................................. 300,000 A1+ 300,000
Keystone Oaks, PA, Auction Rate Securities,
4.1%, 9/1/16 (c)*............................... 2,250,000 AAA 2,250,000
Pennsylvania General Obligation, Auction Rate
Securities, 4.05%, 4/15/02*..................... 150,000 AAA 150,000
Pennsylvania Higher Educational Facilities Authority,
Temple University, Series 1984, Daily Demand Note,
4.45%, 10/1/09*................................. 2,100,000 MIG1 2,100,000
Philadelphia PA, Regional Port Authority, Inverse
Floater, 4.3%, 9/1/13 (c)****................... 1,000,000 NR 1,000,000
Philadelphia, PA, Tax and Revenue Anticipation Note,
4.75%, 6/15/95.................................. 1,500,000 SP1 1,500,570
Total Short-term Municipal Investments ---------
(Cost $7,402,024)............................... 7,400,570
---------
89.6% LONG-TERM MUNICIPAL INVESTMENTS
Pennsylvania Allegheny County, PA:
Hospital Development Authority, Hospital Revenue,
Magee Women's Hospital, 5.3%, 10/1/07 (c)....... 1,260,000 AAA 1,237,420
Sanitary Authority, Sewer Revenues, Series 1986 B,
prerefunded, 7.5%, 6/1/99 (c)***................. 500,000 AAA 549,595
Armstrong County, PA, Hospital Authority, St. Frances
Medical Center, Series A, 6.25%, 6/1/13 (c)...... 1,000,000 AAA 1,011,690
Beaver County, PA, Industrial Development Authority,
Ohio Edison, Beaver Valley, Pollution Control
Revenue, 10.5%, 10/1/15.......................... 500,000 BBB 526,910
Berks County, PA, Municipal Authority Hospital
Revenue, Reading Hospital and Medical
Center Project:
5.5%, 10/1/08 (c)............................... 2,000,000 AAA 1,979,360
5.7%, 10/1/14 (c)............................... 1,000,000 AAA 963,560
Bethlehem, PA, Water Authority, Refunding,
4.875%, 11/15/14 (c)............................ 1,000,000 AAA 867,050
Bethlehem, PA, Water Revenue, Series 1992,
prerefunded, 6.25%, 11/15/01 (c)***............. 1,000,000 AAA 1,065,020
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blair County, PA, Hospital Authority, 5.5%, 7/1/07 (c).. 1,000,000 AAA 979,850
Bucks County, PA, Water and Sewer Authority
Revenue, ETM, 6.375%, 12/1/08**........................ 425,000 NR 453,186
Clearfield, PA, Hospital Authority Revenue,
Clearfield Hospital, 6.875%, 6/1/16.................... 1,490,000 NR 1,443,839
Commonwealth of Pennsylvania, Certificate of
Participation, Lease Revenue, Series A:
5.25%, 7/1/10 (c)..................................... 1,890,000 AAA 1,778,244
5%, 7/1/15 (c)........................................ 1,000,000 AAA 885,720
Delaware County, PA, Health Facilities Revenue,
Mercy Health Corporation of Southeastern
Pennsylvania, Series B, 6%, 11/15/07................... 1,500,000 BBB 1,447,155
Delaware County Authority, Commonwealth of
Pennsylvania, University Revenue, Villanova
University, prerefunded, 7.75%, 8/1/98***.............. 200,000 NR 220,912
Erie, PA, Higher Education Building Authority, College
Revenue, Mercyhurst College Project,
5.75%, 3/15/20......................................... 1,000,000 BBB 842,120
Erie County, PA:
General Obligation, 5.25%, 9/1/12 (c).................. 1,000,000 AAA 930,820
Prison Authority, Commonwealth Lease Revenue,
prerefunded, 6.25%, 11/1/01 (c)***................... 1,000,000 AAA 1,060,130
Harrisburg, PA, Water Authority Revenue,
Series 1993 B, Inverse Floater, 7.38%,
6/18/15 (c)****........................................ 1,000,000 AAA 963,750
Lebanon County, PA, Good Samaritan Hospital
Authority Revenue, Series 1989 B, prerefunded,
8.25%, 11/1/99***...................................... 600,000 BBB 690,120
Lehigh County, PA:
Hospital Revenue, Healtheast, Series B, prerefunded,
9%, 7/1/97***........................................ 200,000 A 221,100
Industrial Development Authority, Pollution Control
Revenue, PA Power and Light Company Project,
9.375%, 7/1/15....................................... 150,000 A 154,608
Montgomery County, PA:
Holy Redeemer Hospital, 6.75%, 2/1/09 (c).............. 500,000 AAA 523,475
Redevelopment Authority, Multi-Family Housing
Revenue Refunding, KBF Associates,
6.375%, 7/1/12........................................ 1,500,000 BBB 1,411,005
Pennsylvania Convention Center Authority,
Funding Revenue, Series 1994 A, 6.75%, 9/1/19........... 2,550,000 BBB 2,561,883
Pennsylvania General Obligation:
6.25%, 7/1/10........................................... 1,000,000 AA 1,051,250
5.375%, 5/1/13.......................................... 1,500,000 AA 1,394,175
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
SCUDDER PENNSYLVANIA TAX FREE FUND
-----------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inverse Floater, 18.445%, 4/15/02 (c)****...................... 1,000,000 AAA 1,671,250
Prerefunded, Zero Coupon, 12/15/98***.......................... 2,040,000 AA 1,251,274
Pennsylvania Higher Educational Facilities Authority,
Colleges and University Revenue, Carnegie-
Mellon University, 9%, 11/1/09................................. 50,000 A 53,603
Pennsylvania Housing Finance Agency,
Single Family Mortgage Revenue:
Series 1992-33, 6.85%, 10/1/09............................... 840,000 AA 892,684
Series 1991-32, 7.15%, 4/1/15................................ 1,000,000 AA 1,058,650
Pennsylvania Industrial Development Authority,
Economic Development Revenue, 5.8%, 1/1/08 (c)................. 1,000,000 AAA 1,014,290
Pennsylvania Intergovernmental Cooperation
Authority, Special Tax Revenue, City of
Philadelphia, prerefunded, 6.8%, 6/15/02***.................... 1,000,000 AAA 1,099,440
Philadelphia, PA, Airport Revenue, Philadelphia
Airport System, 9%, 6/15/15.................................... 100,000 BBB 103,796
Philadelphia, PA, Gas Works Revenue,
Series A, prerefunded, 7.3%, 7/1/97***......................... 1,000,000 BBB 1,069,250
Philadelphia, PA, General Obligation:
11.5%, 8/1/98 (c).............................................. 500,000 AAA 597,220
Refunding Revenue, Series A, 11.5%, 8/1/99 (c)................. 710,000 AAA 882,069
Philadelphia, PA, Hospital and Higher Education
Facilities Authority, Hospital Revenue:
Albert Einstein Medical Center, 7.5%, 4/1/99.................. 1,000,000 A 1,059,910
Chestnut Hill Hospital, 6.5%, 11/15/22........................ 1,750,000 A 1,729,875
Children's Seashore House, Series A, 7%,
8/15/12...................................................... 1,000,000 A 1,015,650
Graduate Health System Obligation Group,
6.625%, 7/1/21............................................... 1,000,000 BBB 926,920
Temple University Hospital, Series 1993 A,
6.625%, 11/15/23............................................. 1,100,000 BBB 1,083,929
Philadelphia, PA, Municipal Authority, Lease
Revenue Refunding:
Series C, 5%, 4/1/07 (c)...................................... 2,000,000 AAA 1,906,220
Series A, 5.625%, 11/15/14 (c)................................ 1,000,000 AAA 958,110
Philadelphia, PA, Regional Port Authority,
Inverse Floater, 7.82%, 9/1/13 (c)****......................... 1,000,000 AAA 1,016,250
Philadelphia, PA, Water and Wastewater Refunding
Revenue, 5.625%, 6/15/09 (c)................................... 2,000,000 AAA 1,994,960
Pittsburgh, PA, General Obligation, Series 1993 A,
5.5%, 9/1/14 (c)............................................... 1,500,000 AAA 1,429,440
Pittsburgh, PA, Water and Sewer System Revenue:
Series A, prerefunded, 6.5%, 9/1/01 (c)***.................. 1,250,000 AAA 1,365,650
ETM, 7.25%, 9/1/14 (c)**.................................... 150,000 AAA 177,081
Series A, 4.75%, 9/1/16 (c)................................. 2,000,000 AAA 1,683,680
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pottsville, PA, Hospital Authority, 7.25%, 7/1/24.......... 1,000,000 BBB 953,350
Shenango Valley, PA, Osteopathic Hospital Authority,
Shenango Valley Medical Center, 7.875%, 4/1/10............ 500,000 BBB 514,700
Somerset County, PA, General Authority,
Commonwealth Lease Revenue, prerefunded,
6.25%, 10/15/01 (c)***.................................... 1,000,000 AAA 1,059,810
Union County, PA, Higher Education Facilities
Authority, University Revenue, Bucknell University,
6.2%, 4/1/07 (c).......................................... 1,000,000 AAA 1,041,730
University Area, PA, Sewer Revenue, 5.25%,
11/1/14 (c)............................................... 1,750,000 AAA 1,618,838
Upper Merion County, PA:
General Authority, Lease Revenue, crossover
refunded, 7.2%, 8/15/96*****............................ 350,000 AA 367,602
Municipal Utility Authority, Sewer Revenue,
crossover refunded, 7.2%, 8/15/96*****.................. 150,000 AA 157,544
Washington County, PA, Lease Revenue, Shadyside
Hospital Project, prerefunded, 7.375%,
6/15/00 (c)***............................................ 1,000,000 AAA 1,130,270
York County, PA, Resource Recovery Solid Waste
Authority, General Obligation, Series C,
8.2%, 12/1/14............................................. 315,000 AA 342,273
Puerto Rico Puerto Rico Electric Power Authority, Power Revenue
Refunding, Series N, Zero Coupon, 7/1/03 (c).............. 1,500,000 AAA 986,850
Puerto Rico, Public Improvement Refunding,
General Obligation, 5.4%, 7/1/07.......................... 1,500,000 A 1,449,030
Virgin Islands Virgin Islands Public Finance Authority,
General Obligation, Matching Fund Loan Notes,
Series A, 7.25%, 10/1/18.................................. 1,000,000 NR 1,034,640
Total Long-term Municipal Investments ----------
(Cost $62,393,297)........................................ 63,911,785
----------
-----------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio - 100.0%
(Cost $69,795,321) (a).................................... 71,312,355
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $69,795,321. At March 31,
1995, net unrealized appreciation for all securities based on tax cost
was $1,517,034. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $2,423,614 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $906,580.
(b) All of the securities held have been determined to be of appropriate
credit quality as required by the Fund's investment objectives. Credit
ratings shown are assigned by either Standard & Poor's Ratings Group,
Moody's Investors Service, Inc. or Fitch Investors Service, Inc. Unrated
securities (NR) have been determined to be of comparable quality to
rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such
as the coupon-equivalent of the Treasury bill rate. Variable rate demand
notes are securities whose yields are periodically reset at levels that
are generally comparable to tax-exempt commercial paper. These
securities are payable on demand within seven calendar days and normally
incorporate an irrevocable letter of credit from a major bank. These
notes are carried, for purposes of calculating average weighted
maturity, at the longer of the period remaining until the next rate
change or to the extent of the demand period.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by
a trustee and used to pay principal and interest on bonds so designated.
*** Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay
principal and interest on the tax-exempt issue and to retire the bonds
in full at the earliest refunding date.
**** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of March 31, 1995.
***** Bonds which are crossover refunded are secured by an escrow of
securities which is used to pay principal on the tax exempt issue and
retire the bonds in full at the earliest refunding date, except in the
case of default by the issuer or inadequacy in the escrow account.
The accompanying notes are an integral part of the financial statements
14
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
-----------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995
-----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $69,795,321)
(Note A)............................................. $ 71,312,355
Receivables:
Interest............................................. 1,302,095
Fund shares sold..................................... 5,569
------------
Total assets.................................. 72,620,019
LIABILITIES
Payables:
Due to custodian bank................................ $ 78,520
Dividends............................................ 129,166
Fund shares redeemed................................. 78,218
Accrued management fee (Note C)...................... 4,921
Other accrued expenses (Note C)...................... 37,077
------------
Total liabilities............................. 327,902
-------------
Net assets, at market value............................. $ 72,292,117
=============
NET ASSETS
Net assets consist of:
Unrealized appreciation on investments............... $ 1,517,034
Accumulated net realized gain........................ 168,196
Shares of beneficial interest........................ 55,071
Additional paid#in capital........................... 70,551,816
-------------
Net assets, at market value............................. $ 72,292,117
=============
NET ASSET VALUE, offering and redemption price per share
($72,292,117 -:- 5,507,084 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized)............................... $13.13
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
-------------------------------------------------------------------------------
<TABLE>
STATEMENT OF OPERATIONS
Year Ended March 31, 1995
-------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest............................................ $ 4,442,917
Expenses:
Management fee (Note C)............................. $ 114,361
Services to shareholders (Note C)................... 89,038
Custodian and accounting fees (Note C).............. 60,436
Trustees' fees (Note C)............................. 14,900
Auditing............................................ 29,352
Reports to shareholders............................. 20,403
Legal............................................... 7,165
State registration.................................. 3,050
Other............................................... 17,403 356,108
---------------------
Net investment income 4,086,809
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENT TRANSACTIONS
Net realized gain from investment transactions...... 181,781
Net unrealized appreciation on investments
during the period............................... 452,741
-----------
Net gain on investments............................. 634,522
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.. $ 4,721,331
===========
</TABLE>
The accompanying notes are in intergral part of the financial statements
16
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
----------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
Years Ended March 31,
-----------------------
Increase (Decrease) in Net Assets 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income............................ $ 4,086,809 $ 3,861,005
Net realized gain from investment
transactions.................................. 181,781 443,959
Net unrealized appreciation (depreciation)
on investments during the period.............. 452,741 (2,824,618)
Net increase in net assets resulting from ----------- -------------
operations.................................... 4,721,331 1,480,346
Distributions to shareholders: ----------- -------------
From net investment income ($.73 and $.75 per
share, respectively).......................... (4,086,809) (3,861,005)
From net realized gains from investment ----------- -------------
transactions ($.03 and $.09 per share,
respectively)................................. (157,473) (461,284)
Fund share transactions: ----------- -------------
Proceeds from shares sold........................ 15,679,635 29,798,073
Net asset value of shares issued to
shareholders in reinvestment
of distributions.............................. 2,980,880 2,820,609
Cost of shares redeemed.......................... (20,409,846) (17,260,892)
Net increase (decrease) in net assets from ----------- -------------
Fund share transactions....................... (1,749,331) 15,357,790
------------ -------------
INCREASE (DECREASE) IN NET ASSETS................ (1,272,282) 12,515,847
Net assets at beginning of period................ 73,564,399 61,048,552
------------ -------------
NET ASSETS AT END OF PERIOD...................... $ 72,292,117 $ 73,564,399
============ =============
OTHER INFORMATION
Increase (decrease) in Fund shares
Shares outstanding at beginning of period 5,653,359 4,535,748
------------ -------------
Shares sold...................................... 1,242,877 2,163,009
Shares issued to shareholders in
reinvestment of distributions................. 232,520 204,984
Shares redeemed.................................. (1,621,672) (1,250,382)
------------ -------------
Net increase (decrease) in Fund shares (146,275) 1,117,611
------------ -------------
Shares outstanding at end of period.............. 5,507,084 5,653,359
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
SCUDDER PENNSYLVANIA TAX FREE FUND
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION
DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
------------------------------------------------------------------ TO MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..................... $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80 $12.00
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (a)............... .73 .75 .76 .77 .82 .84 .79 .65
Net realized and unrealized gain
(loss) on investment
transactions.......................... .15 (.36) .87 .52 .08 .20 .40 (.26)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations.......... .88 .39 1.63 1.29 .90 1.04 1.19 .39
------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income.............. (.73) (.75) (.76) (.77) (.82) (.84) (.85) (.59)
From net realized gains on
investment transactions............... (.03) (.09) (.21) (.07) -- (.01) (.06) --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions....................... (.76) (.84) (.97) (.84) (.82) (.85) (.91) (.59)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period............ $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (b)...................... 7.09 2.70 13.19 10.70 7.58 8.75 11.00 3.39**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)............................ 72 74 61 39 26 18 11 5
Ratio of operating expenses, net to
average daily net assets (%) (a)........ .50 .50 .50 .50 .50 .50 .50 .50*
Ratio of net investment income to
average daily net assets (%)............ 5.74 5.42 5.79 6.05 6.67 6.78 7.09 7.16*
Portfolio turnover rate (%)............... 26.2 17.4 29.2 11.2 7.8 2.0 13.5 97.6*
(a) Reflects a per share amount of
expenses, exclusive of
management fees, reimbursed
by the Adviser of.................... $ -- $ -- $ -- $ -- $ .02 $ .06 $ .15 $ .43
Reflects a per share amount of
management fees and other
fees not imposed of.................. $ .06 $ .06 $ .07 $ .08 $ .07 $ .07 $ .07 $ .05
Operating expense ratio
including expenses reimbursed,
management fee and other
expenses not imposed (%)............. .94 .95 1.02 1.13 1.43 1.84 2.43 5.75*
<FN>
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Scudder Pennsylvania Tax Free Fund (the "Fund") is a non-diversified series of
Scudder State Tax Free Trust (the "Trust"). The Trust is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. There are
currently six series in the Trust. The policies described below are followed
consistently by the Fund in the preparation of its financial statements in
conformity with generally accepted accounting principles.
SECURITY VALUATION. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which quotations reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost. All other debt securities are valued at their fair
value as determined in good faith by the Valuation Committee of the Board of
Trustees.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment companies
and to distribute all of its taxable and tax-exempt income to its shareholders.
Accordingly, the Fund paid no federal income taxes and no provision for federal
income taxes was required.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. As a
19
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
--------------------------------------------------------------------------------
result, net investment income and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
OTHER. Investment security transactions are accounted for on a trade date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to maturity.
B. PURCHASES AND SALES OF SECURITIES
--------------------------------------------------------------------------------
During the year ended March 31, 1995, purchases and sales of municipal
securities (excluding short-term investments) aggregated $17,134,932 and
$20,253,673, respectively.
C. RELATED PARTIES
--------------------------------------------------------------------------------
Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a fee
equal to an annual rate of approximately 0.60% of the Fund's average daily net
assets, computed and accrued daily and payable monthly. The Adviser has agreed
not to impose all or a portion of its management fee until July 31, 1995, and
during such period to maintain the annualized expenses of the Fund at not more
than 0.50% of average daily net assets. For the year ended March 31, 1995, the
Adviser did not impose a portion of its management fee amounting to $312,807 and
the portion imposed amounted to $114,361.
Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend-paying and shareholder service agent for the Fund.
Included in services to shareholders is $67,137 charged to the Fund by SSC for
the year ended March 31, 1995, of which $5,286 is unpaid at March 31, 1995.
Effective November 16, 1994, Scudder Fund Accounting Corporation ("SFAC"), a
wholly-owned subsidiary of the Adviser, assumed responsibility for determining
the daily net asset value per share and maintaining the portfolio and general
accounting records of the Fund.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
For the year ended March 31, 1995, the amount charged to the Fund by SFAC
aggregated $13,429, of which $3,000 is unpaid at March 31, 1995.
The Trust pays each Trustee not affiliated with the Adviser $12,000 annually,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1995,
Trustees' fees charged to the Fund aggregated $14,900.
21
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER STATE TAX FREE TRUST AND THE SHAREHOLDERS OF SCUDDER
PENNSYLVANIA TAX FREE FUND:
We have audited the accompanying statement of assets and liabilities of Scudder
Pennsylvania Tax Free Fund, including the investment portfolio, as of March 31,
1995, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the seven years in the period
then ended, and for the period May 28, 1987 (commencement of operations) to
March 31, 1988. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1995, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Pennsylvania Tax Free Fund as of March 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the seven years in the period then ended, and for the period May 28, 1987
(commencement of operations) to March 31, 1988, in conformity with generally
accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 8, 1995
22
<PAGE>
TAX INFORMATION
--------------------------------------------------------------------------------
The Fund paid distributions of $.028 per share from net long-term capital gains
during its fiscal year ended March 31, 1995. Pursuant to Section 852 of the
Internal Revenue Code, the Fund designates $181,781 as capital gain dividends
for its fiscal year ended March 31, 1995.
Of the dividends paid by the Fund from net investment income for the fiscal year
ended March 31, 1995, 100% constituted exempt interest dividends for regular
federal income tax and Pennsylvania personal income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
23
<PAGE>
This page is blank.
24
<PAGE>
OFFICERS AND TRUSTEES
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; Director, Executive Vice President and Manager, Safeguard
Scientifics, Inc.
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
25
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
The Scudder Family of Funds
<C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax Free Money Market+ Scudder Income Fund
Scudder Tax Free Money Fund Scudder International Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Global Income Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Value Fund
Scudder Growth and Income Fund The Japan Fund
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(TM)++
</TABLE>
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +A portion of the income from the tax-free funds may
be subject to federal, state, and local taxes. *Not available in all states.
+++A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc. are
traded on various stock exchanges. ++For information on Scudder Treasurers
Trust,(TM) an institutional cash management service that utilizes certain
portfolios of Scudder Fund, Inc. ($100,000 minimum), call 1-800-541-7703.
26
<PAGE>
HOW TO CONTACT SCUDDER
Account Service and Information
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For account updates, prices, yields, exchanges, and redemptions
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they
can be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder For information on Scudder
Treasurers Trust,(TM) an Institutional Funds,* funds
institutional cash management designed to meet the broad
service for corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
27
<PAGE>
Celebrating 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 36 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
<PAGE>
This combined prospectus sets forth concisely the information about Scudder
Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax Free
Fund, each a series of Scudder State Tax Free Trust, an open-end management
investment company, that a prospective investor should know before investing.
Please retain it for future reference.
If you require more detailed information, a Statement of Additional Information
dated August 1, 1995, as amended from time to time, may be obtained without
charge by writing Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103 or calling 1-800-225-2470. The Statement, which is
incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Contents--see page 6.
Scudder Massachusetts Limited Term Tax Free Fund
Scudder Massachusetts Tax Free Fund
Prospectus
August 1, 1995
Two pure no-load(TM) (no sales charges) mutual funds which seek to provide
double tax-free income, exempt from both Massachusetts state personal income and
regular federal income tax.
<PAGE>
Expense information
Scudder Massachusetts Limited Term Tax Free Fund
How to compare a Scudder pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Massachusetts Limited Term Tax Free Fund (the
"Fund"). By reviewing this table and those in other mutual funds' prospectuses,
you can compare the Fund's fees and expenses with those of other funds. With
Scudder's pure no-load(TM) funds, you pay no commissions to purchase or redeem
shares, or to exchange from one fund to another. As a result, all of your
investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended October 31, 1994.
Investment management fee (after waiver) 0.00%**
12b-1 fees NONE
Other expenses (after reimbursement) 0.50%**
------
Total Fund operating expenses 0.50%**
======
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$5 $16 $28 $63
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Fund or by Write-A-Check. If you
wish to receive your redemption proceeds via wire, there is a $5 wire
service fee. For additional information, please refer to "Transaction
information--Redeeming shares."
** Until February 29, 1996, the Adviser has agreed to reimburse Fund operating
expenses and waive its fee to the extent necessary so that the total
annualized expenses of the Fund do not exceed 0.50% of average daily net
assets. If the Adviser had not agreed to reimburse operating expenses and
waive its fee so that the total annualized expenses of the Fund did not
exceed 0% from February 15, 1994 (commencement of operations) to October
31, 1994, Fund expenses would have been: investment management fee 0.60%,
other expenses 0.60% and total operating expenses 1.20% for the fiscal year
ended October 31, 1994. To the extent that expenses fall below 0.50% during
the fiscal year, the Adviser reserves the right to recoup, during the
fiscal year incurred, amounts reimbursed or waived during the period, but
only to the extent that the Fund's expenses do not exceed 0.50%.
2
<PAGE>
Expense information
Scudder Massachusetts Tax Free Fund
How to compare a Scudder pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Massachusetts Tax Free Fund (the "Fund"). By
reviewing this table and those in other mutual funds' prospectuses, you can
compare the Fund's fees and expenses with those of other funds. With Scudder's
pure no-load(TM) funds, you pay no commissions to purchase or redeem shares, or
to exchange from one fund to another. As a result, all of your investment goes
to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended March 31, 1995.
Investment management fee (after waiver) 0.58%**
12b-1 fees NONE
Other expenses 0.17%**
------
Total Fund operating expenses 0.75%**
======
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$8 $24 $42 $93
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."
** Until December 31, 1995, the Adviser has agreed to waive a portion of its
fee to the extent necessary so that the total annualized expenses of the
Fund do not exceed 0.75% of average daily net assets. If the Adviser had
not agreed to waive a portion of its fee so that the total annualized
expenses of the Fund did not exceed 0.25% from April 1, 1994 to July 31,
1994, 0.50% from August 1, 1994 to December 31, 1994 and 0.75% from January
1, 1995 to March 31, 1995, Fund expenses would have been: investment
management fee 0.60%, other expenses 0.17% and total operating expenses
0.77% for the fiscal year ended March 31, 1995. To the extent that expenses
fall below 0.75% during the fiscal year, the Adviser reserves the right to
recoup, during the fiscal year incurred, amounts reimbursed or waived
during the period, but only to the extent that the Fund's expenses do not
exceed 0.75%.
3
<PAGE>
Financial highlights
Scudder Massachusetts Limited Term Tax Free Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated October 31, 1994 and may be obtained without charge
by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
SIX MONTHS FOR THE PERIOD
ENDED FEBRUARY 15, 1994
APRIL 30, (COMMENCEMENT
1995 OF OPERATIONS) TO
(UNAUDITED) OCTOBER 31, 1994
----------- ----------------
<S> <C> <C>
Net asset value, beginning of period $11.64 $12.00
------ ------
Income from investment operations:
Net investment income (a) ............................................... .27 .36
Net realized and unrealized gain (loss) on investment transactions ...... .17 (.36)
------ ------
Total from investment operations ........................................ .44 .00
------ ------
Less distributions from net investment income ........................... (.27) (.36)
------ ------
Net asset value, end of period ............................................ $11.81 $11.64
====== ======
TOTAL RETURN (%) (b) ...................................................... 3.83** 0.00**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) .................................... 47 36
Ratio of operating expenses, net to average daily net assets (%) (a) ...... .09* -
Ratio of net investment income to average daily net assets (%) ............ 4.69* 4.45*
Portfolio turnover rate (%) ............................................... 20.6* 26.3*
<FN>
(a) Reflects a per share amount of expenses, exclusive of management
fees, reimbursed by the Adviser of................................. $ .01 $ .04
Reflects a per share amount of management fee and other fees not
imposed by the Adviser of ......................................... $ 04 $ .07
Operating expense ratio including expenses reimbursed, management fee
and other expenses not imposed (%) ................................ .94* 1.44*
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
* * Not annualized
</FN>
</TABLE>
4
<PAGE>
Financial highlights
Scudder Massachusetts Tax Free Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements. If you would like more detailed information concerning the Fund's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated March 31, 1995 and may be obtained
without charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
-------------------------------------------------------- TO MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .............. $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28 $12.00
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (a)......... .74 .81 .84 .81 .83 .82 .81 .69
Net realized and unrealized gain
(loss) on investment
transactions ................ .18 (.33) .96 .46 .19 .13 .22 .21
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations..... .92 .48 1.80 1.27 1.02 .95 1.03 .90
------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income........ (.74) (.81) (.84) (.81) (.83) (.82) (.88) (.62)
From net realized gains on
investment transactions...... -- (.08) (.16) (.09) -- (.11)(b) (.20) --
In excess of net realized gains... (.01) (.04) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions.................. (.75) (.93) (1.00) (.90) (.83) (.93) (1.08) (.62)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period....... $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (c)................. 7.37 3.37 14.59 10.46 8.60 7.89 9.50 7.73**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)...................... 296 332 267 120 67 46 31 16
Ratio of operating expenses, net
to average daily net
assets (%) (a).................... .47 .07 -- .48 .60 .60 .51 .50*
Ratio of net investment income to
average daily net assets (%)...... 5.73 5.80 6.36 6.38 6.72 6.60 7.23 7.55*
Portfolio turnover rate (%).......... 10.2 17.0 29.6 23.2 27.1 45.5 110.5 95.9*
<FN>
(a) Reflects a per share amount
of expenses, exclusive of
management fees,
reimbursed by the
Adviser of.................... $ -- $ .01 $ .02 $ -- $ -- $ -- $ .01 $ .10
Reflects a per share amount
of management fees and
other fees not imposed of..... $ .04 $ .09 $ .08 $ .05 $ .06 $ .07 $ .07 $ .05
Operating expense ratio
including expenses
reimbursed, management
fee and other expenses
not imposed (%) .............. .77 .77 .83 .93 1.05 1.16 1.20 2.25*
(b) Includes $.01 per share distributions in excess of realized gains pursuant
to Internal Revenue Code Section 4982.
(c) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
5
<PAGE>
A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $90 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
The Funds
* seek to provide double tax-free income exempt from both Massachusetts
personal and regular federal income tax
* active portfolio management by Scudder's professional team of credit
analysts and municipal bond market experts
* dividends declared daily and paid monthly
Scudder Massachusetts Limited Term Tax Free Fund
* average portfolio maturity limited to between one and five years
* invests primarily in shorter-term, investment-grade municipal securities
* free checkwriting
Scudder Massachusetts Tax Free Fund
* invests primarily in long-term investment-grade municipal securities
Contents
Investment objectives and policies 7
Summary of important features 9
Tax-exempt vs. taxable income 9
Why invest in these Funds? 10
Additional information about policies
and investments 11
Purchases 14
Exchanges and redemptions 15
Distribution and performance information 18
Fund organization 19
Transaction information 21
Shareholder benefits 23
Trustees and Officers 26
Investment products and services 27
How to contact Scudder Back cover
6
<PAGE>
Investment objectives and policies
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax
Free Fund (the "Funds"), each a non-diversified series of Scudder State Tax Free
Trust, are pure no load(TM) funds designed for Massachusetts residents seeking
income exempt from both state and regular federal income tax. Because these
Funds are intended for investors subject to Massachusetts personal income tax,
they may not be appropriate for all investors and are not available in all
states.
The two Funds have different investment objectives and characteristics. Their
two prospectuses are presented together so you can understand their important
differences and decide which Fund or combination of the two is most suitable for
your investment needs.
Except as otherwise indicated, each Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. Shareholders
will receive written notice of any changes in either Fund's objective. If there
is a change in investment objective, shareholders should consider whether that
Fund remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that either Fund's objective will
be met.
Scudder Massachusetts Limited Term Tax Free Fund
Scudder Massachusetts Limited Term Tax Free Fund seeks a higher and more stable
level of income than normally provided by tax-free money market investments, yet
more price stability than investments in intermediate- and long-term municipal
bonds.
The Fund's objective is to provide as high a level of income exempt from
Massachusetts state personal income and regular federal income tax as is
consistent with a high degree of price stability. The dollar-weighted average
effective maturity of the Fund's portfolio will range between one and five
years. Within this limitation, Scudder Massachusetts Limited Term Tax Free Fund
may not purchase individual securities with effective maturities greater than 10
years at the time of purchase or issuance, whichever is later.
Scudder Massachusetts Tax Free Fund
Scudder Massachusetts Tax Free Fund seeks a higher level of income than normally
provided by tax-free money market or tax-free short-term investments. Typically,
however, it will experience less price stability than Scudder Massachusetts
Limited Term Tax Free Fund because the investments will be principally in
municipal securities with long-term maturities (i.e., more than 10 years).
Scudder Massachusetts Tax Free Fund has the flexibility, however, to invest in
Massachusetts municipal securities with short- and medium-term maturities as
well.
Quality standards of both Funds
Normally, at least 75% of the municipal securities purchased by each Fund will
be investment-grade quality which are those rated Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") or AAA, AA, A or BBB by Standard & Poor's
("S&P") or Fitch Investors Service, Inc. ("Fitch"), or if unrated, judged by the
Fund's investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"), to be
of equivalent quality. This limit notwithstanding, Scudder Massachusetts Limited
Term Tax Free Fund will, under normal conditions, invest at least 50% of its
total assets in fixed-income 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. To the extent the Fund invests in higher-grade securities,
it will be unable to avail itself of opportunities for higher income which may
be available with lower-grade investments. Securities in these three top rating
categories are judged by the Adviser to have an adequate if not strong capacity
to repay principal and pay interest.
7
<PAGE>
Investment objectives and policies (cont'd)
Each 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 Funds may not invest in fixed-income securities rated below B
by Moody's, S&P or Fitch, or their equivalent.
During the year ended March 31, 1995, the average monthly dollar-weighted market
value of the bonds in Scudder Massachusetts Tax Free Fund's portfolio were as
follows: 29% rated AAA, 7% AA, 52% A and 12% BBB. During the fiscal year ended
October 31, 1994, the average monthly dollar-weighted market value of the bonds
in Scudder Massachusetts Limited Term Tax Free Fund's portfolio were as follows:
51.0% rated AAA, 16.1% AA, 25.6% A, and 5.7% BBB. The bonds are rated by
Moody's, S&P or Fitch, or of equivalent quality as determined by the Adviser.
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 Funds' investments must also meet credit standards applied by the Adviser.
Should the rating of a portfolio security be downgraded after being purchased by
either Fund, the Adviser will determine whether it is in the best interest of
that Fund to retain or dispose of the security.
Investments of both Funds
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 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. Each 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, each 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 a Fund's
assets may be held in cash or invested in short-term taxable investments,
including U.S. Government obligations and
8
<PAGE>
Summary of important features
<TABLE>
<CAPTION>
Investment objectives Investments Maturity Quality Dividends
and characteristics
--------------------- ----------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Scudder o prices expected to o focus on o primarily o 75% of o declared
Massachusetts fluctuate moderately investment- shorter-term investments rated daily and
Limited Term with changes in grade bonds, average within top four paid monthly
Tax Free Fund interest rates Massachusetts maturity quality ratings, o option to
o income exempt from municipal between one including 50% receive in
both Massachusetts securities and five years within top three, cash or
state personal income or judged to be reinvest in
tax and regular of comparable additional
federal income tax quality shares
Scudder o prices will fluctuate o focus on o primarily o 75% of o declared
Massachusetts with changes in investment- long-term investments rated daily and
Tax Free Fund interest rates grade bonds, within top four paid monthly
o income exempt from Massachusetts generally with quality ratings o option to
both Massachusetts municipal maturities of or judged to be receive in
state personal income securities more than ten of comparable cash or
tax and regular years quality reinvest in
federal income tax additional
shares
</TABLE>
Tax-exempt vs. taxable income
Tax Free Yields and Corresponding Taxable Equivalents. The table below shows
Massachusetts taxpayers what an investor would have to earn from a comparable
taxable investment to equal Scudder Massachusetts Limited Term Tax Free Fund's
or Scudder Massachusetts Tax Free Fund's double tax-free yield.
Today many investors may find that federal tax and Massachusetts personal income
tax rates make either Fund an attractive alternative to investments paying
taxable income.
<TABLE>
<CAPTION>
TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7%
COMBINED AND 9%, A TAXABLE INVESTMENT WOULD HAVE TO EARN*:
1995 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDIVIDUAL
----------------------------------------
$23,351-56,550 36.64% 7.89% 11.05% 14.20%
56,551-117,950 39.28 8.23 11.53 14.82
117,951-256,500 43.68 8.88 12.43 15.98
OVER 256,500 46.85 9.41 13.17 16.93
<S> <C> <C> <C> <C>
JOINT RETURN
----------------------------------------
$39,001-94,250 36.64% 7.89% 11.05% 14.20%
94,251-143,600 39.28 8.23 11.53 14.82
143,601-256,500 43.68 8.88 12.43 15.98
OVER 256,500 46.85 9.41 13.17 16.93
<FN>
* These illustrations assume a marginal federal income tax rate of 28% to
39.6% and that the federal alternative minimum tax is not applicable. Upper
income individuals may be subject to an effective federal income tax rate
in excess of the applicable marginal rate as a result of the phase-out of
personal exemptions and itemized deductions made permanent by the Revenue
Reconciliation Act of 1993. Individuals subject to these phase-out
provisions would have to invest in taxable securities with a yield in
excess of those shown on the table in order to achieve an after-tax yield
equivalent to the yield on a comparable tax-exempt security.
</FN>
</TABLE>
9
<PAGE>
Investment objective and policies (cont'd)
money market instruments and, in the case of Scudder Massachusetts Tax Free
Fund, repurchase agreements.
Each 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.
Each 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.
Each Fund may invest in third party puts, and when-issued or forward delivery
securities, which may involve certain expenses and risks, including credit
risks. Scudder Massachusetts Tax Free Fund may also enter into repurchase
agreements and reverse repurchase agreements, 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 engage in strategic transactions. See "Additional information
about policies and investments" for more information about certain of these
investment techniques.
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' supervision, 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.
Why invest in these Funds?
The Funds are professionally managed portfolios consisting primarily of
investment-grade municipal securities. The Adviser believes that investment
results can be enhanced by active professional management. Professional
management distinguishes the Funds from unit investment trusts, which cannot be
actively managed.
Tax-free income
As illustrated by the chart on the preceding page, depending on your tax bracket
and individual situation, you may earn a substantially higher after-tax return
from these Funds than from comparable investments that pay income subject to
both Massachusetts personal income tax and regular federal income tax. For
example, if your regular federal marginal tax rate is 36% and your Massachusetts
tax rate is 12%, your effective combined marginal tax rate is 43.68% when
adjusted for the deductibility of state taxes. This means, for example, you
would need to earn a taxable return of 9.36% to receive after-tax income equal
to the 5.27% tax-free yield provided by Scudder Massachusetts Tax Free Fund for
the 30-day period ended March 31, 1995, or earn a taxable return of 8.47% to
receive after-tax income equal to the 4.77% tax-free yield provided by Scudder
Massachusetts Limited Term Tax Free Fund for the 30-day period ended October 31,
1994. In other words, it would be necessary to earn $1,775 from a taxable
investment to equal $1,000 of tax-free income you receive from either Fund. The
yield levels of tax-free and taxable investments continually change. Before
10
<PAGE>
investing in a Fund, you should compare its yield to the after-tax yield you
would receive from a comparable investment paying taxable income. For up-to-date
yield information on the Funds, shareholders can call SAIL, Scudder Automated
Information Line, for toll-free information at any time.
Investment characteristics
Scudder Massachusetts Limited Term Tax Free Fund is managed for current income,
liquidity and a relatively high degree of price stability. For the investor who
can tolerate more price volatility, Scudder Massachusetts Limited Term Tax Free
Fund can be used as an alternative to a tax-free money market fund. While a
tax-free money fund is managed for total price stability, it generally offers
lower and less stable yields than a short-term municipal bond fund. Further,
Scudder Massachusetts Limited Term Tax Free Fund may appeal to investors
concerned about market volatility or the possibility of rising interest rates,
and so are willing to accept somewhat lower yields than normally provided by a
longer-term bond fund in exchange for greater price stability. Some investors
may view Scudder Massachusetts Limited Term Tax Free Fund as a tax-free
alternative to a bank certificate of deposit ("CD"). While an investment in
Scudder Massachusetts Limited Term Tax Free Fund is not federally insured and
there is no guarantee of price stability, an investment in the Fund--unlike a
CD--is not locked away for any period, may be redeemed at any time without
incurring early withdrawal penalties and may provide a higher after-tax yield.
Investors may choose Scudder Massachusetts Tax Free Fund as an alternative or
complement to tax-free money market or tax-free shorter-term investments.
Although shareholders will be assuming the possibility of greater price
fluctuation, they will typically be receiving a higher yield than normally
provided by tax-free income funds with relatively short maturities. Investors in
either Fund will also benefit from the convenience, cost-savings and
professional management of a mutual fund free of sales commissions. Scudder,
Stevens & Clark, Inc. has been researching and managing fixed-income investments
since 1929 and currently oversees more than $40 billion in bonds, including $9
billion in municipal securities. Further, Scudder, Stevens & Clark, Inc. serves
as investment manager to 13 tax-free mutual funds with assets exceeding $2
billion as of June 30, 1995.
In addition, each Fund offers all the benefits of the Scudder Family of Funds.
Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-load(TM)
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.
Additional information about policies and investments
Investment restrictions
Each Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Funds'
investment risk.
Each Fund may not borrow money except as a temporary measure for extraordinary
or emergency purposes or, in the case of Scudder Massachusetts Tax Free Fund, in
connection with reverse repurchase agreements.
Scudder Massachusetts Limited Term Tax Free Fund may not make loans except
through the lending of portfolio securities, the purchase of debt securities or
through repurchase agreements.
Scudder Massachusetts Tax Free Fund may not make loans except through the
purchase of debt obligations or through repurchase agreements. Each Fund may
invest more than 25% of its assets in industrial development or other private
activity bonds. For purposes of each Fund's investment limitation regarding
concentration of investments in any one industry, all such bonds
11
<PAGE>
Additional information about policies and investments (cont'd)
ultimately payable by companies within the same industry will be considered as
if they were issued by issuers in the same industry. In addition, as a matter of
nonfundamental policy, Scudder Massachusetts Tax Free Fund may not invest more
than 10% of its total assets, in the aggregate, in repurchase agreements
maturing in more than seven days, restricted securities or securities which are
not readily marketable. Neither Fund may invest more than 5% of its net assets
in restricted securities.
Each Fund also may not invest more than 25% of its assets in Massachusetts
municipal securities which are secured by revenues from health facilities, toll
roads, ports and airports, or colleges and universities. The Funds do not expect
to invest in non-publicly offered securities.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Funds' Statement of Additional
Information.
Investing in Massachusetts
Each Fund is more susceptible to factors adversely affecting issuers of
Massachusetts municipal securities than is a comparable municipal bond fund that
does not emphasize these issuers to this degree. 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 has slowed since 1988. All sectors of the economy have
experienced job losses, including high technology, construction and financial
industries. In addition, the economy has experienced shifts in employment from
labor-intensive manufacturing industries to technology and service-based
industries. After declining since 1989, Massachusetts employment showed positive
annual growth in 1993. The unemployment rate for the Commonwealth as of June,
1995 was 5.6%, compared to a national rate of 5.8%. Per capita personal income
growth has slowed in recent years, after several years during which the per
capita personal income growth rate in Massachusetts was among the highest in the
nation. In 1994, however, per capita personal income grew at a rate higher than
the national average. Per capita personal income in Massachusetts is still one
of the highest in the nation. For additional information about the Massachusetts
economy, see the Funds' Statement of Additional Information dated August 1,
1995.
When-issued securities
Each Fund may purchase securities on a when-issued or forward delivery basis,
for payment and delivery at a later date. The price and yield are generally
fixed on the date of commitment to purchase. During the period between purchase
and settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, Scudder
Massachusetts Tax Free Fund may enter into repurchase agreements with selected
banks and broker/dealers. Under a repurchase agreement, the Fund acquires
securities, subject to the seller's agreement to repurchase at a specified time
and price. Income from repurchase agreements will be taxable when distributed to
shareholders.
Stand-by commitments
To facilitate liquidity, Scudder Massachusetts Tax Free Fund may enter into
"stand-by commitments" permitting it to resell municipal securities to the
original seller at a specified price. Stand-by commitments generally involve no
cost to the Fund, and any costs would be, in any event, limited to no more than
0.50% of the value of the total assets of the Fund. Any such costs may, however,
reduce yield.
12
<PAGE>
Third party puts
Each Fund may purchase long-term fixed rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Funds at
specified intervals to tender (or "put") its bonds to the institution and
receive the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps.
Variable rate demand instruments
Each Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally.
These instruments also permit 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
Each Fund may invest in municipal lease obligations and participation interests
in such obligations. These obligations, which may take the form of a lease, an
installment purchase contract or a conditional sales contract, are issued by
state and local governments and authorities to acquire land and a wide variety
of equipment and facilities. Generally, the Funds will not hold such obligations
directly, but will purchase a certificate of participation or other
participation interest in a municipal obligation from a bank or other financial
intermediary. A participation interest gives the Funds a proportionate interest
in the underlying obligation.
Indexed securities
Each Fund may invest in indexed securities, the value of which is linked to
currencies, interest rates, commodities, indices or other financial indicators
("reference instruments"). The interest rate or (unlike most fixed-income
securities) the principal amount payable at maturity of an indexed security may
be increased or decreased, depending on changes in the value of the reference
instrument.
Strategic Transactions and derivatives
Each Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements), to manage the effective maturity
or duration of each Fund's portfolio, or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Funds may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit (except to the extent that 80% of each Fund's net assets
are required to be invested in tax-exempt Massachusetts municipal securities,
and as limited by each Fund's other investment restrictions) to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for each Fund's portfolio resulting from securities markets
fluctuations, to protect each Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of each Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for
(Continued on page 16)
13
<PAGE>
Purchases
--------------------------------------------------------------------------------
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar
or lower minimums. See appropriate plan literature.
Make checks o By Mail Send your completed and signed application
payable to "The and check
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 1099 Hingham Street
Boston, MA Rockland, MA
02107-2291 02370-1052
o By Wire Please see Transaction information--
Purchasing shares--By wire following
these tables for details, including the ABA
wire transfer number. Then call 1-800-225-5163
for instructions.
o In Person Visit one of our Funds Centers to
complete your application with the
help of a Scudder representative.
Funds Center locations are listed
under Shareholder benefits.
--------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional Group retirement plans (401(k), 403(b), etc.) have similar
shares or lower minimums. See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip,
payable to "The or with a letter of instruction including your
Scudder Funds." account number and the complete Fund name, to
the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing
shares--By wire following these tables for
details, including the ABA wire transfer
number.
o In Person Visit one of our Funds Centers to make an
additional investment in your Scudder fund
account. Funds Center locations are
listed under Shareholder benefits.
o By Automatic You may arrange to make investments on a
Investment regular basis through automatic deductions
Plan from your bankchecking account. Please call
1-800-225-5163 ($50 minimum) for more
information and an enrollment form.
-------------------------------------------------------------------------------
14
<PAGE>
Exchanges and redemptions
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
<C> <C>
Exchanging Minimum investments: $1,000 to establish a new account; $100 to exchange among existing accounts
shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail
or Fax Print or type your instructions and include:
- the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into; and
- your signature(s) as it appears on your account and a daytime telephone
number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 1099 Hingham Street
Boston, MA 02107-2291 Rockland, MA 02370-1052
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may have redemption
proceeds sent to your predesignated bank account, or redemption proceeds of up
to $50,000 sent to your address of record.
o By Mail
or Fax Send your instructions for redemption to the appropriate address or fax number
above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem; and
- your signature(s) as it appears on your account and a daytime telephone
number.
A signature guarantee is required for redemptions over $50,000. See Transaction
information--Redeeming shares following these tables.
o By Automatic You may arrange to receive automatic cash payments periodically if the value of
Withdrawal Plan your account is $10,000 or more. Call 1-800-225-5163 for more information and
an enrollment form.
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Additional information about policies and investments (cont'd)
(Continued from page 13)
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. Each Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes. Please refer to "Risk factors--Strategic Transactions and
derivatives" for more information.
Risk factors
The Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Funds may use from time to time.
Non-diversified investment company. As "non-diversified" investment companies,
each Fund may invest a greater proportion of their assets in the securities of a
smaller number of issuers. The investment of a large percentage of each Fund's
assets in the securities of a small number of issuers may cause a Fund's share
price to fluctuate more than that of a diversified investment company.
Investing in Massachusetts. If either Massachusetts or any of its local
governmental entities or public instrumentalities were to be unable to meet its
financial obligations, the income derived by the Funds, their net asset value or
liquidity and the ability to preserve or realize appreciation of the Funds'
capital could be adversely affected.
The persistence of serious financial difficulties could adversely affect the
market value and marketability of, or result in default in payment on,
outstanding municipal securities. Beginning in fiscal 1987 through fiscal 1991,
the Commonwealth experienced operating deficits and lower than anticipated tax
revenues resulting in an extended period of serious financial difficulties. In
fiscal 1992, tax revenues exceeded official estimates, expenditures were cut and
revenues grew by only 0.7%. However, despite the recession, the Commonwealth
ended the year with a $312.3 million operating surplus and a positive fund
balance of $549.4 million, when combined with the prior year surplus
attributable to the deficit bonds. The Commonwealth ended both fiscal 1993 and
fiscal 1994 with surpluses of $13.1 million and $26.8 million, respectively, and
positive aggregate ending fund balances in budgeted operating funds of $562.5
million and approximately $589.3 million, respectively. The fiscal 1995 budget
calls for expenditures of $16.8 billion.
As of the date of this prospectus, the Commonwealth's general obligation bonds
are rated A+ by S&P and A1 by Moody's. From time to time, the rating agencies
16
<PAGE>
may change their ratings in response to budgetary matters or other economic
indicators. Massachusetts local governmental entities are subject to certain
limitations on their taxing power that could affect their ability or the ability
of the Commonwealth to meet their respective financial obligations. See
"Investing in Massachusetts" in the Funds' Statement of Additional Information
for further details about the risks of investing in Massachusetts municipal
securities.
Lower-grade debt securities. While each Fund invests 75% of its assets in
investment-grade securities, each may invest a portion of its assets in
lower-grade securities rated below Baa by Moody's or below BBB by S&P or Fitch.
Securities rated below investment-grade are commonly referred to as "junk bonds"
and involve greater price volatility and higher degrees of speculation with
respect to the payment of principal and interest than higher quality
fixed-income securities. The market prices of such lower-rated debt securities
may decline significantly in periods of general economic difficulty. In
addition, the trading market for these securities is generally less liquid than
for higher rated securities and a Fund may have difficulty disposing of these
securities at the time it wishes to. The lack of a liquid secondary market for
certain securities may also make it more difficult for a Fund to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its net
asset value.
Third party puts. In connection with a third party put, the financial
institution granting the option does not provide credit enhancement, and
typically if there is a default on or significant downgrading of the bond or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Funds will be that of holding a long-term bond.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Funds. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, a Fund will bear the
market risk of the reference instrument.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to a Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation a
17
<PAGE>
Additional information about policies and investments (cont'd)
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 a 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 contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that each Fund
may use and some of their risks are described more fully in the Funds' Statement
of Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Funds' dividends from net investment income are declared daily and
distributed monthly. The Funds intend to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of federal excise tax, although an additional
distribution may be made within three months of each Fund's fiscal year end, if
necessary. Any dividends or capital gains distributions declared in October,
November or December with a record date in such a month and paid during the
following January will be treated by shareholders for federal income tax
purposes as if received on December 31 of the calendar year declared. According
to preference, shareholders may receive distributions in cash or have them
reinvested in additional shares of the Funds.
Distributions derived from interest on Massachusetts municipal securities are
not subject to regular federal income taxes, except for the possible
applicability of the federal alternative minimum tax. For federal income tax
purposes, a portion of the Funds' income may be taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable as
long-term capital gains for federal income tax purposes, regardless of the
length of time shareholders have owned their shares. Short-term capital gains
and any other taxable income distributions are taxable as ordinary income.
Distributions of tax-exempt income are taken into consideration in computing the
portion, if any, of Social Security and railroad retirement benefits subject to
federal and, in some cases, state taxes.
Under Massachusetts law, dividends paid by the Funds are exempt from
Massachusetts personal income tax for individuals who reside in Massachusetts to
the extent such dividends are exempt from regular federal income tax and are
identified by the Funds as derived from interest payments on Massachusetts
municipal securities and certain other qualifying securities (including Puerto
Rico, the U.S. Virgin Islands and Guam). Long-term capital gains distributions
18
<PAGE>
are taxable as long-term capital gains, except such distributions which the
Funds identify as derived from the sale of certain Massachusetts obligations
which are exempt from Massachusetts personal income tax. These obligations,
which are few in number, are those issued pursuant to legislation which
specifically exempts gain on their sale from Massachusetts income taxation.
The Funds expect to ordinarily provide income that is 100% free from
Massachusetts personal income tax and regular federal income tax. However, gains
from certain Strategic Transactions are taxable.
Some of the Funds' interest income may be treated as a tax preference item that
may subject an individual investor to liability (or increased liability) under
the federal alternative minimum tax, depending upon an investor's particular
situation. However, at least 80% of each Fund's net assets will normally be
invested in Massachusetts municipal securities whose interest income is not
treated as a tax preference item under the individual alternative minimum tax.
Tax-exempt income may also subject a corporate investor to liability (or
increased liability) under the corporate alternative minimum tax.
Each Fund sends detailed tax information to shareholders about the amount and
type of their distributions by January 31 of the following year.
Performance information
From time to time, quotations of each Fund's performance may be included in
advertisements, sales literature, or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance. The "SEC yield" of a Fund is an
annualized expression of the net income generated by a Fund over a specified
30-day (one month) period, as a percentage of a Fund's share price on the last
day of that period. This yield is calculated according to methods required by
the Securities and Exchange Commission (the "SEC"), and therefore may not equate
to the level of income paid to shareholders. A Fund's "tax-equivalent yield" is
calculated by determining the rate of return that would have to be achieved on a
fully taxable investment to produce the after-tax equivalent of a Fund's yield,
assuming certain tax brackets for a Fund shareholder. Yields are expressed as
annualized percentages. "Total return" is the change in value of an investment
in a Fund for a specified period. The "average annual total return" of a Fund is
the average annual compound rate of return of an investment in a Fund assuming
the investment has been held for one year, five years and the life of the Fund
as of a stated ending date. (If a Fund has not been in operation for at least
ten years, the life of the Fund is used where applicable.) "Cumulative total
return" represents the cumulative change in value of an investment in a Fund for
various periods. All types of total return calculations assume that all
dividends and capital gains distributions during the period were reinvested in
shares of a Fund. Performance will vary based upon, among other things, changes
in market conditions and the level of each Fund's expenses.
Fund organization
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax
Free Fund are series of Scudder State Tax Free Trust (the "Trust"), an open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"). The Trust was organized as a Massachusetts business trust
in May 1983.
The Funds' activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
19
<PAGE>
Fund organization (cont'd)
be called for purposes such as electing or removing Trustees, changing
fundamental investment policies or approving an investment management contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Trustee as if Section 16(c) of the 1940 Act were
applicable.
The prospectuses of both Funds are combined in this prospectus. Each Fund offers
only its own shares, yet it is possible that a Fund might become liable for a
misstatement or omission in the prospectus of the other Fund. The Trustees of
the Trust have considered this and approved the use of a combined prospectus.
Investment adviser
Each Fund retains the investment management firm of Scudder, Stevens & Clark,
Inc., a Delaware corporation, to manage the Fund's daily investment and business
affairs subject to the policies established by the Board of Trustees. The
Trustees have overall responsibility for the management of the Funds under
Massachusetts law.
The Adviser receives monthly an investment management fee for its services equal
to 0.60% of each Fund's average daily net assets on an annual basis.
From February 15, 1994 through February 28, 1995 the Adviser maintained the
total annualized expenses for Scudder Massachusetts Limited Term Tax Free Fund
at 0%, and accordingly did not receive an investment management fee for the
initial fiscal period ended October 31, 1994.
The Adviser has agreed to maintain the total annualized expenses for Scudder
Massachusetts Limited Term Tax Free Fund at 0.50% of the average daily net
assets of the Fund until February 29, 1996.
The Adviser maintained the total annualized expenses for Scudder Massachusetts
Tax Free Fund at 0.25% of average daily net assets from April 1, 1994 to July
31, 1994; 0.50% from August 1, 1994 to December 31, 1994 and 0.75% from January
1, 1995 to March 31, 1995. For the fiscal year ended March 31, 1995, the Adviser
received an investment management fee of 0.30% of the Fund's average daily net
assets on an annualized basis. The Adviser has agreed to maintain the annualized
expenses for Scudder Massachusetts Tax Free Fund at 0.75% of the average daily
net assets of the Fund until December 31, 1995.
All of a Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.
Scudder, Stevens & Clark, Inc. is located at Two International Place, Boston,
Massachusetts.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
wholly-owned subsidiary of the Adviser, is the transfer, shareholder servicing
and dividend-paying agent for the Funds.
Underwriter
Scudder Investor Services, Inc., a wholly-owned subsidiary of the Adviser, is
the Funds' principal underwriter. Scudder Investor Services, Inc. confirms, as
agent, all purchases of shares of each Fund. Scudder Investor Relations is a
telephone information service provided by Scudder Investor Services, Inc.
Custodian
State Street Bank and Trust Company is the Funds' custodian.
Fund accounting agent
Scudder Fund Accounting Corporation, a wholly-owned subsidiary of the Adviser,
is responsible for determining the daily net asset value per share and
maintaining the general accounting records of the Funds.
20
<PAGE>
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Funds' transfer agent in Boston receives the purchase request in good order.
Purchases are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
a Fund may hold redemption proceeds until the purchase check has cleared. If you
purchase shares by federal funds wire, you may avoid this delay. Redemption or
exchange requests by telephone or by "Write-A-Check," in the case of Scudder
Massachusetts Limited Term Tax Free Fund, prior to the expiration of the
seven-day period will not be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent in Boston. Accounts cannot
be opened without a completed, signed application and a Scudder fund account
number. Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
-- the name of the fund in which the money is to be invested,
-- the account number of the fund, and
-- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By exchange. Your new account will have the same registration and address as
your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
Redeeming shares
The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions. You can
also make redemptions from your Scudder fund account on SAIL, the Scudder
Automated Information Line, by calling 1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
21
<PAGE>
Transaction information (cont'd)
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $50,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (Each Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
By "Write-A-Check." You may redeem shares of Scudder Massachusetts Limited Term
Tax Free Fund by writing checks against your account balance for at least $100.
Your Fund investments will continue to earn dividends until your check is
presented to the Fund for payment.
Checks will be returned by the Fund's transfer agent if there are insufficient
shares to meet the withdrawal amount. You should not attempt to close an account
by check because the exact balance at the time the check clears will not be
known when the check is written.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $50,000 to their address of record.
Shareholders also may, by telephone, request that redemption proceeds be sent to
a predesignated bank account. Each Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine.
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines the net asset value per share for
each Fund as of the close of regular trading on the Exchange, normally 4 p.m.
eastern time, on each day the Exchange is open for trading. Net asset value per
share is calculated by dividing the value of total Fund assets, less all
liabilities, by the total number of shares outstanding.
Processing time
All purchase and redemption requests must be received in good order by the
Funds' transfer agent in Boston. Those requests received by the close of regular
trading on the Exchange are executed at the net asset value per share calculated
at the close of trading that day. Purchase and redemption requests received
after the close of regular trading on the Exchange will be executed the
following business day. Purchases made by federal funds wire before noon eastern
time will begin earning income that day; all other purchases received before the
close of regular trading on the Exchange will begin earning income the next
business day. Redeemed shares will earn income on the day on which the
22
<PAGE>
redemption request is executed.
If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.
Each Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Short-term trading
Purchases and sales should be made for long-term investment purposes only. The
Funds and Scudder Investor Services, Inc. each reserve the right to restrict
purchases of a Fund's shares (including exchanges) when a pattern of frequent
purchases and sales made in response to short-term fluctuations in a Fund's
share price appears evident.
Tax information
A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires a Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. Each Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
Each Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $1,000, which amount
may be changed by the Board of Trustees. Scudder retirement plans have similar
or lower minimum share balance requirements. Each Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
sub-minimum accounts, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account.
Reductions in value that result solely from market activity will not trigger an
involuntary redemption. Each Fund will mail the proceeds of the redeemed account
to the shareholder. The shareholder may restore the share balance to $1,000 or
more during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.
Third party transactions
If purchases and redemptions of Fund shares are arranged and settlement is made
at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
Shareholder benefits
Experienced professional management
Scudder, Stevens & Clark, Inc., one of the nation's most experienced investment
management firms, actively manages your Scudder fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.
23
<PAGE>
Shareholder benefits (cont'd)
A team approach to investing
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax
Free Fund are each managed by a team of Scudder investment professionals who
each play an important role in the Funds' management process. Team members work
together to develop investment strategies and select securities for the Funds'
portfolios. They are supported by Scudder's large staff of economists, research
analysts, traders and other investment specialists. We believe our team approach
benefits Fund investors by bringing together many disciplines and leveraging
Scudder's extensive resources.
Philip G. Condon, Lead Portfolio Manager of each Fund, joined Scudder in 1983
and has 15 years of experience in municipal investing and portfolio management.
Mr. Condon has had responsibility for Scudder Massachusetts Limited Term Tax
Free Fund since its inception in 1994 and since 1989 for Scudder Massachusetts
Tax Free Fund. Kathleen A. Meany, Portfolio Manager of each Fund, has worked on
Scudder Massachusetts Limited Term Tax Free Fund since it was introduced and
since 1988 for Scudder Massachusetts Tax Free Fund. Ms. Meany joined Scudder in
1988 and has 18 years of municipal investment and portfolio management
experience.
SAIL(TM)--Scudder Automated Information Line
For touchtone access to account information, prices and yields, or to perform
transactions in existing Scudder fund accounts, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890. During periods of extreme
economic or market changes, or other conditions, it may be difficult for you to
effect telephone transactions in your account. In such an event you should write
to the Fund; please see "How to contact Scudder" for the address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you At the Helm, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
24
<PAGE>
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
Scudder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
* Scudder No-Fee IRA
* 401(k) Plans
* Profit Sharing and Money Purchase Pension Plans (Keogh Plans)
* 403(b) Plans
* SEP-IRA
* Scudder Horizon Plan (a variable annuity)
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s, please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, Profit Sharing
or Pension Plan accounts, call 1-800-225-5163.
The variable annuity contract is provided by Charter National Life Insurance
Company (in New York State, Intramerica Life Insurance Company [S 1802]). The
contract is offered by Scudder Insurance Agency, Inc. (in New York State, Nevada
and Montana, Scudder Insurance Agency of New York, Inc.). CNL, Inc. is the
Principal Underwriter. Scudder Horizon Plan is not available in all states.
25
<PAGE>
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
College of Business Administration
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; General Partner, TL Ventures
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
26
<PAGE>
<TABLE>
<CAPTION>
Investment products and services
<C> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder GNMA Fund
Scudder U.S. Treasury Money Fund Scudder Income Fund
Tax free money market+ Scudder International Bond Fund
Scudder Tax Free Money Fund Scudder Short Term Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Global Income Fund
Scudder New York Tax Free Money Fund* Scudder Zero Coupon 2000 Fund
Tax free+ Growth
Scudder California Tax Free Fund* Scudder Capital Growth Fund
Scudder High Yield Tax Free Fund Scudder Development Fund
Scudder Limited Term Tax Free Fund Scudder Global Fund
Scudder Managed Municipal Bonds Scudder Global Small Company Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Gold Fund
Scudder Massachusetts Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Medium Term Tax Free Fund Scudder International Fund
Scudder New York Tax Free Fund* Scudder Latin America Fund
Scudder Ohio Tax Free Fund* Scudder Pacific Opportunities Fund
Scudder Pennsylvania Tax Free Fund* Scudder Quality Growth Fund
Growth and Income Scudder Value Fund
Scudder Balanced Fund The Japan Fund
Scudder Growth and Income Fund
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including management fees and expenses, call or write for a free
prospectus. Read it carefully before you invest or send money. +A portion of the income from the tax-free funds may be subject to
federal, state and local taxes. *Not available in all states. +++A no-load variable annuity contract provided by Charter National
Life Insurance Company and its affiliate, offered by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc., are traded on various stock exchanges. ++For information on Scudder Treasurers Trust(TM), an
institutional cash management service that utilizes certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call:
1-800-541-7703.
</TABLE>
27
<PAGE>
How to contact Scudder
<TABLE>
<CAPTION>
<C> <C>
Account Service and Information: Please address all correspondence to:
For existing account service Scudder Investor Relations The Scudder Funds
and transactions 1-800-225-5163 P.O. Box 2291
Boston, Massachusetts
02107-2291
For account updates, prices, Scudder Automated
yields, exchanges and Information Line (SAIL)
redemptions 1-800-343-2890
Investment Information: Or Stop by a Scudder Funds Center:
To receive information about Scudder Investor Relations Many shareholders enjoy the personal, one-on-one
the Scudder funds, for 1-800-225-2470 service of the Scudder Funds Centers. Check for a
additional applications and Funds Center near you--they can be found in the
prospectuses, or for following cities:
investment questions
For establishing 401(k) and Scudder Defined Boca Raton New York
403(b) plans Contribution Services Boston Portland, OR
1-800-323-6105 Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*, funds
institutional cash management service for corporations, designed to meet the broad investment management and
non-profit organizations and trusts which utilizes service needs of banks and other institutions, call:
certain portfolios of Scudder Fund, Inc.* ($100,000 1-800-854-8525.
minimum), call: 1-800-541-7703.
Scudder Investor Relations and Scudder Funds Centers are services provided through Scudder
Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
</TABLE>
27
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
and
SCUDDER MASSACHUSETTS TAX FREE FUND
Two Pure No-Load(TM) (No Sales Charges) Mutual Funds
Specializing in the Management
of Massachusetts Municipal
Security Portfolios
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1995
--------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder
Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax Free Fund
dated August 1, 1995, as amended from time to time, a copy of which may be
obtained without charge by writing to Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES..........................................................................1
General Investment Objective and Policies of Scudder Massachusetts Limited Term Tax Free Fund................1
Massachusetts Limited Term Tax Free Fund's Investments.......................................................1
General Investment Objective and Policies of Scudder Massachusetts Tax Free Fund.............................2
Massachusetts Tax Free Fund's Investments....................................................................2
Municipal Obligations........................................................................................2
Management Strategies........................................................................................6
Special Considerations.......................................................................................6
Trustees' Power to Change Objective and Policies............................................................19
Investment Restrictions.....................................................................................20
PURCHASES............................................................................................................23
Additional Information About Opening an Account.............................................................23
Checks......................................................................................................24
Wire Transfer of Federal Funds..............................................................................24
Share Price.................................................................................................24
Share Certificates..........................................................................................24
Other Information...........................................................................................24
EXCHANGES AND REDEMPTIONS............................................................................................25
Exchanges...................................................................................................25
Redemption by Telephone.....................................................................................26
Redemption by Mail or Fax...................................................................................26
Redemption by Write-a-Check.................................................................................27
Other Information...........................................................................................27
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................27
The Pure No-Load(TM) Concept................................................................................27
Distribution Plans..........................................................................................28
Scudder Funds Centers.......................................................................................29
Reports to Shareholders.....................................................................................29
Transaction Summaries.......................................................................................29
THE SCUDDER FAMILY OF FUNDS..........................................................................................29
SPECIAL PLAN ACCOUNTS................................................................................................32
Automatic Withdrawal Plan...................................................................................33
Cash Management System - Group Sub-Accounting Plan for Trust Accounts,
Nominees and Corporations...................................................................................33
Automatic Investment Plan...................................................................................33
Uniform Transfers/Gifts to Minors Act.......................................................................34
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................34
PERFORMANCE INFORMATION..............................................................................................34
Average Annual Total Return.................................................................................34
Cumulative Total Return.....................................................................................35
Total Return................................................................................................35
Yield.......................................................................................................36
Tax-Equivalent Yield........................................................................................36
Comparison of Portfolio Performance.........................................................................36
ORGANIZATION OF THE FUNDS............................................................................................40
<PAGE>
TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER...................................................................................................40
Personal Investments by Employees of the Adviser............................................................43
TRUSTEES AND OFFICERS................................................................................................44
REMUNERATION.........................................................................................................46
DISTRIBUTOR..........................................................................................................46
TAXES................................................................................................................47
Federal Taxation............................................................................................47
State Taxation..............................................................................................50
PORTFOLIO TRANSACTIONS...............................................................................................51
Brokerage Commissions.......................................................................................51
Portfolio Turnover..........................................................................................52
NET ASSET VALUE......................................................................................................52
ADDITIONAL INFORMATION...............................................................................................53
Experts.....................................................................................................53
Shareholder Indemnification.................................................................................53
Ratings of Municipal Obligations............................................................................53
Commercial Paper Ratings....................................................................................54
Glossary....................................................................................................55
Other Information...........................................................................................55
FINANCIAL STATEMENTS.................................................................................................56
Massachusetts Limited Term Tax Free Fund....................................................................56
Massachusetts Tax Free Fund.................................................................................57
</TABLE>
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
(See "Investment objective and policies" and
"Additional information about policies and
investments" in the Funds' prospectus.)
Scudder Massachusetts Limited Term Tax Free Fund and Scudder
Massachusetts Tax Free Fund (each a "Fund," collectively the "Funds") are series
of Scudder State Tax Free Trust (the "Trust"). The Trust is a pure no-load(TM)
open-end management investment company presently consisting of six series.
General Investment Objective and Policies of Scudder Massachusetts Limited Term
Tax Free Fund
Scudder Massachusetts Limited Term Tax Free Fund ("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. 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 ("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 "Massachusetts Limited Term Tax Free Fund's
Investments," the Fund may also invest in taxable obligations.
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 Funds' investment adviser, Scudder, Stevens & Clark, Inc. (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 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.
<PAGE>
General Investment Objective and Policies of Scudder Massachusetts Tax Free Fund
Scudder Massachusetts Tax Free Fund ("Massachusetts Tax Free Fund")
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.
Massachusetts 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, in the
opinion of bond counsel rendered on the date of issuance, is exempt from regular
federal and Massachusetts state 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 state 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, 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.
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.
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.
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."
2
<PAGE>
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 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 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.
3
<PAGE>
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.
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 that 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 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.
4
<PAGE>
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.
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 October 31, 1994, the average monthly
dollar-weighted market value of the bonds in Massachusetts Limited Term Tax Free
Fund's portfolio were as follows: 51.0% rated AAA, 16.1% AA, 25.6% A and 5.7%
BBB. The bonds are rated by Moody's, S&P or Fitch, or of equivalent quality as
determined by the Adviser.
5
<PAGE>
During the fiscal year ended March 31, 1995, the average monthly
dollar-weighted market value of the bonds in Massachusetts Tax Free Fund's
portfolio were as follows: 29% rated AAA, 7% AA, 52% A and 12% BBB. The bonds
are rated by Moody's, S&P or Fitch, or of equivalent quality as determined by
the Adviser.
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.
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
6
<PAGE>
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 each Fund'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.
State Economy. Throughout much of the 1980's, 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 has
slowed since 1988. All sectors of the economy have experienced job losses,
including the high technology, construction and financial industries. In
addition, the economy has experienced shifts in employment from labor-intensive
manufacturing industries to technology and service-based industries. The
unemployment rate for the Commonwealth as of June 1995 was 5.6% compared to a
national average of 5.8%. Comparisons between 1994 data and data for earlier
years are not advisable, due to the Current Population survey redesign. As of
April 30, 1995 the unemployment compensation trust fund was running a surplus of
$159 million. Per capita personal income has grown at a rate lower than the
national average in recent years, but is still one of the highest in the nation.
Moreover, 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.
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.
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Recent Financial Results. 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.
Since 1989, S&P and Moody's have 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 A+ by S&P and A1 by Moody's. From time to time, the rating
agencies may further change their ratings.
State Budget. On July 10, 1994 the Governor signed into law the fiscal
1995 budget. As signed by the Governor, and including expected supplemental
appropriations, the budget currently provides for approximately $16.482 billion
in fiscal 1995 expenditures, which reflects a veto and reduction of individual
line items and reduced expenditures of approximately $298.2 million. The fiscal
1995 budget generally maintains current service levels for most programs but
also provides for increased funding to reflect various factors including
inflation, increased medical costs, increased pension costs and higher debt
services expenditures, as well as approximately $219 million recommended to
fully fund the education reform law passed in fiscal 1993. The budget also
contains increases in spending in certain priority areas. The budget also
projects savings from proposed reform of the state's welfare system, increased
privatization of state services, higher health insurance contributions from
state employees and other administrative reductions. The fiscal 1995 budget as
signed includes $30.6 million in tax reductions.
Budgeted revenues and other sources to be collected in fiscal 1995 are
estimated by the Executive Office for Administration and Finance to be
approximately $16.360 billion. This amount includes estimated fiscal 1995 tax
revenues of $11.179 billion, which is approximately $572 million higher than
fiscal 1994 tax revenues of $10.607 billion. In December, 1994, the Governor
signed into law legislation modifying the capital gains tax by phasing out the
tax for assets held longer than six years and increasing the non-tax status
threshold for personal income tax purposes. The capital gains tax change is not
effective until January 1, 1996 and, therefore, is not expected to affect fiscal
1995 tax revenues and to have only a minor effect on fiscal 1996 tax revenues.
The no-tax status change is estimated to reduce fiscal 1995 tax revenues by
approximately $5.5 million and fiscal 1996 tax revenues by $13.3 million.
The fiscal 1995 budget is based on numerous spending and revenue
estimates, the achievement of which cannot be assured.
On June 21, 1995, the Governor signed a $16.8 billion budget for the
1996 fiscal year which is 2.6% greater than fiscal 1995 expenditures. When
signed, the fiscal 1996 budget marked the sixth consecutive year that the budget
had been balanced without new taxes or deficit borrowing. The Governor used his
veto to carve $19.2 million in new spending out of the higher education budget,
which veto was subsequently overridden by the Legislature. In the wake of
numerous vetoes by the Governor of various spending increases in the budget, as
of the date hereof the Legislature had overridden 58 vetoes which would increase
budgetary expenditures, putting the budget out of balance by approximately $40
to $60 million and would restore funding and various programs.
The fiscal 1996 budget is based on numerous spending and revenue
estimates, the achievement of which cannot be assured.
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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 Chairman of
the House and Senate Ways and Means Committee 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
Committee and the Secretary for Administration and Finance jointly endorsed an
estimate of tax revenues for fiscal 1994 of $11.328 billion, an increase 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. On
September 26, 1994, the Secretary for Administration and Finance revised the
fiscal 1995 tax revenue estimate to $11.234 billion, a reduction of
approximately $75 million from the prior estimate. On January 25, 1995, based on
tax revenue collections through December 31, 1994, the Secretary for
Administration and Finance further revised the fiscal 1995 tax revenue estimate
to $11.179 billion, a reduction of approximately $55 million from the September,
1994 estimate, which amount includes a $5.5 million reduction estimated to
result from change in the no-tax status threshold for Massachusetts personal
income tax purposes. The Governor's fiscal 1996 budget recommendation projects
total fiscal 1996 tax revenues to be approximately $11.720 billion.
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 three types of bonds and notes
outstanding: general obligation debt, dedicated income tax debt and special
obligation debt. Dedicated income tax debt consists of general obligation bonds
or notes issued pursuant to Chapter 151 of the Acts of 1990, to which a portion
of the Commonwealth's income tax receipts is dedicated for the payment of debt
service. 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 two
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 (i) Commonwealth supported debt; (ii)
Commonwealth guaranteed debt; or (iii) 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
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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 under
construction in Chelsea, Massachusetts. In addition, the Commonwealth has
liabilities under certain tax-exempt capital leases. Guaranteed debt consists of
certain liabilities arising out of the Commonwealth's guarantees of the bonds of
local housing authorities and the four higher education building authorities and
certain bonds of the town of Mashpee. Commonwealth supported debt of the
Commonwealth arises from statutory requirements for 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 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.
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. It is estimated that fiscal 1995 expenditures
for direct Local Aid will be $2.984 billion, which is an increase of
approximately 9.4% above the fiscal 1994 level. The additional amount of
indirect Local Aid provided over and above direct Local Aid was approximately
$2.069 billion in fiscal 1994. It is estimated that in fiscal 1995,
approximately $2.318 billion of indirect local aid will also be paid. The
Governor's proposed fiscal 1996 budget includes approximately $3.222 billion and
$2.585 billion of direct Local Aid and indirect local aid, respectively. A
petition approved in the November 1990 election requires distributions to cities
and towns of no less than 40% of collections from personal income taxes, sales
and use taxes, corporate excise taxes and lottery fund proceeds. However, local
aid payments explicitly remain subject to annual appropriation, and fiscal 1992,
1993 and 1994 appropriations for local aid did not meet, and fiscal 1995
appropriations for local aid do 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.
In fiscal 1992, Medicaid accounted for more than half of the
Commonwealth's appropriations for health care. It was the largest item in the
Commonwealth's budget and has been one of the fastest growing budget items. The
Executive Office for Administration and Finance has estimated that fiscal 1995
Medicaid expenditures will be approximately $3.411 billion, an increase of 3.0%
over 1994 expenditures. Substantial Medicaid expenditures in recent years have
been provided through supplemental appropriations because program requirements
consistently exceeded initial appropriations. The large Medicaid expenditure
increases experienced in recent years have been driven by several forces,
including rising health care costs in general and, in particular, forces
affecting the aggregate cost of long-term care for the elderly. Medicaid costs
in the long-term care area increased from $1.158 billion in fiscal 1990 to
approximately $1.499 billion in fiscal 1994. For fiscal 1995, no supplemental
Medicaid appropriations are currently expected to be necessary. The future
burdens of long-term care on Medicaid expenditures are expected to continue to
be high.
To further stem the considerable annual cost increases in the Medicaid
program, the Administration has commenced the implementation of a managed-care
program, which is in addition to major rate controlling initiatives implemented
since fiscal 1991. A waiver of federal regulations granting recipients freedom
of choice of provider recently was approved by federal authorities in fiscal
1992. This waiver enables the program to assign certain recipients to primary
care clinicians who will function as gatekeepers to specialty and inpatient care
and to enroll recipients in need of mental health or substance abuse services in
a capitated managed system of care. Selective contracts with certain service
providers will also be executed in an effort to obtain services in a more
cost-effective fashion. In addition, nursing home prescreening and community
service planning for long-term care will be concentrated in 27 Home Care
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Corporations to provide a single entry point and coordinated nursing home
diversion services for the elderly. Other savings initiatives include the
repricing and buy-in of Medicare services for Medicaid recipients and
restrictions, both financial and clinical, on nursing home eligibility.
Pension Liabilities. The aggregate unfunded actuarial liabilities of
the pension systems of the Commonwealth and the unfunded liability of the
Commonwealth related to state employees' and teachers' retirement systems and
the Boston teachers' retirement system and of costs of living increases are
significant--estimated to be approximately $9.651 billion as of January 1, 1993,
on the basis of certain actuarial assumptions. No assurance can be given that
these assumptions will be realized. The legislature adopted a comprehensive
pension bill addressing the issue in January 1988, which requires the
Commonwealth, beginning in fiscal year 1989, to fund future pension liabilities
currently and amortize the Commonwealth's unfunded liabilities over 40 years in
accordance with funding schedules prepared by the Secretary of Administration
and Finance and approved by the legislature. As of December 31, 1994, the
Commonwealth's state pension reserve was approximately $4.925 billion.
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 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. Massachusetts Tax Free Fund, subject to the receipt of any
required regulatory authorization, may acquire "Stand-by Commitments," which
will enable the 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). The Fund may enter into such
transactions subject to the limitations in the rules under the Investment
Company Act of 1940 (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 the Fund's option, at a specified
price. Stand-by Commitments are also known as "puts." The Fund's investment
policies permit the acquisition of Stand-by Commitments solely to facilitate
portfolio liquidity. The exercise by the 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 the Fund will have the following
features: (1) they will be in writing and will be physically held by the Fund's
custodian, State Street Bank and Trust Company; (2) the 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) the Fund's acquisition cost (excluding the cost, if any, of
the Stand-by Commitment) of the municipal obligations which are subject to the
commitment (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date. The 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 the Fund's
business relationship with that seller.
The Fund expects that Stand-by Commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for Stand-by Commitments, either
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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 the 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 the Fund
had not acquired such Stand-by Commitment.
It is difficult to evaluate the likelihood of use or the potential
benefit of a Stand-by Commitment. Therefore, it is expected that the Trustees
will determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the Stand-by Commitment is less than
the exercise price of the Stand-by Commitment, such security will ordinarily be
valued at such exercise price. Where 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 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.
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
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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.
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.
Repurchase Agreements. Massachusetts Tax Free Fund 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,
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the Fund may be required to return the Obligation to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, 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. Massachusetts Tax Free 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 may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which
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.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates and broad or specific market movements), to
manage the effective maturity or duration of a Fund's portfolio, or to enhance
potential gain. These strategies may be executed through the use of derivative
contracts. Such strategies are generally accepted as a part of modern portfolio
management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit (except to the extent that 80% of each Fund's net assets
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are required to be invested in tax-exempt Massachusetts municipal securities,
and as limited by each Fund's other investment restrictions) to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets
fluctuations, to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of a Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of a 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 a
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. Each Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to 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
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.
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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 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 no more than 10% of its assets in illiquid
securities.
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.
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
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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 financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by a Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right in return for the premium paid to assume a position in a
futures contract and obligates the seller to deliver such position.
Each Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires 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 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.
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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 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 intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream 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 these swaps, caps,
floors and collars are entered into for good faith hedging purposes, 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 imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
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Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security or financial instrument.
In general, either the full amount of any obligation by the Fund to pay or
deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by a Fund will require that Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high-grade
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a Fund on an index will require that Fund to
own portfolio securities which correlate with the index or to segregate liquid
high grade assets equal to the excess of the index value over the exercise price
on a current basis. A put option written by a Fund requires that Fund to
segregate liquid, high grade 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.
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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, Massachusetts Limited Term Tax Free
Fund may not:
1. invest more than 25% of the value of its total assets in the
securities of any one issuer;
2. borrow money except from banks as a temporary measure for
extraordinary or emergency purposes (the Fund is required to
maintain asset coverage (including borrowings) of 300% for all
borrowings) and no purchases of securities will be made while
such borrowings exceed 5% of the Fund's assets;
3. purchase and sell real estate (though it may invest in
securities of companies which deal in real estate and in other
permitted investments secured by real estate) or physical
commodities or physical commodities contracts;
4. act as underwriter of the securities issued by others, except
to the extent that the purchase of securities in accordance
with its investment objective and policies directly from the
issuer thereof and the later disposition thereof may be deemed
to be underwriting;
5. issue senior securities, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to
investment restriction (2) and except for shares of any other
series which may have been or may be hereafter established by
the Trustees;
6. with respect to 50% of the value of the total assets of the
Fund, invest more than 5% of its total assets in securities of
any one issuer, except U.S. Government securities; and
7. purchase (i) pollution control and industrial development
bonds or (ii) securities which are not municipal obligations
if the purchase would cause more than 25% in the aggregate of
the market value of the total assets of the Fund at the time
of such purchase to be invested in the securities of one or
more issuers having their principal business activities in the
same industry.
8. make loans to other persons, except (a) loans of portfolio
securities, and (b) to the extent the entry into repurchase
agreements and the purchase of debt securities in accordance
with its investment objectives and investment policies may be
deemed to be loans.
As a matter of fundamental policy, Massachusetts Tax Free Fund may not:
1. invest more than 25% of the value of its total assets in the
securities of any one issuer;
2. borrow money except from banks or pursuant to reverse
repurchase agreements as a temporary measure for extraordinary
or emergency purposes (the Fund is required to maintain asset
coverage (including borrowings) of 300% for all borrowings)
and no purchases of securities will be made while such
borrowings exceed 5% of the Fund's assets;
3. purchase and sell real estate (though it may invest in
securities of companies which deal in real estate and in other
permitted investments secured by real estate) or commodities
or commodities contracts, except futures contracts, including
but not limited to contracts for the future delivery of
securities and contracts based on securities indices;
20
<PAGE>
4. act as underwriter of the securities issued by others, except
to the extent that the purchase of securities in accordance
with its investment objective and policies directly from the
issuer thereof and the later disposition thereof may be deemed
to be underwriting;
5. make loans to other persons, except to the extent that the
purchase of debt obligations in accordance with its investment
objective and policies and the entry into repurchase
agreements may be deemed to be loans. The purchase of all of a
publicly offered issue of debt obligations or all or a portion
of non-publicly offered debt obligations may be deemed the
making of a loan for this purpose, but, although not a policy
which may be changed only by a vote of the shareholders,
management expects that such securities would seldom exceed
25% of the net assets of the Fund;
6. issue senior securities, except as appropriate to evidence
indebtedness which the Fund is permitted to incur pursuant to
investment restriction (2) and except for shares of any
additional series which may be established by the Trustees;
7. with respect to 50% of the total assets of the Fund, purchase
the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by
the Fund;
8. with respect to 50% of the total assets of the Fund, invest
more than 5% of its total assets in securities of any one
issuer, except U.S. Government securities; and
9. purchase (i) pollution control and industrial development
bonds or (ii) securities which are not municipal obligations
if the purchase would cause more than 25% in the aggregate of
the market value of the total assets of the Fund at the time
of such purchase to be invested in the securities of one or
more issuers having their principal business activities in the
same industry.
As a matter of non-fundamental policy, Massachusetts Limited Term Tax
Free Fund may not:
(i) purchase or sell interests in oil, gas or other mineral leases
or exploration or development programs (although it may invest
in municipal obligations and other permitted investments of
issuers which own or invest in such interests);
(ii) purchase warrants, unless attached to other securities in
which it is permitted to invest;
(iii) purchase or retain securities of any open-end investment
company or securities of closed-end investment companies
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchases, or
except when such purchase, though not made in the open market,
is part of a plan of merger, consolidation, reorganization or
acquisition of assets; in any event the Fund may not purchase
more than 3% of the outstanding voting securities of another
investment company, may not invest more than 5% of its assets
in another investment company, and may not invest more than
10% of its assets in other investment companies;
(iv) participate on a joint or a joint and several basis in any
trading account in securities, but may for the purpose of
possibly achieving better net results on portfolio
transactions or lower brokerage commission rates join with
other investment company and client accounts advised by the
Adviser in the purchase or sale of debt obligations;
(v) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions;
(vi) purchase securities of any issuer with a record of less than
three years continuous operation, including predecessors,
except (a) obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or (b)
municipal obligations (including securities issued by state
agencies, cities and towns) which are rated by at least one
nationally recognized municipal obligations rating service, if
21
<PAGE>
such purchase would cause the Fund's investments in all such
issuers to exceed 5% of the Fund's total assets taken at
market value;
(vii) purchase restricted securities (for these purposes restricted
security means a security with a legal or contractual
restriction on resale in the principal market in which the
security is traded) if, as a result thereof, more than 5% of
the value of the Fund's net assets would be invested in
restricted securities;
(viii) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of the value of its net assets;
or sell put options on securities if, as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of the Fund's net assets; and
(ix) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% of the fair
market value of the Fund's total assets; provided, however,
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.
(x) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the
time any loan is made; all loans of portfolio securities will
be fully collateralized and marked to market daily. The Fund
has no current intention of making loans of portfolio
securities that would amount to greater than 5% of the Fund's
total assets;
(xi) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Fund or a member, officer, director
or trustee of the investment adviser of the Fund if one or
more of such individuals owns beneficially more than one-half
of one percent (1/2 of 1%) of the shares or securities or both
(taken at market value) of such issuer and such individuals
owning more than one-half of one percent (1/2 or 1%) of such
shares or securities together own beneficially more than 5% of
such shares or securities or both;
(xii) purchase or sell real estate limited partnership interests.
As a matter of non-fundamental policy, Massachusetts Tax Free Fund may
not:
(i) purchase or sell interests in oil, gas or other mineral
exploration or development programs (although it may invest in
municipal obligations and other permitted investments of
issuers which own or invest in such interests);
(ii) purchase warrants, unless attached to other securities in
which it is permitted to invest;
(iii) invest in the securities of other investment companies, or
except by purchase in the open market when no commission or
profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such
purchase, though not made on the open market, is part of a
plan of merger or consolidation;
(iv) enter into repurchase agreements or purchase any securities
if, as a result thereof, more than 10% of the total assets of
the Fund (taken at market value) would be, in the aggregate,
subject to repurchase agreements maturing in more than seven
days and invested in restricted securities or securities which
are not readily marketable;
(v) participate on a joint or a joint and several basis in any
trading account in securities, but may for the purpose of
possibly achieving better net results on portfolio
transactions or lower brokerage commission rates join with
other investment company and client accounts advised by the
Adviser in the purchase or sale of debt obligations;
22
<PAGE>
(vi) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions;
(vii) purchase securities of any issuer with a record of less than
three years continuous operation, including predecessors,
except (a) obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or (b)
municipal obligations of the Commonwealth of Massachusetts
(including securities issued by state agencies, cities and
towns) which are rated by at least one nationally recognized
municipal obligations rating service, if such purchase would
cause the Fund's investments in all such issuers to exceed 5%
of the Fund's total assets taken at market value;
(viii) purchase restricted securities (for these purposes restricted
security means a security with a legal or contractual
restriction on resale in the principal market in which the
security is traded), repurchase agreements maturing in more
than seven days and securities which are not readily
marketable if as a result more than 10% of the Fund's net
assets (valued at market at purchase) would be invested in
such securities;
(ix) purchase restricted securities if, as a result thereof, more
than 5% of the value of the Fund's net assets would be
invested in restricted securities;
(x) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of the value of its net assets;
or sell put options on securities if, as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of the Fund's net assets; and
(xi) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% of the fair
market value of the Fund's total assets; provided, however,
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.
Each Fund has no current intention of engaging in any borrowing,
lending of portfolio securities or investing in closed-end investment companies.
PURCHASES
(See "Purchases" and "Transaction
information" in the Funds' prospectus.)
Additional Information About Opening an Account
Shareholders of other Scudder funds who have submitted an account
application and have a certified tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the
National Association of Securities Dealers, Inc. (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 ($1,000 minimum), name of the bank or trust company
from which the wire will be sent, the exact registration of the new account, the
tax identification or Social Security number, address and telephone number. The
investor must then call his 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 a completed and signed application to the Fund promptly.
23
<PAGE>
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, that Fund reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Fund or the
principal underwriter by reason of such cancelation. If the purchaser is a
shareholder, a Fund will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse that Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from or restricted in placing future orders in any of the Scudder
funds.
Wire Transfer of Federal Funds
To purchase shares of a Fund and obtain the same day dividend you must
have your bank forward federal funds by wire transfer and provide the required
account information so as to be available to a Fund prior to twelve o'clock noon
eastern time on that day. If you wish to make a purchase of $500,000 or more you
should notify the Fund's transfer agent, Scudder Service Corporation (the
"Transfer Agent") of such a purchase by calling 1-800-225-5163. If either the
federal funds or the account information is received after twelve o'clock noon
eastern time, but both the funds and the information are made available before
the close of regular trading on the New York Stock Exchange (the "Exchange")
(normally 4 p.m. eastern time) on any business day, shares will be purchased at
net asset value determined on that day but will not receive the dividend; in
such cases, dividends commence on the next business day.
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 a 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 Funds pay a fee for receipt by the Funds'
custodian, State Street Bank and Trust Company (the "Custodian") of "wired
funds," but the right to charge investors for this service is reserved.
Boston banks are presently closed on certain holidays although the
Exchange may be open. These holidays include Martin Luther King, Jr. Day (the
3rd Monday in January), Columbus Day (the 2nd Monday in October) and Veterans'
Day (November 11). Investors are not able to purchase shares by wiring federal
funds on such holidays because the Custodian is not open to receive such federal
funds on behalf of a Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the purchase order in good order. Net asset value
normally will be computed once a day, as of the close of regular trading on each
day when the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange are executed at the next business day's net
asset value. If the order has been placed by a member of the NASD, other than
Scudder Investor Services, Inc., it is the responsibility of that member broker,
rather than a Fund, to forward the purchase order to the Transfer Agent in
Boston by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Funds' management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Funds.
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
If purchases or redemptions of Fund shares are arranged and settlement
is made at the investor's election through a member of the NASD, other than
Scudder Investor Services, Inc., that member may, at its discretion, charge a
24
<PAGE>
fee for that service. The Trustees and Scudder Investor Services, Inc., each has
the right to limit the amount of purchases by and to refuse to sell to any
person and each may suspend or terminate the offering of shares of a Fund at any
time.
The "Tax Identification Number" section of the application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations certification of exempt status) will be
returned to the investor.
A Fund 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 series thereof) or personal holding company, subject to the
requirements of the 1940 Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and redemptions" and "Transaction information" in
the Funds' prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange 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 $1,000. 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 Fund's 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 through Scudder's Automatic Exchange
Program. Exchanges must be for a minimum of $50. Shareholders may add this free
feature over the phone or in writing. Automatic Exchanges will continue until
the shareholder requests by phone 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.
25
<PAGE>
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 Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated.
Redemption by Telephone
Shareholders currently receive the right to redeem by telephone up to
$50,000 to their address of record automatically, without having to elect it.
Shareholders may also request by telephone to have the proceeds mailed or wired
to their predesignated bank account. In order to request redemptions by
telephone, shareholders must have completed and returned to the Transfer Agent
the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a predesignated 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) appears on the account. An
original signature and an original signature guarantee are
required for each person in whose name the account is
registered.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be 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
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
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.
Redemption requests by telephone (technically a repurchase by agreement
between a Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signatures guaranteed as explained in the
Funds' prospectus.
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 share certificates or shares
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
26
<PAGE>
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 business days
after receipt by the Transfer Agent of a request for redemption that complies
with the above requirements. Delays of more than seven days of payment for
shares tendered for repurchase or redemption may result, but only until the
purchase check has cleared.
Redemption by Write-a-Check
All new investors and existing shareholders of Massachusetts Limited
Term Tax Free Fund 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. The
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 Fund, Scudder Service Corporation and State Street Bank and
Trust Company reserve the right at any time to suspend or terminate the
"Write-a-Check" procedure.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder 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 a shareholder's cost depending
upon the net asset value at the time of redemption or repurchase. Each Fund does
not impose a redemption or repurchase charge, although a wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemptions of shares, including redemptions undertaken to effect an exchange
for shares of another Scudder fund, may result in tax consequences (gain or
loss) to the shareholder and the proceeds of such redemptions may be subject to
backup withholding (see "TAXES").
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 therefore may be
suspended at times (a) during which the Exchange is closed, other than customary
weekend and holiday closings, (b) during which trading on the Exchange is
restricted for any reason, (c) during which an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practicable
or it is not reasonably practicable for a Fund fairly to determine the value of
its net assets, or (d) during which the SEC by order permits a suspension of the
right of redemption or a postponement of the date of payment or of redemption;
provided that applicable rules and regulations of the SEC (or any succeeding
governmental authority) shall govern as to whether the conditions prescribed in
(b), (c) or (d) exist.
If transactions at any time reduce a shareholder's account balance in a
Fund to below $1,000 in value, that Fund may notify the shareholder that, unless
the account balance is brought up to at least $1,000, the Fund will redeem all
shares, close the account and send redemption proceeds to the shareholder. The
shareholder has sixty days to bring the account balance up to $1,000 before any
action will be taken by the Fund. (This policy applies to accounts of new
shareholders, but does not apply to certain Special Plan Accounts.)
FEATURES AND SERVICES OFFERED BY THE FUND
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its funds from the
vast majority of mutual funds available today. The primary distinction is
between load and no-load funds.
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<PAGE>
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 Rules of Fair Practice, a mutual fund
can call itself a "no-load" fund only if the 12b-1 fee and/or service fee does
not exceed 0.25% of a fund's average annual net assets.
Because Scudder funds do not pay any asset-based sales charges or
service fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual funds. Scudder pioneered the
no-load concept when it created the nation's first no-load fund in 1928, and
later developed the nation's first family of no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart show the value
of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
Scudder Load Fund with 0.75% No-Load Fund with
YEARS Pure No-Load(TM)Fund 8.50% Load Fund 12b-1 Fee 0.25% 12b-1 Fee
----- -------------------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
10 $25,937 $23,733 $24,222 $25,354
15 41,772 38,222 37,698 40,371
20 67,275 61,557 58,672 64,282
</TABLE>
Investors are encouraged to review the fee tables on pages 2 and 3 of
the Funds' prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Distribution Plans
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 may change their dividend option either by
calling 1-800-225-5163 or by sending written instructions to the Transfer Agent.
See "How to contact Scudder" in the prospectus for the address. Please include
your account number with your written request.
Reinvestment is usually made on the day following the record date.
Investors may leave standing instructions with the Transfer Agent designating
their option for either reinvestment or cash distribution of any income
dividends or capital gains distributions. If no election is made, dividends and
distributions will be invested in additional shares of the Fund.
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Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gains distributions automatically deposited to their personal
bank account usually within three business days after a 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.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains.
Scudder Funds Centers
Investors may visit any of the Centers maintained by Scudder Investor
Services, Inc. listed in the Funds' prospectus. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or find assistance with opening an account, adding monies or special
options to existing accounts, making exchanges within the Scudder Family of
Funds, redeeming shares or opening retirement plans. Checks should not be mailed
to the Centers but should be mailed to "The Scudder Funds" at the address listed
under "How to contact Scudder" in the Prospectus.
Reports to Shareholders
Each Fund issues to shareholders semiannual financial statements
(audited annually by independent accountants), including a list of investments
held and statements of assets and liabilities, operations, changes in net assets
and supplementary information for each Fund.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.
MONEY MARKET
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital, and consistent therewith, to maintain the liquidity of
capital and to provide current income through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.
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INCOME
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued in
emerging markets.
Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.
Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.
Scudder International Bond Fund seeks to provide income from a
portfolio of high-grade bonds denominated in foreign currencies. As a
secondary objective, the Fund seeks protection and possible enhancement
of principal value by actively managing currency, bond market and
maturity exposure and by security selection.
Scudder Short Term Bond Fund seeks to provide a higher and more stable
level of income than is normally provided by money market investments,
and more price stability than investments in intermediate-and long-term
bonds.
Scudder Short Term Global Income Fund seeks to provide high current
income from a portfolio of high-grade money market instruments and
short-term bonds denominated in foreign currencies and the U.S. dollar.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with the minimization of
reinvestment risks through investments primarily in zero coupon
securities.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") is designed to provide investors
with income exempt from regular federal income tax while seeking
stability of principal. STFMF seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may
not be possible.
Scudder California Tax Free Money Fund* is designed to provide
California taxpayers income exempt from California state and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
Scudder New York Tax Free Money Fund* is designed to provide New York
taxpayers income exempt from New York state, New York City and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
TAX FREE
Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in investment-grade
municipal securities.
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Managed Municipal Bonds seeks to provide income which is exempt
from regular federal income tax primarily through investments in
long-term municipal securities with an emphasis on high quality.
------------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.
Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.
Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.
Scudder New York Tax Free Fund* seeks to provide income exempt from New
York state, New York City and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
investments in New York state, municipal and local government
obligations.
Scudder Ohio Tax Free Fund* seeks to provide income exempt from both
Ohio and regular federal income taxes through the professional and
efficient management of a portfolio consisting of Ohio state, municipal
and local government obligations.
Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
both Pennsylvania and regular federal income taxes through a portfolio
consisting of Pennsylvania state, municipal and local government
obligations.
GROWTH AND INCOME
Scudder Balanced Fund seeks to provide a balance of growth and income,
as well as long-term preservation of capital, from a diversified
portfolio of equity and fixed income securities.
Scudder Growth and Income Fund seeks to provide long-term growth of
capital, current income, and growth of income through a portfolio
invested primarily in common stocks and convertible securities by
companies which offer the prospect of growth of earnings while paying
current dividends.
GROWTH
Scudder Capital Growth Fund seeks to maximize long-term growth of
capital through a broad and flexible investment program emphasizing
common stocks.
Scudder Development Fund seeks to achieve long-term growth of capital
primarily through investments in marketable securities, principally
common stocks, of relatively small or little-known companies which in
the opinion of management have promise of expanding their size and
profitability or of gaining increased market recognition for their
securities, or both.
Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S.
and foreign issuers. Income is an incidental consideration.
Scudder Global Small Company Fund seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
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Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Quality Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.
The Japan Fund, Inc. seeks capital appreciation through investment in
Japanese securities, primarily in common stocks of Japanese companies.
The net asset values of most Scudder Funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder Funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
Scudder Service Representative; easy telephone exchanges into Scudder money
market, tax free, income, and growth funds; shares redeemable at net asset value
at any time.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By
Automatic Investment Plan" and "Exchanges and redemptions--By
Automatic Withdrawal Plan" in the Funds' prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to 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. 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.
Shares of each Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Funds'
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
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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. Payments are mailed at the
end of each month. The check amounts may be based on the redemption of a fixed
dollar amount, fixed share amount, percent of account value or declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be reinvested in additional shares. Shares are then liquidated as
necessary to provide for withdrawal payments. Since the withdrawals are in
amounts selected by the investor and have no relationship to yield or income,
payments received cannot be considered as yield or income on the investment and
the resulting liquidations may deplete or possibly extinguish the initial
investment. Requests for increases in withdrawal amounts or to change payee must
be submitted in writing, signed exactly as the account is registered and contain
signature guarantee(s) as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Funds' prospectus. Any such requests must
be received by the Funds' transfer agent by the 15th of the month in which such
change is to take effect. An Automatic Withdrawal Plan may be terminated at any
time by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of a 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.
Cash Management System - Group Sub-Accounting Plan
for Trust Accounts, Nominees and Corporations
To minimize record-keeping by fiduciaries and corporations,
arrangements have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund or Portfolio.
In its discretion, a Fund may accept minimum initial investments of
less than $1,000 (per Portfolio) as part of a continuous group purchase plan by
fiduciaries and others (e.g., brokers, bank trust departments, employee benefit
plans) provided that the average single account in any one Fund or Portfolio in
the group purchase plan will be $1,000 or more. A Fund may also wire all
redemption proceeds where the group maintains a single designated bank account.
Shareholders who withdraw from the group purchase plan through which
they were permitted to initiate accounts under $1,000 will be subject to the
minimum account restrictions described under "EXCHANGES AND REDEMPTIONS--Other
Information."
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan 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.
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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
(See "Distribution and performance information--Dividends and
capital gains distributions" in the Fund's prospectus.)
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.
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
(See "Distribution and performance information--Performance
information" in the Funds' prospectus.)
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for one year, five years and for the life of a Fund, ended on the last
day of a recent calendar quarter. 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):
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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.
The average annual total return of Scudder Massachusetts Tax Free Fund
for the one and five year periods ended March 31, 1995, and life of the Fund(1)
are 7.37%, 8.82%, and 8.83%, respectively.
(1) For the period beginning May 28, 1987.
If the Adviser had not maintained Scudder Massachusetts Tax Free Fund
expenses and had imposed a full management fee, the average annual total return
for the one and five year periods, 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):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
As of October 31, 1994 the cumulative total return of Massachusetts
Limited Term Tax Free Fund for the life of the Fund(1) was 0.00%. The Adviser
maintained Massachusetts Limited Term Tax Free Fund expenses for the period
February 15, 1994 through October 31, 1994. The cumulative total return for the
life of the Fund had the Adviser not maintained Fund expenses would have been
approximately -0.84%.
(1) For the period beginning February 15, 1994 (commencement of
operations).
The cumulative total return of Massachusetts Tax Free Fund for the one
and five year periods ended March 31, 1995, and life of the Fund(2) were 7.37%,
52.58%, and 94.18%, respectively. If the Adviser had not maintained
Massachusetts Tax Free Fund expenses and had imposed a full management fee, the
cumulative total return for the one and five year periods, and life of the Fund
would have been lower.
(2) For the period beginning May 28, 1987.
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.
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Yield
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Yield is calculated
by dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((a-b)/cd + 1)^6-1]
Where:
a = dividends and interest earned during the period
including the amortization of market premium or
accretion of market discount.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
The 30-day net-annualized SEC yield of Massachusetts Limited Term Tax
Free Fund for the period ended October 31, 1994 was 4.77%.
The 30-day net-annualized SEC yield of Massachusetts Tax Free Fund for
the period ended March 31, 1995 was 5.27%.
Tax-Equivalent Yield
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. Thus, taxpayers with a federal tax
rate of 36% and an effective combined marginal tax rate of 43.68% would need to
earn a taxable yield of 8.47% to receive after-tax income equal to the 4.77%
tax-free yield of Massachusetts Limited Term Tax Free Fund for the 30-day period
ended October 31, 1994. Taxpayers with a federal tax rate of 36% and an
effective combined marginal tax rate of 43.68% would need to earn a taxable
yield of 9.36% to receive after-tax income equal to the 5.27% tax-free yield of
Massachusetts Tax Free Fund for the 30-day period ended on March 31, 1995.
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.
Comparison of Portfolio Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
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From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
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Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic, and
business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
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Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national business 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. national 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 put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
39
<PAGE>
ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectus.)
Each Fund is a series of Scudder State Tax Free Trust. The Trust is a
Massachusetts business trust established under a Declaration of Trust dated May
25, 1983. Such Declaration of Trust was amended and restated on December 8,
1987. Its authorized capital consists of an unlimited number of shares of
beneficial interest of $0.01 par value. The shares are currently divided into
six series. The other series of the Trust are: Scudder New York Tax Free Fund,
Scudder New York Tax Free Money Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund. The Trustees have the authority 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.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with its equitable share of the
general liabilities of the Trust, as determined by the Trustees. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust or any
series, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such shares available for distribution to
shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the 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 the Trust except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or 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
(See "Fund organization--Investment adviser" in the
Funds' prospectus.)
Scudder, Stevens & Clark, Inc., an investment counsel firm, acts as
investment adviser to each Fund. This organization is one of the most
experienced investment management firms in the United States. It was established
as a partnership in 1919 and pioneered the practice of providing investment
counsel to individual clients on a fee basis. In 1928 it introduced the first
no-load mutual fund to the public. In 1953, the Adviser introduced Scudder
International Fund, the first mutual fund registered with the SEC in the U.S.
investing internationally in several foreign countries. The firm reorganized
from a partnership to a corporation on June 28, 1985.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
40
<PAGE>
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder Institutional Fund,
Inc., Scudder International Fund, Inc., Scudder Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Securities Trust, Scudder State Tax Free
Trust, Scudder Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S.
Treasury Money Fund, Scudder Variable Life Investment Fund, Scudder World Income
Opportunities Fund, Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The
First Iberian Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The
Latin America Dollar Income Fund, Inc. Some of the foregoing companies or trusts
have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets of over $11 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.
In selecting the securities in which 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.
The Investment Advisory Agreement between the Trust, on behalf of
Massachusetts Limited Term Tax Free Fund, and the Adviser was approved by the
Trustees on December 14, 1993 and by the Fund's sole shareholder on February 10,
1994. The Investment Advisory Agreement between the Trust, on behalf of
Massachusetts Tax Free Fund, and the Adviser was last approved by the Trustees
on August 9, 1994 and by the Fund's shareholders on December 8, 1987. The
Massachusetts Limited Term Tax Free Fund Investment Advisory Agreement dated
February 15, 1994 and the Massachusetts Tax Free Fund Investment Advisory
Agreement dated June 1, 1987 (collectively, the "Agreements") will continue in
effect until September 30, 1995 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 vote of a majority of the Trustees or a majority of the
outstanding voting securities of each Fund. The Agreements may be terminated at
any time without payment of penalty by either party on sixty days' written
notice, and automatically terminates in the event of its assignment.
Under 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.
41
<PAGE>
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.
For these services, Massachusetts Limited Term Tax Free Fund pays the
Adviser a monthly fee of 0.60 of 1% (approximately 0.60 of 1% on an annual
basis) of the average daily net assets of the Fund. Massachusetts Tax Free 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.
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 period
February 15, 1994 (commencement of operations) to October 31, 1994, these
agreements resulted in Massachusetts Limited Term Tax Free Fund incurring no
investment management fee. Had the Adviser imposed the management fee for the
period February 15, 1994 (commencement of operations) to October 31, 1994, the
investment management fee would have equaled $95,975. For the period February
15, 1994 (commencement of operations) to October 31, 1994 for Massachusetts
Limited Term Tax Free Fund, the amount to be reimbursed by the Adviser equaled
$83,314.
The Adviser has agreed to maintain the annualized expenses of
Massachusetts Limited Term Tax Free Fund at not more than 0.50% of the average
daily net assets of the Fund until February 29, 1996.
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, 1993, 1994 and 1995, pursuant to these agreements, the
investment management fees incurred by Massachusetts Tax Free Fund were $0,
$85,149 and $925,856, respectively. Had the Adviser imposed a full investment
management fee for the fiscal years ended March 31, 1993, 1994 and 1995, the
investment management fees would have equaled $1,146,901, $2,042,707 and
$1,853,862, respectively. For the fiscal year ended March 31, 1995 for
Massachusetts Tax Free Fund, the amount not imposed by the Adviser equaled
$928,006.
The Adviser has agreed to maintain the annualized expenses of
Massachusetts Tax Free Fund at not more than 0.75% of the average daily net
assets of the Fund until December 31, 1995.
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 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
42
<PAGE>
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.
Management has been advised that, while most states have eliminated expense
limitations the lowest such limitation is currently 2 1/2% of average daily net
assets up to $30 million, 2% of the next $70 million of average daily net assets
and 1 1/2% of average daily net assets in excess of that amount. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitations. Any such fee advance required to be
returned to a Fund 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."
Each Agreement also provides that the Trust and either Fund may use any
name derived from the name "Scudder, Stevens & Clark" only as long as each
Agreement or any extension, renewal or amendment thereof remains in effect.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning the 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.
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 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.
43
<PAGE>
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
----------- ---------- ------------ --------------
<S> <C> <C> <C>
David S. Lee*+@ President and Managing Director of Scudder, President, Assistant
Trustee Stevens & Clark, Inc. Treasurer and Director
Henry P. Becton, Jr. Trustee President and General Manager, --
WGBH WGBH Educational Foundation
125 Western Avenue
Allston, MA
Dawn-Marie Driscoll Trustee Attorney & Corporate Director; --
5760 Flamingo Drive Partner, Palmer & Dodge from
Cape Coral, FL 1988 to 1990
Peter B. Freeman@ Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI
Dudley H. Ladd*+ Trustee Managing Director of Scudder, Senior Vice President
Stevens & Clark, Inc. and Director
Wesley W. Marple, Jr.@ Trustee Professor of Business --
413 Hayden Hall Administration, Northeastern
360 Huntington Avenue University College of Business
Boston, MA Administration
Juris Padegs*# Trustee Managing Director of Scudder, Vice President and
Stevens & Clark, Inc. Director
Daniel Pierce*+@ Trustee Chairman of the Board and Vice President,
Managing Director of Scudder, Director and Assistant
Stevens & Clark, Inc. Treasurer
Jean C. Tempel Trustee General Partner, --
Ten Post Office Square TL Ventures
Suite 1325
Boston, MA
Donald C. Carleton+ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Jerard K. Hartman# Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Thomas W. Joseph+ Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer and
Assistant Clerk
Thomas F. McDonough+ Vice President and Principal of Scudder, Stevens & Clerk
Secretary Clark, Inc.
44
<PAGE>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
----------- ---------- ------------ --------------
Pamela A. McGrath+ Vice President and Principal of Scudder, Stevens & --
Treasurer Clark, Inc.
Edward J. O'Connell# Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Coleen Downs Dinneen+ Assistant Secretary Vice President of Scudder, Assistant Clerk
Stevens & Clark, Inc.
* Messrs. Lee, Ladd, Padegs and Pierce 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
@ Messrs. Lee, Freeman, Marple and Pierce are members of the Executive
Committee of each Fund, 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.
</TABLE>
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of June 30, 1995 all Trustees and officers of the 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 shares of Massachusetts
Limited Term Tax Free Fund outstanding on such date.
As of June 30, 1995 all Trustees and officers of the 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 shares of Massachusetts Tax
Free Fund outstanding on such date.
As of June 30, 1995 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
375,866 shares or 8.91% of the outstanding shares of Massachusetts Limited Term
Tax Free Fund. Scudder, Stevens & Clark, Inc. may be deemed to be the beneficial
owner of such shares but disclaims any beneficial ownership in such shares.
As of June 30, 1995 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
2,073,796 shares or 9.35% of the outstanding shares of Massachusetts Tax Free
Fund. Scudder, Stevens & Clark, Inc. may be deemed to be the beneficial owner of
such shares but disclaims any beneficial ownership in such shares.
As of June 30, 1995, 271,636 shares in the aggregate, 6.44% of the
outstanding shares of Scudder Massachusetts Limited Term Tax Free Fund, were
held in the name of John W. Childs, 421 Heath Street, Chestnut Hill, MA 02167.
As of June 30, 1995, 2,118,448 shares in the aggregate, 9.55% 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.
To the best of the Trust's knowledge, as of June 30, 1995 no person
owned beneficially more than 5% of either Fund's outstanding shares, except as
stated above.
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<PAGE>
REMUNERATION
Several of the officers and Trustees of the Trust may be officers of
the Adviser, Scudder Investor Services, Inc., Scudder Service Corporation or
Scudder Trust Company and participate in fees paid by either Fund. Each Fund
pays no direct remuneration to any officer of the Trust. However, each of the
Trustees who is not affiliated with the Adviser will be paid by the Trust. Each
of these unaffiliated Trustees receives an annual Trustee's fee of $12,000 from
the Trust allocated equally among the series of the Trust and fees of $300 from
the Trust allocated equally among the series of the Trust for each attended
Trustees' meeting, audit committee meeting or meeting held for the purpose of
considering arrangements between the Fund and the Adviser. Each unaffiliated
Trustee also receives $100 per committee meeting, other than those set forth
above. For the fiscal year ended October 31, 1994 such fees totaled $7,083 for
Scudder Massachusetts Limited Term Tax Free Fund, and for the fiscal year ended
March 31, 1995, such fees totaled $15,138 for Scudder Massachusetts Tax Free
Fund.
The following Compensation Table provides, in tabular form, the following data:
Column (1): all Trustees who receive compensation from the Trust.
Column (2): aggregate compensation received by a Trustee from all the series of
the Trust.
Columns (3) and (4): pension or retirement benefits accrued or proposed be paid
by the Trust. Scudder State Tax Free Trust does not pay its Trustees such
benefits.
Column (5): total compensation received by a Trustee from the Trust, plus
compensation received from all funds for which a Trustee serves in a fund
complex. The total number of funds from which a Trustee receives such
compensation is also provided.
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1994
===================== ============================== ==================== ===================== =========================
(1) (2) (3) (4) (5)
Pension or
Retirement Total Compensation From
Benefits Accrued Estimated Annual Scudder State Tax Free
Name of Person, Aggregate Compensation from As Part of Fund Benefits Upon Trust and Fund Complex
Position Scudder State Tax Free Trust* Expenses Retirement Paid to Trustee
===================== ============================== ==================== ===================== =========================
<S> <C> <C> <C> <C>
Henry P. Becton, Jr., $17,097 N/A N/A $90,597
Trustee (15 funds)
Dawn-Marie Driscoll, $17,097 N/A N/A $99,193
Trustee (16 funds)
Peter B. Freeman, $17,097 N/A N/A $146,243
Trustee (31 funds)
Wesley W. Marple, Jr., $17,097 N/A N/A $100,093
Trustee (15 funds)
Jean C. Tempel, $3,600 N/A N/A $15,965
Trustee (15 funds)
* 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 Fund and Scudder Pennsylvania Tax Free Fund.
</TABLE>
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a Massachusetts corporation, which is a wholly-owned
subsidiary of Scudder, Stevens & Clark, Inc., a Delaware corporation. The
Trust's underwriting agreement dated June 1, 1987 will remain in effect until
September 30, 1995, 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
46
<PAGE>
by vote of a majority of the Board of Trustees or a majority of the outstanding
voting securities of the Trust. The underwriting agreement was last approved by
the Trustees on August 9, 1994.
Under the underwriting agreement, the Trust is responsible for the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of the 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 the 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 the 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 Trust 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
(See "Transaction information--Tax information, Tax identification
number" and "Distribution and performance information--Dividends
and capital gains distributions" in the Funds' prospectus.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situation.
Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in either Fund.
Federal Taxation
Each fund within the 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 and must also derive less than 30% of its gross
income in each taxable year from certain types of investments (such as
securities, options and financial futures) held for less than three months.
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Legislation currently pending before the U.S. Congress would repeal this
requirement. However, it is impossible to predict whether this legislation will
become law and, if it is so enacted, what form it will eventually take.
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 and at least 98% of the excess of its capital gains over capital losses
realized during the one-year period ending October 31 during such year, together
with any undistributed, untaxed amounts of ordinary income and capital gains
from the previous calendar year. Each Fund has adjusted its distribution
policies to minimize any adverse impact from this tax or eliminate its
application.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward 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. As of March 31, 1995, Scudder Massachusetts Tax Free Fund had a net
capital loss carryforward of approximately $2,088,105 which may be applied
against realized capital gains of each succeeding year until fully utilized or
until March 31, 2003. As of October 31, 1994, Scudder Massachusetts Limited Term
Tax Free Fund had a net capital loss carryforward of approximately $77,594,
which may be applied against realized capital gains of each succeeding year
until fully utilized or until March 31, 2002.
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.
The Revenue Reconciliation Act of 1993 requires that market discount
recognized on a tax-exempt bond is taxable as ordinary income. This rule applies
only for disposals of bonds purchased after April 30, 1993. A market discount
bond is a bond acquired in the secondary market at a price below its redemption
value. Under prior law, the treatment of market discount as ordinary income did
not apply to tax-exempt obligations. Instead, realized market discount on
tax-exempt obligations was treated as capital gain. Under the new law, gain on
the disposition of a tax-exempt obligation or any other market discount bond
that is acquired for a price less than its principal amount will be treated as
ordinary income (instead of capital gain) to the extent of accrued market
discount.
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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.
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 24% 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.
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
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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. Under certain circumstances, entry into a futures contract to sell a
security may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying security or a substantially
identical security in a Fund's portfolio.
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 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
The Trust is organized as a Massachusetts business trust, and neither
the Trust nor either Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund qualifies as a regulated
investment company.
Individual shareholders of a Fund 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
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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.
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 the Custodian 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 not authorized when placing portfolio transactions for a Fund to
pay a brokerage commission (to the extent applicable) in excess of that which
another broker might 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.
The Adviser may place brokerage transactions through the Custodian and
a credit against the Custodian fee due to State Street Bank and Trust Company
equal to one-half of the commission on any such transaction will be given.
Except for implementing the policy stated above, there is no intention to place
portfolio transactions with particular brokers or dealers or groups thereof.
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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. Massachusetts Limited Term Tax Free Fund's annualized portfolio
turnover rate for the fiscal year ended October 31, 1994 was 26.3%.
Massachusetts Tax Free Fund's portfolio turnover rate for the fiscal periods
ended March 31, 1993, 1994 and 1995 were 29.6%, 17.0% and 10.2%, respectively.
Purchases and sales are made for a Fund's portfolio whenever necessary in
management's opinion, to meet a Fund's objective.
NET ASSET VALUE
The net asset value of shares of each Fund is computed as of the close
of regular trading on the New York Stock Exchange (the "Exchange") on each day
the Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value per
share is determined by dividing the value of the total assets of a Fund, less
all liabilities, by the total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at its most recent sale price. Lacking any sales, the security is valued
at the high or "inside" bid quotation. The value of an equity security not
quoted on the NASDAQ System, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by each Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
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a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon 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 a Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee most fairly
reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial highlights in this Statement of Additional Information
has been audited by Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA
02109, independent accountants, and is included in this Statement of Additional
Information in reliance upon the accompanying report of said firm, which report
is given upon their authority as experts in accounting and auditing.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with a Fund's property or the
acts, obligations or affairs of the Trust. The Declaration 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
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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 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
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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
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 Massachusetts Limited Term Tax Free Fund is
811209105.
The CUSIP number of Massachusetts Tax Free Fund is 811184-30-8.
55
<PAGE>
Massachusetts Limited Term Tax Free Fund has a fiscal year ending on
October 31.
Scudder Massachusetts Tax Free Fund has a fiscal year ending on March
31.
Portfolio securities of the Fund 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 the
Trust.
The name "Scudder State Tax Free Trust" is the designation of the
Trustees for the time being under an Amended and Restated Declaration of Trust
dated December 8, 1987, as amended from time to time, and all persons dealing
with a Fund must look solely to the property of that Fund for the enforcement of
any claims against 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 Trust is liable for the obligations of any
other Fund. Upon the initial purchase of shares, the shareholder agrees to be
bound by the Trust's Declaration of Trust, as amended from time to time. The
Declaration of Trust of the Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts. All persons dealing with a Fund must
look only to the assets of 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.
Costs of $29,959 incurred by Massachusetts Limited Term Tax Free Fund
in conjunction with its organization are amortized over five years beginning
December 31, 1993.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a wholly-owned 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 Massachusetts Limited Term Tax Free Fund to SFAC for the period
February 15, 1994 (commencement of operations) to October 31, 1994 would have
amounted to $25,263, had this been imposed. For the fiscal year ended March 31,
1995, the amount charged to Scudder Massachusetts Tax Free Fund by SFAC amounted
to $21,946, of which $4,865 is unpaid at March 31, 1995.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a wholly-owned subsidiary of the Adviser, is
the transfer and dividend-paying agent. Service Corporation 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 fee incurred by
Massachusetts Limited Term Tax Free Fund to Service Corporation for the period
February 15, 1994 (commencement of operations) to October 31, 1994 would have
amounted to $21,437, had this fee been imposed. The fee incurred by
Massachusetts Tax Free Fund to Service Corporation for the year ended March 31,
1995 amounted to $204,820, of which $15,546 is unpaid at March 31, 1995.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Trust has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement for further information with respect to each Fund
and the securities offered hereby. This Registration Statement is available for
inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Massachusetts Limited Term Tax Free Fund
The financial statements, including the investment portfolio, of
Massachusetts Limited Term Tax Free Fund, together with Financial Highlights and
notes to financial statements are incorporated by reference and attached hereto
in the Annual Report to the Shareholders of the Fund dated October 31, 1994, and
are hereby deemed to be a part of this Statement of Additional Information.
56
<PAGE>
Massachusetts Tax Free Fund
The financial statements, including the investment portfolio, of
Massachusetts Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements are
incorporated by reference and attached hereto in the Annual Report to the
Shareholders of the Fund dated March 31, 1995, and are hereby deemed to be a
part of this Statement of Additional Information.
57
<PAGE>
Scudder
Massachusetts
Tax Free Fund
Annual Report
March 31, 1995
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
o For investors seeking double tax-free income exempt from both Massachusetts
and regular federal income taxes.
o A pure no-load(TM) fund with no commissions
to buy, sell, or exchange shares.
SCUDDER MASSACHUSETTS TAX FREE FUND
CONTENTS
2 Highlights
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
15 Financial Statements
18 Financial Highlights
19 Notes to Financial Statements
22 Report of Independent
Accountants
23 Tax Information
25 Officers and Trustees
26 Investment Products
and Services
27 How to Contact
Scudder
HIGHLIGHTS
o For its fiscal year ended March 31, 1995, Scudder Massachusetts Tax Free
Fund posted a total return of 7.37%, surpassing the 6.36% average return of
the 39 Massachusetts tax-free funds tracked by Lipper Analytical Services.
o As of March 31, 1995, the Fund's 30-day net annualized SEC yield was 5.27%,
equivalent to a 9.91% taxable yield for Massachusetts investors subject to
the 46.85% combined federal and state income tax rate.
30-Day Yield on March 31, 1995
Scudder Massachusetts Tax Free Fund 5.27%
Taxable equivalent yield 9.91%
o For the two-, three-, four-, and five-year periods ended March 31, 1995,
Scudder Massachusetts Tax Free Fund continued to rank number one among
comparable funds tracked by Lipper. Page 6 contains additional information
concerning the Fund's rankings.
2
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Investor concerns about inflationary economic growth have abated in recent
months, after creating much turmoil for the world's investment markets in 1994.
Indications of continued low inflation and weakness in certain segments of the
economy combined with the Federal Reserve's most recent interest-rate increases
in November and February have reassured many investors that inflation is not
currently a serious concern. Bond prices have begun to recover, yields have
declined from their November highs, and bond mutual funds have enjoyed positive
net subscriptions after several months of redemptions. In the first three months
of 1995, municipal bonds, as measured by the unmanaged Lehman Brothers Municipal
Bond Index, returned 7.07% on average, more than making up for the -5.17% return
reported for all of 1994.
The rise in interest rates over the past year and a half has highlighted a
challenge for income funds: to provide shareholders with the higher income
available from bonds while protecting against price erosion. The question is,
has the interest-rate environment shifted once again and become more positive?
In our view, rates should remain relatively stable if economic growth continues
to slacken in the United States. Nevertheless, additional interest-rate
increases are not out of the question, given some lingering inflationary
concerns: Commodity prices continue to rise, factory production is still pushing
the limits of capacity, and the dollar has fallen to record lows against the
Japanese yen and German mark.
Additional uncertainty regarding interest rates may, of course, spark
episodes of volatility in fixed-income markets. Your portfolio managers will
continue to concentrate their efforts on fundamental investment research and
security selection as a means of generating high current income and attractive
total returns. As always, please call a Scudder Investor Relations
representative at 1-800-225-2470 if you have questions about your Fund. Page 27
provides more information on how to contact Scudder. Thank you for choosing
Scudder Massachusetts Tax Free Fund to help meet your investment needs.
Sincerely,
/s/ David S. Lee
David S. Lee
President,
Scudder Massachusetts Tax Free Fund
3
<PAGE>
Scudder Massachusetts Tax Free Fund
Performance Update as of March 31, 1995
-----------------------------------------------------------------
Growth of a $10,000 Investment
-----------------------------------------------------------------
Scudder Massachusetts Tax Free Fund
----------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,737 7.37% 7.37%
5 Year $15,258 52.58% 8.82%
Life of
Fund* $19,418 94.18% 8.83%
Lehman Broters Municipal Bond Index
--------------------------------------
Total Return
Period Growth -------------
Ended of Average
3/31/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,743 7.43% 7.43%
5 Year $14,859 48.59% 8.24%
Life of
Fund* $19,102 91.02% 8.61%
*The Fund commenced operations on May 28, 1987.
Index comparisons begin May 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended March 31
Scudder Massachusetts Tax Free Fund
Year Amount
----------------------
5/31/87 10000
88 10773
89 11796
90 12726
91 13821
92 15267
93 17496
94 18066
95 19418
Lehman Brothers Municipal Bond Index
Year Amount
----------------------
5/31/87 10000
88 10847
89 11628
90 12855
91 14041
92 15444
93 17378
94 17781
95 19102
The unmanaged Lehman Brothers Municipal Bond Index is a market value-
weighted measure of municipal bonds issued across the United States.
Index issues have a credit rating of at least Baa and a maturity of
at least two years. Index returns assume reinvestment of dividends
and, unlike Fund returns, do not reflect any fees or expenses.
-----------------------------------------------------------------
Returns and Per Share Information
-----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended March 31
-----------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988* 1989 1990 1991 1992 1993 1994 1995
--------------------------------------------------------------
Net Asset Value... $12.28 $12.23 $12.25 $12.44 $12.81 $13.61 $13.16 $13.33
Income Dividends.. $ .62 $ .88 $ .82 $ .83 $ .81 $ .84 $ .81 $ .74
Capital Gains
Distributions..... $ -- $ .20 $ .11 $ -- $ .09 $ .16 $ .12 $ .01
Fund Total
Return (%)........ 7.73 9.50 7.89 8.60 10.46 14.59 3.37 7.37
Index Total
Return (%)........ 8.48 7.21 10.56 9.22 10.02 12.52 2.32 7.43
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
If the Adviser had not temporarily capped expenses, the average annual
total return for the Fund for the one year, five year, and life of Fund
periods would have been lower.
4
<PAGE>
Portfolio Summary as of March 31, 1995
---------------------------------------------------------------------------
Diversification
---------------------------------------------------------------------------
General Obligation 21%
Hospital/Health 19% The Fund invests in a variety
Water/Sewer Revenue 17% of bonds from various sectors
Electric Utility Revenue 11% of the municipal market.
Housing Finance Authority 10%
Higher Education 5%
Toll Revenue 5%
Lease Rentals 3%
Miscellaneous Municipal 9%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Quality
--------------------------------------------------------------------------
AAA 27%
AA 5%
A 52% Portfolio quality remains high,
BBB 11% with 84% of the Fund's holdings
Not Rated 5% rated A or higher.
----
100%
====
Weighted average quality: A
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Effective Maturity
--------------------------------------------------------------------------
Less than 1 year 2%
1 < 5 years 3%
5 < 10 years 40% The Fund's strategy included
10 < 20 years 46% purchasing and holding 15-year
20 years or greater 9% non-callable bonds because of
---- their attractive yields and lower
100% risk characteristics.
====
Weighted average effective maturity: 12 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
For more complete details about the Fund's Investment Portfolio,
see page 10.
5
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Scudder Massachusetts Tax Free Fund endured a challenging interest-rate
environment in its fiscal year ended March 31, 1995, and emerged with solid
12-month performance. Bond investors faced a number of obstacles during 1994,
chief among them a nagging fear of inflation due to the strong U.S. economy. The
Federal Reserve hiked short-term rates repeatedly to slow the pace of economic
growth, and rates rose persistently across the maturity spectrum. By
mid-November, many investors were confident that the Fed had acted decisively
enough to prevent the U.S. economy from overheating. As inflationary fears
eased, the bond market -- including municipal bonds -- rallied.
Scudder Massachusetts Tax Free Fund posted a 7.37% total return for the 12
months ended March 31, 1995. By compar-ison, the 39 mutual funds tracked by
Lipper Analytical Services, Inc., returned 6.36% on average. The Fund's total
return reflected a $0.17 increase in net asset value to $13.33 on March 31,
1995, and distributions of $0.74 per share in tax-free income dividends and
$0.01 per share in capital gains. The Fund closed its fiscal year with a 30-day
net annualized SEC yield of 5.27%. For investors subject to the 46.85% maximum
combined federal and state income tax rate, the Fund's yield translated into a
9.91% taxable yield, significantly higher than current yields provided by
comparable taxable investments.
Despite the bond market's ups and downs since the fall of 1993, the Fund's
relative performance remains impressive: The Fund held the number one ranking
among all Massachusetts tax-exempt funds tracked by Lipper for the two-, three-,
four-, and five-year periods ended March 31, 1995.
Scudder Massachusetts
Tax Free Fund:
Consistent Top Performance
(Lipper rankings for periods
through March 31, 1995)
Number
Period Rank of Funds
One year 6 of 39
Two years 1 of 27
Three years 1 of 22
Four years 1 of 19
Five years 1 of 18
Rankings are based on historical total returns, although the Fund's main
objective is income. Rankings for the Fund reflect the effect of an expense
limitation since the Fund's inception. Had the Fund's expenses not been limited,
total returns would have been lower. Past performance does not guarantee future
results.
Good Times for Massachusetts
State finances have improved dramatically since recession-year 1990, when
Massachusetts ended the fiscal year with an operating deficit of $1.2 billion.
The state has produced an operating surplus since fiscal year 1992 and built up
substantial reserve funds. Its 1995 fiscal year is expected to end with a budget
surplus of more than $500 million. Governor Weld's proposed budget for fiscal
year 1996 is conservative and includes a 3.6% increase in revenues compared with
1995 levels. In addition, the state's unemployment level dropped below the
national average for the first time since 1989. All in all, Massachusetts
remains a wealthy state. It has recovered, both economically and financially,
from its severe recession of 1990-1992.
6
<PAGE>
PORTFOLIO MANAGEMENT DISCUSSION
An Eventful Year for Bonds
As we've mentioned, the past 12 months were witness to major gyrations in
interest rates and bond prices. The chart below shows the progress of 30-year
municipal revenue bond yields over the period. As you can see, municipal bond
yields fluctuated in a wide range, but ended the year in almost the same
position as they began. Accordingly, prices dropped precipitously during the
year but have since recovered.
Municipal Yields 3/31/94 - 3/31/95
As tracked by the 30-Year Revenue Bond Index
Yield
3/31/94 0 6.39
1 6.42
2 6.41
6/30 3 6.56
4 6.47
5 6.46
9/29 6 6.70
7 6.95
8 7.18
12/29 9 6.97
10 6.78
11 6.31
3/31/95 12 6.29
Despite wide fluctuation, municipal bond yields ended the period at almost the
same level as March 31, 1994.
Recently, municipal bonds have benefited from positive investor sentiment
concerning moderate economic growth, low inflation, and a lack of supply in the
municipal marketplace. New-issue volume for municipals dropped from $292 billion
in 1993 to $163 billion in 1994, a 44% decrease. We estimate that 1995's supply
of new issues will be even lower, approximately $135 billion.
In the weeks leading up to the tax-exempt bond market rally in
mid-November, municipals represented unusually good value, and we worked to
position the Fund to benefit from a market rebound. While interest rates were
rising in 1994, we favored bonds whose prices had fallen furthest and tended to
sell bonds whose prices had remained relatively steady. We followed this
strategy because groups of bonds with similar characteristics tend to rotate in
and out of the market's favor, causing prices to fluctuate accordingly.
Therefore, a high-quality bond that has dropped significantly in price (because
of its coupon, maturity, or call provision) will tend to rise sharply when its
sector revives. Our strategy was intended to provide the Fund with a high
concentration of bonds that would perform well in a rally and is consistent with
the Fund's value orientation.
7
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
Another component of the Fund's short-term strategy in recent months was
the purchase of 15-year maturity noncallable bonds because of their attractive
yields and lower risk characteristics. Despite the Fund's general emphasis on
longer- to intermediate-maturity bonds, we maintained a somewhat cautious stance
during the period by establishing a relatively short average effective maturity
-- 12 years as of the close of the Fund's fiscal year. In addition, portfolio
quality remains high. The average quality of the Fund was A on March 31, 1995.
At the close of the period, the Fund's top three sectors were general obligation
(G.O.) bonds, hospital and healthcare bonds, and water and sewer revenue bonds.
Massachusetts G.O. bonds continue to make up the Fund's largest grouping because
of their favorable prices, overall quality, and relative stability.
Longer-Term Strategy and Outlook
Our long-term objectives remain the same: to provide investors with a
competitive level of federal and state tax-exempt income while emphasizing total
return. We pursue these objectives by focusing on three types of Massachusetts
municipal bonds:
o Noncallable bonds, which an issuer cannot redeem before the maturity
date. When interest rates are falling, bond issuers tend to reduce their
borrowing expenses by redeeming "callable" existing bonds and issuing new
securities that pay lower interest rates. The focus on noncallables reflects a
longstanding philosophy that such bonds provide a relatively stable stream of
income over time and also tend to have favorable pricing characteristics.
o Steeply discounted callable bonds, which are unlikely to be subject to
redemption by their issuers in the immediate future because of their prices.
o "Cushion" bonds. We balance the Fund's long-maturity bonds by purchasing
so-called cushion bonds (high-coupon bonds) that can be redeemed by their issuer
in a relatively short time but offer higher yields and typically experience
relatively little price volatility.
8
<PAGE>
PORTFOLIO MANAGEMENT DISCUSSION
We anticipate that Massachusetts municipal bonds will continue to earn
attractive returns in the current environment of restrained economic growth and
low inflation. However, some questions remain. Will the Federal Reserve raise
short-term interest rates further to boost the sagging dollar, thus potentially
choking off growth and increasing investment market volatility? Or will consumer
spending remain sufficiently restrained, making for continued modest U.S.
economic activity -- the so-called soft landing, which is likely to be viewed
most favorably in the investment markets? In any case, we intend to maintain a
conservative overall strategy, which includes a high-quality portfolio with a
prudent average maturity. Additionally, we will continue to search for value by
balancing the income potential, credit quality, and maturity characteristics of
municipal bond investments for Scudder Massachusetts Tax Free Fund.
Scudder Massachusetts Tax Free Fund:
A Team Approach to Investing
Scudder Massachusetts Tax Free Fund is managed by a team of Scudder
investment professionals who each play an important role in the Fund's
management process. Team members work together to develop investment strategies
and select securities for the Fund. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Lead Portfolio Manager Philip G. Condon joined Scudder in 1983 and has had
responsibility for Scudder Massachusetts Tax Free Fund's day-to-day operations
since 1989. Phil, who has 15 years of experience in municipal investing and
portfolio management, also is Lead Portfolio Manager of Scudder Massachusetts
Limited Term Tax Free Fund. Kathleen A. Meany, Portfolio Manager, has 18 years
of investment experience and has worked on the Fund since 1988. Kate joined
Scudder in 1988 and also works with Phil as a Portfolio Manager of Scudder
Massachusetts Limited Term Tax Free Fund.
Sincerely,
Your Portfolio Management Team
/s/ Philip G. Condon /s/ Kathleen A. Meany
Philip G. Condon Kathleen A. Meany
9
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1995
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2.3% SHORT-TERM MUNICIPAL INVESTMENTS
--------------------------------------------------------------------------------------------------
MASSACHUSETTS Massachusetts General Obligation, Dedicated Income
Tax, Daily Demand Note:
Series D, 4.5%, 6/1/95* ......................... 200,000 A1+ 200,000
Series E, 4.5%, 12/1/97*......................... 700,000 A1 700,000
Massachusetts General Obligation, Series B,
Daily Demand Note, 4.5%, 12/1/97*..................... 2,800,000 A1+ 2,800,000
Massachusetts Health and Educational Facilities
Authority, Beth Israel Hospital, Weekly Demand Note,
Periodic Auction Reset, 3.85%, 7/1/25 (d)*............ 3,000,000 AAA 3,000,000
----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $6,700,000)..................................... 6,700,000
----------
97.7% LONG-TERM MUNICIPAL INVESTMENTS
--------------------------------------------------------------------------------------------------
MASSACHUSETTS Boston, MA, General Obligation, Series A,
6.5%, 7/1/12 (d)...................................... 2,320,000 AAA 2,448,319
Chicopee, MA, Electric System Revenue, ETM,
7.125%, 1/1/17**...................................... 1,210,000 AAA 1,399,957
Dedham-Westwood, MA, Water District
General Obligation, 5%, 10/15/08 (d).................. 1,035,000 AAA 960,790
Haverhill, MA, Unlimited Tax, General Obligation,
Series A, 7%, 6/15/12 (d)............................. 600,000 AAA 649,416
Inverse Variable Rate Certificate Trust, Series D,
5.477%, 4/30/03 (d)*** ............................... 9,000,000 NR 8,268,750
Massachusetts Bay Transportation Authority:
Certificate of Participation, 7.75%, 1/15/06.......... 1,000,000 A 1,101,410
General Transportation System:
Series A, 5.4%, 3/1/07........................... 13,325,000 A 12,847,965
Series A, 5.5%, 3/1/12........................... 3,000,000 A 2,838,690
Series B, 6.2%, 3/1/16........................... 2,100,000 A 2,149,518
Series C, 6.1%, 3/1/13........................... 1,250,000 A 1,277,325
Massachusetts General Obligation:
Consolidated Loan, Series A, 7.5%, 6/1/04............. 12,400,000 A 14,310,344
Hynes Convention Center, Zero Coupon, 9/1/04.......... 2,000,000 A 1,203,160
Series A, 5.25%, 2/1/08............................... 1,375,000 A 1,311,860
Series A, 6.5%, 6/1/08................................ 5,500,000 A 5,798,760
Series A, 5.8%, 6/1/14................................ 2,000,000 AA 1,927,040
Series B, 5.4%, 11/1/06............................... 5,000,000 A 4,936,250
Series B, 6.5%, 8/1/08................................ 5,400,000 A 5,814,828
Series C, 5%, 8/1/06.................................. 1,020,000 A 970,703
Series 1993 C, 5%, 8/1/07............................. 5,000,000 A 4,688,350
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zero Coupon, 12/1/04.................................. 8,415,000 A 5,060,696
Massachusetts Health & Educational
Facilities Authority:
Anna Jaques Hospital, Series B, 6.875%, 10/1/12..... 2,000,000 BBB 1,957,220
Berkshire Health Systems, Series D, 5.6%,
10/1/08 (d)...................................... 1,760,000 AAA 1,725,733
Charlton Memorial Hospital, Series B,
7.25%, 7/1/07 (b)................................ 10,000,000 A 10,699,600
Community College Program, Series A, Connie
Lee Insured, 6.5%, 10/1/09....................... 1,000,000 AAA 1,041,670
Cooley Dickson Hospital Inc., 7.125%, 11/15/18...... 2,150,000 BBB 2,045,145
Dana Farber Cancer Institute, Series F,
6%, 12/1/15 (d).................................. 2,500,000 AAA 2,488,000
Deaconess Hospital, Series B, 6.625%, 4/1/12 (d).... 2,000,000 AAA 2,107,260
Faulkner Hospital, Series C, 6%, 7/1/13............. 2,650,000 BBB 2,363,880
Lahey Clinic Medical Center, Series B,
5.4%, 7/1/06 (d)................................. 2,500,000 AAA 2,470,750
Massachusetts General Hospital:
Series B, 5.375%, 7/1/11 (d)..................... 5,625,000 AAA 5,307,188
Series F, 6.25%, 7/1/12 (d)...................... 3,500,000 AAA 3,619,490
Medical Academic and Scientific,
Series A, 6.5%, 1/1/09........................... 5,000,000 A 5,011,550
Medical Center of Central Massachusetts,
Series A, 7%, 7/1/12 (d)......................... 3,600,000 AAA 3,869,712
Newton-Wellesley Hospital, Series D,
7%, 7/1/15 (d) .................................. 1,500,000 AAA 1,602,330
Northeastern University:
Series E, 6.4%, 10/1/07 (d)...................... 1,000,000 AAA 1,062,850
Series E, 6.5%, 10/1/12 (d)...................... 450,000 AAA 469,751
St. Luke's Hospital New Bedford, Series C,
Yield Curve Notes, 6.22%, 8/15/10 (d)***......... 3,400,000 AAA 3,281,000
South Shore Hospital, 6.5%, 7/1/10 (d).............. 2,500,000 AAA 2,598,225
Stonehill College, 6.55%, 7/1/12 (d)................ 5,000,000 AAA 5,243,000
Tufts University, Series C, 7.4%, 8/1/18............ 530,000 A 570,084
Wellesley College:
Series D, 5.1%, 7/1/09........................... 1,800,000 AA 1,678,770
Series D, 5.3%, 7/1/14........................... 2,000,000 AA 1,845,520
Massachusetts Housing Finance Agency:
Housing Project Refunding Revenue:
Series A, 6.3%, 10/1/13 ............................ 7,000,000 A 6,954,640
Series B, 6.05%, 12/1/09 ........................... 3,000,000 AAA 3,034,620
Housing Project Revenue, Series A, 6.375%, 4/1/21..... 4,000,000 A 3,977,360
Residential Development, Series C, 6.87%,
11/15/11............................................ 10,250,000 AAA 10,754,608
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS TAX FREE FUND
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Single-Family Mortgage Revenue:
Series 2, 8.25%, 6/1/14 ............................ 275,000 AA 285,953
Series 3, 7.875%, 6/1/14 ........................... 4,000,000 AA 4,180,120
Massachusetts Industrial Finance Agency:
Eastern Edison Company Project, 5.875%, 8/1/08........ 2,250,000 BBB 2,137,118
Evanswood, Series A, 7.875%, 1/15/20.................. 1,000,000 NR 1,007,830
Holy Cross College, Issue II, 6.375%, 11/1/09......... 1,000,000 A 1,069,040
Massachusetts Biomedical Research Corp.,
Series A, Zero Coupon:
8/1/00........................................... 2,860,000 A 2,153,637
8/1/01........................................... 3,650,000 A 2,598,070
8/1/02 (b)....................................... 3,650,000 A 2,451,815
Milton Academy, Revenue Refunding,
Series B, 5.25%:
9/1/09 (d)....................................... 870,000 AAA 831,807
9/1/13 (d)....................................... 1,160,000 AAA 1,069,810
Museum of Science:
4.9%, 11/1/06 (d) .................................. 480,000 AAA 452,400
5%, 11/1/07 (d)..................................... 1,000,000 AAA 944,120
Pollution Control Revenue, Boston Edison
Company, Series A, 5.75%, 2/1/14.................... 2,000,000 BBB 1,802,080
Provider Lease Program, Series 1988 A-1,
8.4%, 7/15/08....................................... 1,985,000 NR 2,037,642
Resource Recovery, North Andover Solid Waste,
Series A, 6.3%, 7/1/05.............................. 6,500,000 BBB 6,523,465
Solid Waste Disposal Revenue, Peabody Monofill
Project, 9%, 9/1/05................................. 3,000,000 NR 3,046,110
Sturdy Memorial Hospital, 7.9%, 6/1/09................ 2,000,000 BBB 2,091,700
Massachusetts Municipal Wholesale Electric
Company, Power Supply Revenue:
Series A, 6.75%, 7/1/06 ............................ 2,855,000 BBB 3,042,487
Series A, 5.1%, 7/1/08 (d).......................... 840,000 AAA 777,277
Series A, 5%, 7/1/12 (d) ........................... 1,000,000 AAA 897,310
Series A, 5%, 7/1/17 (d) ........................... 3,610,000 AAA 3,149,436
Series B, 6.75%, 7/1/08 ............................ 9,000,000 BBB 9,584,460
Series B, 4.95%, 7/1/09 (d)......................... 1,575,000 AAA 1,431,974
Series C, 6.625%, 7/1/10 (d)........................ 3,500,000 AAA 3,688,685
Series C, 6.625%, 7/1/10 ........................... 1,000,000 BBB 1,048,800
Massachusetts Port Authority Revenue, Tax
Exempt Receipts, ETM, Zero Coupon, 7/1/13**........... 1,000,000 AAA 835,380
Massachusetts Water Pollution Abatement Trust,
Pooled Loan Program, Series I, 5.6%, 8/1/13........... 5,425,000 AA 5,167,801
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts Water Resource Authority:
Series A, 6.5%, 7/15/09............................... 15,000,000 A 16,023,900
Series A, 6.5%, 7/15/19............................... 3,000,000 A 3,238,530
Series B, 6%, 11/1/08................................. 5,785,000 A 5,881,552
Series B, 6.25%, 11/1/10.............................. 5,000,000 A 5,104,350
Series B, 5.5%, 11/1/15............................... 3,300,000 A 3,060,288
General Revenue, Series C, 5.25%, 12/1/08............. 2,705,000 A 2,546,217
General Revenue, Series C, 5.25%, 12/1/15............. 4,030,000 A 3,619,383
Nantucket, MA, General Obligation, 6.8%, 12/1/11......... 1,000,000 A 1,062,010
New England Educational Loan Marketing
Corporation, Massachusetts Student Loan Revenue,
5.7%, 7/1/05.......................................... 10,250,000 A 10,069,600
South Essex, MA, Sewer District, 6.75%, 6/1/13 (d)....... 1,000,000 AAA 1,074,620
Worcester, MA, General Obligation, 6.9%:
5/15/05 (d)........................................... 1,850,000 AAA 2,038,589
5/15/06 (d)........................................... 1,500,000 AAA 1,648,230
-----------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $281,274,371)................................... 287,417,683
-----------
-------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $287,974,371) (a)............................... 294,117,683
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $287,974,371. At March 31,
1995, net unrealized appreciation for all securities based on tax cost
was $6,143,312. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $10,449,333 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$4,306,021.
(b) At March 31, 1995 these securities, in part, have been pledged to cover
initial margin requirements for open futures contracts.
<TABLE>
AT MARCH 31, 1995, OPEN FUTURES CONTRACTS SOLD SHORT WERE AS FOLLOWS (NOTE A):
<CAPTION>
Aggregate
Futures Expiration Contracts Face Value ($) Market Value ($)
------- ---------- --------- -------------- ---------------
<S> <C> <C> <C> <C>
Muni Bond Index Jun. 1995 50 4,451,125 4,478,125
--------- ---------
Total net unrealized depreciation on open futures contracts sold short ... (27,000)
=========
</TABLE>
(c) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings
shown are assigned by either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or Fitch Investors Service, Inc. Unrated securities
(NR) have been determined to be of comparable quality to rated eligible
securities.
(d) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC or
MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand notes
are securities whose yields are periodically reset at levels that are
generally comparable to tax-exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit from a major bank. These notes are carried,
for purposes of calculating average weighted maturity, at the longer of the
period remaining until the next rate change or to the extent of the demand
period.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by
a trustee and used to pay principal and interest on bonds so designated.
*** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown
at their rate as of March 31, 1995.
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------------------
MARCH 31, 1995
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $287,974,371)
(Note A).............................................. $294,117,683
Cash..................................................... 63,416
Receivables:
Interest.............................................. 4,708,188
Fund shares sold...................................... 119,700
------------
Total assets..................................... 299,008,987
LIABILITIES
Payables:
Investments purchased................................. $1,740,635
Dividends............................................. 552,546
Fund shares redeemed.................................. 21,358
Accrued management fee (Note C)....................... 141,571
Other accrued expenses (Note C)....................... 71,292
Daily variation margin on open futures contracts
(Note A)......................................... 6,250
----------
Total liabilities................................ 2,533,652
------------
Net assets, at market value.............................. $296,475,335
============
NET ASSETS
Net assets consist of:
Unrealized appreciation (depreciation) on:
Investments...................................... 6,143,312
Futures.......................................... (27,000)
Accumulated net realized loss......................... (4,186,739)
Shares of beneficial interest......................... 222,364
Additional paid-in capital............................ 294,323,398
------------
Net assets, at market value.............................. $296,475,335
============
NET ASSET VALUE, offering and redemption price
per share ($296,475,335 / 22,236,389 outstanding
shares of beneficial interest, $.01 par value,
unlimited number of shares authorized)................ $13.33
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS TAX FREE FUND
-----------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-----------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1995
-----------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest............................................... $19,185,675
Expenses:
Management fee (Note C)................................ $ 925,856
Services to shareholders (Note C)...................... 275,185
Custodian and accounting fees (Note C)................. 105,847
Trustees' fees (Note C)................................ 15,138
Reports to shareholders................................ 45,984
Auditing............................................... 32,613
Legal.................................................. 11,120
State registration..................................... 8,220
Other.................................................. 31,569 1,451,532
---------------------------
Net investment income.................................. 17,734,143
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS
Net realized loss from:
Investments......................................... (1,300,001)
Futures............................................. (1,695,406) (2,995,407)
-----------
Net unrealized appreciation (depreciation) during
the period on:
Investments......................................... 4,950,078
Futures............................................. (27,000) 4,923,078
---------------------------
Net gain on investments................................ 1,927,671
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $19,661,814
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
-------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income............................. $ 17,734,143 $ 19,719,344
Net realized gain (loss) from investment
transactions................................... (2,995,407) 336,644
Net unrealized appreciation (depreciation) on
investment transactions during the period...... 4,923,078 (11,311,943)
------------- -------------
Net increase in net assets resulting from
operations..................................... 19,661,814 8,744,045
------------- -------------
Distributions to shareholders:
From net investment income ($.74 and $.81 per
share, respectively)........................... (17,734,143) (19,719,344)
------------- -------------
From net realized gains from investment
transactions ($.08 per share).................. -- (1,957,503)
------------- -------------
In excess of net realized gains ($.01 and
$.04 per share, respectively).................. (348,200) (843,132)
------------- -------------
Fund share transactions:
Proceeds from shares sold......................... 80,817,626 175,855,379
Net asset value of shares issued to
shareholders in reinvestment
of distributions............................... 11,772,714 13,132,687
Cost of shares redeemed........................... (129,761,019) (110,597,306)
------------- -------------
Net increase (decrease) in net assets from
Fund share transactions........................ (37,170,679) 78,390,760
------------- -------------
INCREASE (DECREASE) IN NET ASSETS................. (35,591,208) 64,614,826
Net assets at beginning of period................. 332,066,543 267,451,717
------------- -------------
NET ASSETS AT END OF PERIOD....................... $ 296,475,335 $ 332,066,543
============= =============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period......... 25,223,573 19,651,437
------------- -------------
Shares sold....................................... 6,244,742 12,578,423
Shares issued to shareholders in
reinvestment of distributions.................. 905,250 942,371
Shares redeemed .................................. (10,137,176) (7,948,658)
------------- -------------
Net increase (decrease) in Fund shares............ (2,987,184) 5,572,136
------------- -------------
Shares outstanding at end of period............... 22,236,389 25,223,573
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS TAX FREE FUND
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
-------------------------------------------------------- TO MARCH 31,
1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .............. $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28 $12.00
------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (a)......... .74 .81 .84 .81 .83 .82 .81 .69
Net realized and unrealized gain
(loss) on investment
transactions ................ .18 (.33) .96 .46 .19 .13 .22 .21
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations..... .92 .48 1.80 1.27 1.02 .95 1.03 .90
------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income........ (.74) (.81) (.84) (.81) (.83) (.82) (.88) (.62)
From net realized gains on
investment transactions...... -- (.08) (.16) (.09) -- (.11)(b) (.20) --
In excess of net realized gains... (.01) (.04) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total distributions.................. (.75) (.93) (1.00) (.90) (.83) (.93) (1.08) (.62)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period....... $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (c)................. 7.37 3.37 14.59 10.46 8.60 7.89 9.50 7.73**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions)...................... 296 332 267 120 67 46 31 16
Ratio of operating expenses, net
to average daily net
assets (%) (a).................... .47 .07 -- .48 .60 .60 .51 .50*
Ratio of net investment income to
average daily net assets (%)...... 5.73 5.80 6.36 6.38 6.72 6.60 7.23 7.55*
Portfolio turnover rate (%).......... 10.2 17.0 29.6 23.2 27.1 45.5 110.5 95.9*
<FN>
(a) Reflects a per share amount
of expenses, exclusive of
management fees,
reimbursed by the
Adviser of.................... $ -- $ .01 $ .02 $ -- $ -- $ -- $ .01 $ .10
Reflects a per share amount
of management fees and
other fees not imposed of..... $ .04 $ .09 $ .08 $ .05 $ .06 $ .07 $ .07 $ .05
Operating expense ratio
including expenses
reimbursed, management
fee and other expenses
not imposed (%) .............. .77 .77 .83 .93 1.05 1.16 1.20 2.25*
(b) Includes $.01 per share distributions in excess of realized gains pursuant
to Internal Revenue Code Section 4982.
(c) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Scudder Massachusetts Tax Free Fund (the "Fund") is a non-diversified series of
Scudder State Tax Free Trust (the "Trust"). The Trust is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. There are
currently six series in the Trust. The policies described below are followed
consistently by the Fund in the preparation of its financial statements in
conformity with generally accepted accounting principles.
SECURITY VALUATION. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which quotations reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost. All other debt securities are valued at their
fair value as determined in good faith by the Valuation Committee of the Board
of Trustees.
FUTURES CONTRACTS. The Fund may enter into interest rate and securities index
futures contracts for bona fide hedging purposes. During the year ended March
31, 1995, to hedge against the negative effects of rising interest rates, the
Fund sold municipal bond index futures contracts. Upon entering into a futures
contract, the Fund is required to deposit with a broker an amount ("initial
margin") equal to a certain percentage of the purchase price indicated in the
futures contract. Subsequent payments ("variation margin") are made or received
by the Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial reporting purposes as
unrealized gains or losses by the Fund. When entering into a closing
transaction, the Fund will realize, for book purposes, a gain or loss
equal to the difference between the value of the futures contract to sell and
the futures contract to buy. Futures contracts are valued at the most recent
settlement price. Certain risks may arise upon entering into futures contracts
from the contingency of imperfect market conditions.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
19
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
--------------------------------------------------------------------------------
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment companies
and to distribute all of its taxable and tax-exempt income to its shareholders.
Accordingly, the Fund paid no federal income taxes and no provision for federal
income taxes was required.
At March 31, 1995, the Fund had a net tax basis capital loss carryforward of
approximately $1,437,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until March 31,
2003, the expiration date.
In addition, from November 1, 1994 through March 31, 1995, the Fund incurred
$651,000 of net realized capital losses. As permitted by tax regulations, the
Fund intends to elect to defer these losses and treat them as arising in the
fiscal year ended March 31, 1996.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital
loss carryforwards, would be taxable to the Fund if not distributed and,
therefore, will be distributed to shareholders. An additional distribution may
be made to the extent necessary to avoid the payment of a four percent
federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles.
These differences primarily relate to investments in futures contracts. As a
result, net investment income and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
OTHER. Investment security transactions are accounted for on a trade date basis.
Distributions of net gains to shareholders are recorded on the ex-dividend
date. Interest income is accrued pro rata to maturity.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
B. PURCHASES AND SALES OF SECURITIES
--------------------------------------------------------------------------------
During the year ended March 31, 1995, purchases and sales of municipal
securities (excluding short-term investments) aggregated $30,596,107 and
$74,022,844, respectively.
The aggregate face value of future contracts opened and closed during the year
ended March 31, 1995 was $44,982,594 and $40,531,469, respectively.
C. RELATED PARTIES
--------------------------------------------------------------------------------
Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a fee
equal to an annual rate of approximately 0.60% of the Fund's average daily net
assets, computed and accrued daily and payable monthly. For the period January
1, 1994 to July 31, 1994, the Adviser agreed to maintain the total annualized
expenses of the Fund at 0.25% of average daily net assets of the Fund. Effective
August 1, 1994, the Adviser agreed to maintain the annualized expenses at
0.50% of average daily net assets of the Fund until December 31, 1994.
Effective January 1, 1995, the Adviser agreed to maintain the annualized
expenses at 0.75% of average daily net assets of the Fund until December 31,
1995. For the year ended March 31, 1995, the management fee not imposed amounted
to $928,006 and the fee imposed aggregated $925,856.
Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend-paying and shareholder service agent for the Fund.
For the year ended March 31, 1995, the amount charged to the Fund by SSC
aggregated $204,820, of which $15,546 is unpaid at March 31, 1995.
Effective November 14, 1994, Scudder Fund Accounting Corporation ("SFAC"), a
wholly-owned subsidiary of the Adviser, assumed responsibility for determining
the daily net asset value per share and maintaining the portfolio and general
accounting records of the Fund. For the year ended March 31, 1995, the amount
charged to the Fund by SFAC aggregated $21,946, of which $4,865 is unpaid at
March 31, 1995.
The Trust pays each Trustee not affiliated with the Adviser $12,000 annually,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1995,
Trustees' fees charged to the Fund aggregated $15,138.
21
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER STATE TAX FREE TRUST AND THE SHAREHOLDERS OF SCUDDER
MASSACHUSETTS TAX FREE FUND:
We have audited the accompanying statement of assets and liabilities of Scudder
Massachusetts Tax Free Fund, including the investment portfolio, as of March
31, 1995, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the seven years in the
period then ended, and for the period May 28, 1987 (commencement of operations)
to March 31, 1988. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Massachusetts Tax Free Fund as of March 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for
each of the seven years in the period then ended, and for the period May 28,
1987 (commencement of operations) to March 31, 1988, in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 8, 1995
22
<PAGE>
TAX INFORMATION
--------------------------------------------------------------------------------
Of the dividends paid by the Fund from net investment income for the fiscal
year ended March 31, 1995, 100% constituted exempt interest dividends for
regular federal income tax and Massachusetts personal income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
23
<PAGE>
OFFICERS AND TRUSTEES
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; Director, Executive Vice President and Manager,
Safeguard Scientifics, Inc.
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
25
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
The Scudder Family of Funds
<S> <C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax Free Money Market+ Scudder Income Fund
Scudder Tax Free Money Fund Scudder International Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Global Income Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Value Fund
Scudder Growth and Income Fund The Japan Fund
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(TM)++
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not available
in all states. +++A no-load variable annuity contract provided by Charter
National Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens &
Clark, Inc. are traded on various stock exchanges. ++For information on Scudder
Treasurers Trust,(TM) an institutional cash management service that utilizes
certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call
1-800-541-7703.
</TABLE>
26
<PAGE>
HOW TO CONTACT SCUDDER
Account Service and Information
For existing account service and
transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For account updates, prices, yields,
exchanges, and redemptions SCUDDER
AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
To receive information about the Scudder
funds, for additional applications and
prospectuses, or for investment
questions
SCUDDER INVESTOR RELATIONS
1-00-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
Many shareholders enjoy the personal,
one-on-one service of the Scudder Funds
Centers. Check for a Funds Center near
you--they can be found in the following
cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers
Trust,(TM) an institutional cash
management service for corporations,
non-profit organizations and trusts that
uses certain portfolios of Scudder Fund,
Inc.* ($100,000 minimum), call
1-800-541-7703.
For information on Scudder Institutional
Funds,* funds designed to meet the
broad investment management and service
needs of banks and other institutions,
call 1-800-854-8525.
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a prospectus
with more complete information, including management fees and expenses.
Please read it carefully before you invest or send money.
27
<PAGE>
Celebrating 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 36 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
<PAGE>
Scudder Massachusetts Limited Term Tax Free Fund
Semiannual Report
April 30, 1995
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
* For investors seeking double tax-free income, exempt from both Massachusetts
and regular federal income taxes consistent with a high degree of principal
stability.
* A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
CONTENTS
2 In Brief
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
13 Financial Statements
16 Financial Highlights
17 Notes to Financial Statements
21 Officers and Trustees
22 Investment Products and Services
23 How to Contact Scudder
IN BRIEF
* Scudder Massachusetts Limited Term Tax Free Fund provided shareholders with
a 30-day net annualized SEC yield of 4.82% on April 30, 1995, equivalent to
a 9.07% taxable yield for shareholders subject to the 46.85% combined
federal and state income tax rate. This yield is significantly higher than
that of the average money market fund.
(bar chart title)
30-Day Yields as of April 30, 1995
(bar chart data)
Scudder Massachusetts IBC/Donoghue's Taxable
Limited Term Tax Free Fund Taxable Equivalent Yield Money Fund Average
--------------------------------------------------------------------------------
4.82 9.07 3.59
* The Fund returned 3.83% for the semiannual period through April 30, 1995. By
comparison, the 34 short state municipal debt funds tracked by Lipper
Analytical Services, Inc. returned 3.40% on average for the same period.
* Scudder Massachusetts Limited Term Tax Free Fund's assets continue to grow,
reaching approximately $47 million on April 30, 1995.
2
<PAGE>
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Investor concerns about inflationary economic growth have abated in
recent months, after creating much turmoil for the world's investment markets in
1994. Indications of continued low inflation and weakness in certain segments of
the economy, combined with the Federal Reserve's most recent interest-rate
increases in November and February, have reassured many investors. Yields have
declined from their November highs, and municipal bond prices have recovered.
Year-to-date through April 30, short-term municipal bonds, as measured by the
unmanaged Lehman Brothers 3-year Municipal Bond Index, returned 3.14% on
average, compared with 0.68% for all of 1994.
Given the swings in interest rates over the past year and a half, the
question for municipal bond investors is, can the recent positive shift in
interest rates be sustained? In our view, rates should remain relatively stable
as long as economic growth continues to slacken in the United States. Already,
evidence of a slowing economy can be seen in the recent drop in non-farm
payrolls and the declining sales of houses and automobiles.
As the economic and investment landscape unfolds, your portfolio
managers will continue to concentrate their efforts on fundamental investment
research and security selection as a means of generating high current income and
attractive total returns. As always, please call a Scudder Investor Relations
representative at 1-800-225-2470 if you have questions about your Fund. Page 23
provides more information on how to contact Scudder. Thank you for choosing
Scudder Massachusetts Limited Term Tax Free Fund to help meet your investing
needs.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Massachusetts Limited Term Tax Free Fund
3
<PAGE>
Scudder Massachusetts Limited Term Tax Free Fund
Performance Update as of April 30, 1995
-----------------------------------------------------------------
Growth of a $10,000 Investment
-----------------------------------------------------------------
Scudder Massachusetts Limited Term Tax Free Fund
------------------------------------------------
Total Return
Period Growth -------------
Ended of Average
4/30/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,507 5.07% 5.07%
Life of
Fund* $10,383 3.83% 3.18%
LB Municipal Bond Index (3 year)
--------------------------------------
Total Return
Period Growth -------------
Ended of Average
4/30/95 $10,000 Cumulative Annual
--------- ------- ---------- -------
1 Year $10,464 4.64% 4.64%
Life of
Fund* $10,399 3.99% 3.41%
*The Fund commenced operations on February 15, 1994.
Index comparisons begin February 28, 1994.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Scudder Massachusetts Limited Term Tax Free Fund
Year Amount
----------------------
2/94* 10000
4/94 9912
7/94 10071
10/94 10030
1/95 10150
4/95 10414
LB Municipal Bond Index (3 year)
Year Amount
----------------------
2/94* 10000
4/94 9938
7/94 10070
10/94 10056
1/95 10165
4/95 10399
The 3-year Lehman Brothers (LB) Municipal Bond Index is an unmanaged,
market-value-weighted measure of the short-term municipal bond
market and includes bonds with maturities of two to three years.
Index returns assume reinvested dividends and, unlike Fund
returns, do not reflect any fees or expenses.
-------------------------------------------------------------------
Returns and Per Share Information
-------------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly Periods ended April 30
----------------------------------
<TABLE>
<S> <C> <C>
1994* 1995
----------------
Net Asset Value... $ 11.76 $11.81
Income Dividends.. $ .10 $ .53
Fund Total
Return (%)........ -1.18 5.07
Index Total
Return (%)........ -.62 4.64
</TABLE>
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares, when
redeemed, may be worth more or less than when purchased. If the Adviser
had not maintained the Fund's expenses, the total return for the one year
and life of Fund periods would have been lower.
4
<PAGE>
Portfolio Summary as of April 30, 1995
---------------------------------------------------------------------------
Diversification
---------------------------------------------------------------------------
General Obligation 28%
Escrow & Collateral 27% We continued to hold a large
Hospital/Health 25% percentage of escrow and collateral
Housing Finance Authority 4% bonds, which offer the highest quality
Sales & Special Tax 4% available in the municipal marketplace.
Electric Utility 3%
Higher Education 2%
Water/Sewer 1%
Miscellaneous Municipal 6%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Quality
--------------------------------------------------------------------------
AAA 61%
AA 11% Bonds rated A or better constitute
A 17% almost 90% of the Fund's portfolio.
BBB 11%
----
100%
====
Weighted average quality: AA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
--------------------------------------------------------------------------
Effective Maturity
--------------------------------------------------------------------------
Less than 1 year 20%
1 < 5 years 31% In anticipation of improved yields
5 < 10 years 49% and higher prices, we especially
---- emphasized the shortest and longest
100% maturity bonds the Fund can hold.
====
Weighted average maturity: 4 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
5
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Welcome to those who have recently become shareholders of Scudder
Massachusetts Limited Term Tax Free Fund. This semiannual report covers the
Fund's performance, strategy, and investment environment for the six-month
period ended April 30, 1995. The Fund's twin objectives are to seek 1) higher
tax-free income than is typically available from tax-free money market
investments; and 2) less share-price fluctuation than higher-yielding
longer-term tax-free bonds.
In 1994, U.S. bond markets weathered sharp increases in interest rates and
corresponding declines in price: Treasury bond prices dropped an average of 9.7%
as yields rose 1.5 percentage points, creating their worst 12-month total return
in history; yields of long-term municipal bonds rose almost as much. From
February 28, 1994, through November 30 of the same year, Scudder Massachusetts
Limited Term Tax Free Fund's net asset value declined only 3.3% when compared
with the prices of long-term municipal bonds (nearly 10%), as measured by the
unmanaged Lehman Brothers Municipal Bond Index. In November, the municipal bond
market began to rally, and the prices of five- and ten-year municipal bonds rose
steadily. During the six months from October 31 through April 30, 1995, the
Fund's net asset value increased $0.17 to $11.81 per share, contributing to a
total return of 3.83%, which more than made up for the Fund's earlier
performance. The Fund's total return compares favorably with that of the 34
mutual funds with similar investment objectives tracked by Lipper Analytical
Services, Inc., which returned 3.40% on average.
On April 30, the Fund provided a 30-day net annualized SEC yield of 4.82%.
For shareholders subject to the 46.85% maximum combined federal and
Massachusetts income tax rate, the Fund's yield translated into a 9.07% taxable
yield, significantly higher than current yields provided by comparable taxable
investments. The Fund's yield also compares favorably with the 6.55% average
yield of 2 1/2-year Massachusetts bank certificates of deposit as of April 30,
1995. Unlike insured fixed-rate CDs, the Fund's yield and share price fluctuate,
and principal investments in the Fund are not insured. During the semiannual
period, shareholders received a total of $0.27 per share of income exempt from
federal and Massachusetts taxes.
6
<PAGE>
Inflation Worries Abate
In late 1994 and early 1995, the Federal Reserve continued to nudge
short-term interest rates upward in an attempt to slow the economy and prevent
inflation from accelerating. By November, bond market participants already had
begun to believe that the Fed's program was taking hold, thanks to several
economic reports indicating slower growth. The Fed's last two moves -- in
November 1994 and February 1995 -- seemed to reassure the market that a
significant increase in inflation would be averted. Investors returned to the
bond market, boosting bond prices and pushing down yields of municipal bonds.
Five-year municipal bond yields fell 0.25 percentage points from November
through April, while 10-year bond yields fell almost 0.50 points.
Last fall, in anticipation of a rally, we emphasized both the shortest
maturities (for safety) and longest maturities (for higher yields and possible
capital appreciation) in the Fund's portfolio. (The maximum maturity debt
instrument that Scudder Massachusetts Limited Term Tax Free Fund can hold is a
ten-year municipal bond.) This strategy rewarded us in two ways. First, the Fund
experienced significantly less price volatility than longer-maturity investments
during the period. Second, the Fund benefited from the declines in yields of
five- to ten-year municipal bonds and their corresponding increases in price.
[line chart title]
Scudder Massachusetts Limited Term Tax Free Fund vs.
Lehman Brothers Municipal Bond Index
(Monthly Percentage Price Change 12 months through April 30, 1995)
[line chart data]
Massachusetts Limited Lehman Brothers
Term Tax Free Fund Municipal Bond Index
--------------------- --------------------
-0.0017 0.0038
-0.0034 -0.011
0.0034 0.0134
0.0008 -0.0014
-0.0051 -0.0195
-0.0068 -0.0227
-0.0112 -0.0231
0.0052 0.0168
0.0026 0.0235
0.0103 0.0241
0.006 0.0066
0.0008 -0.0036
7
<PAGE>
Scudder Massachusetts Limited Term Tax Free Fund is broadly diversified
among nine separate categories of municipal bonds. The Fund's largest single
sector at the close of the period was Massachusetts general obligation (G.O.)
bonds. In our opinion, these bonds offer attractive value, high overall quality,
and relative stability. In addition, we continue to hold a large percentage of
pre-refunded (also known as escrow and collateral) bonds in the Fund's
portfolio. Bonds are pre-refunded when issuers sell new debt at lower prevailing
rates and use the proceeds to establish an escrow account designated to retire
the original bonds on their future call dates (the escrowed funds are invested
in Treasury securities). These bonds offer the highest quality available in the
municipal marketplace.
Good Times for Massachusetts
Massachusetts's finances have improved dramatically since recession-year
1990, when the Commonwealth ended the fiscal year with an operating deficit of
$1.2 billion. The Commonwealth has produced an operating surplus since fiscal
year 1992 and built up substantial reserve funds. Its 1995 fiscal year is
expected to end with a budget surplus of more than $500 million. Governor Weld's
proposed budget for fiscal year 1996 is conservative and includes a 3.6%
increase in revenues compared with 1995 levels. In addition, Massachusetts's
1994 unemployment levels dropped below the national average for the first time
since 1989. All in all, Massachusetts remains a wealthy state. It has recovered,
both economically and financially, from the severe recession of 1990-1992.
Expectations for This Year and Beyond
We anticipate that short- to intermediate-term Massachusetts municipal
bonds will continue to earn attractive returns in the current environment of
restrained economic growth and low inflation. But some questions remain
unanswered: Will the Federal Reserve raise short-term interest rates to boost
the sagging dollar, which could choke off growth and increase investment market
volatility? Or, will consumer spending remain sufficiently restrained, making
for continued modest U.S. economic activity--the so-called soft landing, which
is likely to be viewed most favorably in the investment markets? Additionally,
will Congress pass a flat tax or some other major revision of the federal tax
code? We cannot predict the precise outcome of the tax proposals, but because
cities, states, and state agencies need access to the municipal market more than
ever, we are confident that municipal bonds will continue to offer significant
tax advantages.
8
<PAGE>
In any case, we intend to maintain our customarily conservative
strategy, which includes a prudent average maturity, broad diversification, and
high credit quality. Additionally, we will continue to search for value by
balancing the maturity characteristics, credit quality, and income potential of
municipal bond investments for Scudder Massachusetts Limited Term Tax Free Fund.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Kathleen A. Meany
Philip G. Condon Kathleen A. Meany
Scudder Massachusetts Limited Term Tax Free Fund:
A Team Approach to Investing
Scudder Massachusetts Limited Term Tax Free Fund is run by a team of
Scudder investment professionals who each play an important role in the Fund's
management process. Team members work together to develop investment strategies
and select securities for the Fund. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Philip G. Condon, Lead Portfolio Manager, joined Scudder in 1983 and has 15
years of experience as a portfolio manager and in municipal research. Phil has
managed Scudder Massachusetts Limited Term Tax Free Fund since its inception and
Scudder Massachusetts Tax Free Fund since 1989. Kathleen A. Meany, Portfolio
Manager, joined Scudder in 1988 and has 18 years of municipal sales and
portfolio management experience. Kathleen has managed Scudder Massachusetts
Limited Term Tax Free Fund since its inception and Scudder Massachusetts Tax
Free Fund since 1988.
9
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
INVESTMENT PORTFOLIO as of April 30, 1995 (Unaudited)
-------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
17.3% SHORT-TERM MUNICIPAL INVESTMENTS
------------------------------------------------------------------------------------------
MASSACHUSETTS Barnstable, MA, School and Sewer Improvement,
5%, 9/15/95 ........................................ 1,030,000 AA 1,032,709
Boston, MA, Water and Sewer Commission Revenue,
Series A, Weekly Demand Note, 4%, 11/1/15* ......... 100,000 MIG1 100,000
Massachusetts Bay Transportation Authority,
Series B, 5%, 9/8/95 ............................... 2,000,000 SP1 2,004,720
Massachusetts General Obligation, Dedicated
Income Tax, Daily Demand Note:
Series D, 5.15%, 6/1/95* ......................... 800,000 A1+ 800,000
Series E, 5.15%, 12/1/97* ........................ 600,000 A1+ 600,000
Massachusetts General Obligation, Series B, Daily
Demand Note, 5.15%, 12/1/97* ....................... 100,000 A1+ 100,000
Massachusetts Water Resource Authority, Bond
Anticipation Notes, Series A, 4.125%, 10/15/95 ..... 440,000 SP1 439,736
Natick, MA, Bond Anticipation Notes, 4.1%, 9/1/95..... 1,000,000 SS&C 999,280
New Bedford, MA, Bond Anticipation Notes, 4.75%,
8/11/95 ............................................ 1,000,000 A 1,000,570
Springfield, MA, Bond Anticipation Notes, 4.75%,
8/4/95 ............................................. 1,000,000 SS&C 1,001,100
---------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(COST $8,083,839) .................................. 8,078,115
---------
------------------------------------------------------------------------------------------
82.7% INTERMEDIATE-TERM MUNICIPAL INVESTMENTS
------------------------------------------------------------------------------------------
MASSACHUSETTS Lowell, MA, General Obligation, 8.3%, 2/15/05,
Prerefunded 2/15/01** .............................. 1,635,000 BBB 1,932,079
Massachusetts Dedicated Income Tax, Series A,
7.875%, 6/1/97 ..................................... 1,190,000 A 1,268,254
Massachusetts Educational Loan Authority, Issue E,
Series A, 6.7%, 1/1/02 (c) ......................... 485,000 AAA 516,258
Massachusetts General Obligation:
5.25%, 2/1/01 (c) .................................. 3,000,000 AAA 3,026,400
Series A, 5.2%, 6/1/04 ............................. 1,000,000 AA 986,430
Series C, 7.5%, 12/1/07, Prerefunded 12/1/00** ..... 750,000 AAA 852,202
Series C, 7%, 12/1/10, Prerefunded 12/1/00** ....... 275,000 AAA 301,524
Massachusetts Health and Educational Facilities
Authority:
Bentley College, Series G, 8.125%, 7/1/17,
Prerefunded 7/1/95** ........................... 250,000 AAA 256,642
Berkshire Health System, Series D, 5.3%,
10/1/03 (c) .................................... 1,350,000 AAA 1,342,683
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<TABLE>
INVESTMENT PORTFOLIO
----------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Central Massachusetts Medical Center, Series B,
6%, 7/1/02 (c) ................................... 500,000 AAA 522,440
Children's Hospital, Series D, 7.75%, 12/1/18,
Prerefunded 6/1/98** ............................. 1,750,000 AA 1,923,618
Daughters of Charity:
Carney Hospital, 7.5%, 7/1/05, Prerefunded
7/1/00** ....................................... 1,000,000 AAA 1,127,160
Series D, 4.9%, 7/1/00 ........................... 1,000,000 AA 981,130
Medical Academic and Scientific:
Series A, 5.9%, 1/1/00 ........................... 500,000 A 502,785
Series A, 6%, 1/1/01 ............................. 1,000,000 A 1,008,010
Series A, 6.1%, 1/1/02 ........................... 500,000 A 504,850
St. Joseph's Hospital, Series C, 9.5%, 10/1/20,
Prerefunded 10/1/99** ............................ 3,380,000 AAA 3,997,087
Valley Regional Health System, Series C, HIBI
Insured, 5.3%, 7/1/00 ............................ 1,500,000 AAA 1,501,215
Wheaton College, Series B, 7.2%, 7/1/09
Prerefunded 7/1/99** ............................. 590,000 AAA 650,729
Massachusetts Housing Finance Agency Multi-Family
Housing Project, 1988 Series A, 8.7%, 4/1/14,
Prerefunded 4/1/98** ................................. 1,495,000 A 1,689,978
Massachusetts Housing Finance Agency Revenue,
Housing Project:
Series A, 5.2%, 10/1/00 ............................ 575,000 A 569,894
Series B, 4.05%, 12/1/95 ........................... 1,000,000 AAA 996,840
Massachusetts Industrial Finance Agency:
Cape Cod Health Systems, Series 1990,
8.5%, 11/15/20, Prerefunded 11/15/00** ............. 2,650,000 AAA 3,124,774
Leominister Hospital, Series 1989A, 8.625%, 8/1/09,
Prerefunded 8/1/99** ................................. 2,000,000 BBB 2,312,160
Milton Academy, Revenue Refunding, Series A,
7.25%, 9/1/19, Prerefunded 9/1/99** (c) .............. 700,000 AAA 774,627
Resource Recovery, North Andover Solid Waste,
Series A, 6.15%, 7/1/02 .............................. 750,000 BBB 753,368
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue:
Series B, 6.3%, 7/1/00 ............................. 345,000 A 360,563
Series B, 6.375%, 7/1/01 ........................... 1,000,000 A 1,051,060
Massachusetts Water Resource Authority, Series A,
6.75%, 7/15/12, Prerefunded 7/15/02** ................ 1,000,000 AAA 1,105,310
Nantucket, MA, General Obligation, 6.25%, 12/1/02....... 250,000 A 265,633
Southeastern Massachusetts University Building,
Series A, 5.5%, 5/1/04 (c) ........................... 1,010,000 AAA 1,018,908
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<TABLE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
----------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Worcester, MA, General Obligation, FSA Insured,
5.25%, 10/1/96 ................................... 1,250,000 AAA 1,266,200
TOTAL INTERMEDIATE-TERM MUNICIPAL INVESTMENTS ----------
(Cost $38,162,888) ............................... 38,490,811
----------
----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $46,246,727) (a) ........................... 46,568,926
==========
<FN>
(a) The cost for federal income tax purposes was $46,258,334. At April 30, 1995, net
unrealized appreciation for all securities was $310,592. This consisted of aggregate
gross unrealized appreciation for all securities in which there was an excess of
market value over tax cost of $411,905 and aggregate gross unrealized depreciation
for all investment securities in which there was an excess of tax cost over market
value of $101,313.
(b) All of the securities held have been determined to be of appropriate credit quality
as required by the Fund's investment objectives. Credit ratings are either Standard
& Poor's Ratings Group, Moody's Investors Service, Inc. or Fitch Investors Service,
Inc. Securities rated by Scudder (SS&C) have been determined to be of comparable
quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities whose yields
vary with a designated market index or market rate, such as the coupon-equivalent of
the Treasury bill rate. Variable rate demand notes are securities whose yields are
periodically reset at levels that are generally comparable to tax-exempt commercial
paper. These securities are payable on demand within seven calendar days and normally
incorporate an irrevocable letter of credit or line of credit from a major bank.
These notes are carried, for purposes of calculating average weighted maturity, at
the longer of the period remaining until the next rate change or to the extent of the
demand period.
** Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and interest on
tax-exempt issue and to retire the bonds in full at the earliest refunding date.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<TABLE>
FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
------------------------------------------------------------------------------------------
<CAPTION>
APRIL 30, 1995 (UNAUDITED)
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $46,246,727)
(Note A) ................................................ $ 46,568,926
Cash ...................................................... 14,745
Receivables:
Interest ................................................ 859,899
Fund shares sold ........................................ 49,639
Due from Adviser (Note C) ............................... 39,388
Deferred organization expenses (Note A) ................... 21,350
------------
Total assets ............................................ 47,553,947
LIABILITIES
Payables:
Dividends ............................................... $ 52,651
Fund shares redeemed .................................... 20,250
Accrued management fee (Note C) ......................... 5,770
Other accrued expenses (Note C) ......................... 33,606
------------
Total liabilities ....................................... 112,277
------------
Net assets, at market value ............................... $ 47,441,670
============
NET ASSETS
Net assets consist of:
Unrealized appreciation on investments .................. $ 322,199
Accumulated net realized loss ........................... (104,756)
Shares of beneficial interest ........................... 40,179
Additional paid-in capital .............................. 47,184,048
------------
Net assets, at market value ............................... $ 47,441,670
============
NET ASSET VALUE, offering and redemption price per
share ($47,441,670 -:- 4,017,861 outstanding
shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) .................. $11.81
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<TABLE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
-------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED APRIL 30, 1995 (UNAUDITED)
-------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest ........................................................... $ 1,115,702
Expenses:
Management fee (Note C) ............................................ $ 5,770
Custodian and accounting fees (Note C) ............................. 13,714
Services to shareholders (Note C) .................................. 5,321
Trustees' fees (Note C) ............................................ 5,090
Auditing ........................................................... 10,226
State registration ................................................. 6,582
Reports to shareholders ............................................ 5,720
Federal registration ............................................... 2,089
Amortization of organization expense (Note A) ...................... 2,528
Other .............................................................. 2,913
-----------
Total expenses before reimbursement from Adviser ................... 59,953
Reimbursement of expenses from Adviser (Note C) .................... (39,388)
-----------
Expenses, net ...................................................... 20,565
-----------
Net investment income .............................................. 1,095,137
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized loss from investments ................................. (15,555)
Net unrealized appreciation on investments during the period ....... 771,845
-----------
Net gain on investments ............................................ 756,290
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $ 1,851,427
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<TABLE>
FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE PERIOD
SIX MONTHS FEBRUARY 15, 1994
ENDED (COMMENCEMENT OF
APRIL 30, OPERATIONS) TO
1995 OCTOBER 31,
INCREASE (DECREASE) IN NET ASSETS (UNAUDITED) 1994
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ........................................... $ 1,095,137 $ 709,232
Net realized loss on investments ................................ (15,555) (89,201)
Net unrealized appreciation (depreciation)
on investments during the period .............................. 771,845 (449,646)
------------- -----------
Net increase in net assets resulting from operations ............ 1,851,427 170,385
------------- -----------
Distributions to shareholders from net investment income
($.27 and $.36 per share, respectively) ....................... (1,095,137) (709,232)
------------- -----------
Fund share transactions:
Proceeds from shares sold ....................................... 32,177,500 45,335,631
Net asset value of shares issued to shareholders in
reinvestment of distributions ................................. 768,528 540,042
Cost of shares redeemed ......................................... (21,808,629) (9,790,045)
------------- -----------
Net increase in net assets from Fund share transactions ......... 11,137,399 36,085,628
------------- -----------
Increase in net assets .......................................... 11,893,689 35,546,781
Net assets at beginning of period ............................... 35,547,981 1,200
------------- -----------
NET ASSETS AT END OF PERIOD ..................................... $ 47,441,670 $35,547,981
============= ===========
OTHER INFORMATION INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period ....................... 3,052,899 100
------------- -----------
Shares sold ..................................................... 2,773,220 3,839,448
Shares issued to shareholders in reinvestment of distributions .. 65,724 45,947
Shares redeemed ................................................. (1,873,982) (832,596)
------------- -----------
Net increase in Fund shares ..................................... 964,962 3,052,799
------------- -----------
Shares outstanding at end of period ............................. 4,017,861 3,052,899
============= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<TABLE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
SIX MONTHS FOR THE PERIOD
ENDED FEBRUARY 15, 1994
APRIL 30, (COMMENCEMENT
1995 OF OPERATIONS) TO
(UNAUDITED) OCTOBER 31, 1994
----------- ----------------
<S> <C> <C>
Net asset value, beginning of period $11.64 $12.00
------ ------
Income from investment operations:
Net investment income (a) ............................................... .27 .36
Net realized and unrealized gain (loss) on investment transactions ...... .17 (.36)
------ ------
Total from investment operations ........................................ .44 .00
------ ------
Less distributions from net investment income ........................... (.27) (.36)
------ ------
Net asset value, end of period ............................................ $11.81 $11.64
====== ======
TOTAL RETURN (%) (b) ...................................................... 3.83** 0.00**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) .................................... 47 36
Ratio of operating expenses, net to average daily net assets (%) (a) ...... .09* -
Ratio of net investment income to average daily net assets (%) ............ 4.69* 4.45*
Portfolio turnover rate (%) ............................................... 20.6* 26.3*
<FN>
(a) Reflects a per share amount of expenses, exclusive of management
fees, reimbursed by the Adviser of................................. $ .01 $ .04
Reflects a per share amount of management fee and other fees not
imposed by the Adviser of ......................................... $ 04 $ .07
Operating expense ratio including expenses reimbursed, management fee
and other expenses not imposed (%) ................................ .94* 1.44*
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
* * Not annualized
</FN>
</TABLE>
16
NOTES TO FINANCIAL STATEMENTS (Unaudited)
--------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
Scudder Massachusetts Limited Term Tax Free Fund (the "Fund") is a
non-diversified series of Scudder State Tax Free Trust, a Massachusetts
business trust (the "Trust"), which is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company. There
are currently six series in the Trust. The policies described below are
followed consistently by the Fund in the preparation of its financial
statements in conformity with generally accepted accounting principles.
SECURITY VALUATION. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the officers of the
Fund, which quotations reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Short-term investments having a maturity of sixty days or less
are valued at amortized cost. All other debt securities are valued at their
fair value as determined in good faith by the Valuation Committee of the
Trustees.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment
companies and to distribute all of its taxable and tax-exempt income to its
shareholders. The Fund accordingly paid no federal income taxes and no
provision for federal income taxes was required.
At October 31, 1994, the Fund had a net tax basis capital loss carryforward of
approximately $77,600, which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until October 31,
2002, whichever occurs first.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital
loss carryforwards, would be taxable to the Fund if not distributed and,
therefore, will be distributed to
17
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
--------------------------------------------------------------------------------
shareholders. An additional distribution may be made to the extent necessary to
avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles. As
a result, net investment income (loss) and net realized gain (loss) on
investment transactions for a reporting period may differ significantly from
distributions during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
ORGANIZATION COST. Costs incurred by the Fund in connection with its
organization and initial registration of shares have been deferred and are
being amortized on a straight-line basis over a five-year period.
OTHER. Investment transactions are accounted for on a trade date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of call or
maturity.
B. PURCHASES AND SALES OF SECURITIES
--------------------------------------------------------------------------------
For the six months ended April 30, 1995, purchases and sales of investments
(excluding short-term) aggregated $18,274,613 and $3,175,061, respectively.
C. RELATED PARTIES
--------------------------------------------------------------------------------
Under the Investment Management Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a fee
equal to an annual rate of 0.60% of the Fund's average daily net assets,
computed and accrued daily and payable monthly. As manager of the assets of the
Fund, the Adviser directs the investments of the Fund in accordance with its
investment objectives, policies, and restrictions. The Adviser determines the
securities, instruments, and other contracts relating to investments to be
purchased, sold or entered into by the Fund. In addition to portfolio
management services, the Adviser provides certain administrative services in
accordance with the Agreement. The Agreement also provides that if the Fund's
expenses, exclusive of taxes, interest, and extraordinary expenses, exceed
specified limits, such excess, up to the
18
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
amount of the management fee, will be paid by the Adviser. For the period
February 15, 1994 (commencement of operations) to February 28, 1995 the Adviser
agreed not to impose all of its management fee and to maintain the annualized
expenses of the Fund at not more than 0.00% of average daily net assets.
Effective March 1, 1995, the Adviser agreed to maintain the annualized expenses
at 0.25% of average daily net assets until July 31, 1995. For the six months
ended April 30, 1995, the Adviser did not impose its fee amounting to $135,361
and the fee imposed aggregated $5,770. Further, due to the limitation of such
Agreement, the Adviser's reimbursement payable for the six months ended April
30, 1995 amounted to $39,388.
Scudder Service Corporation ("SSC"), a wholly-owned subsidiary of the Adviser,
is the transfer, dividend paying and shareholder service agent for the Fund.
For the six months ended April 30, 1995, SSC did not impose its fee amounting
to $10,314 and the fee imposed aggregated $5,181.
Scudder Fund Accounting Corporation ("SFAC"), a wholly-owned subsidiary of the
Adviser, is responsible for determining the daily net asset value per share and
maintaining the portfolio and general accounting records of the Fund. For the
six months ended April 30, 1995, SFAC did not impose its fee amounting to
$12,000 and the fee imposed aggregated $6,000.
The Fund pays each Trustee not affiliated with the Adviser $12,000 annually,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the six months ended April 30, 1995,
Trustees' fees aggregated $5,090.
19
(This page intentionally left blank.)
20
<PAGE>
OFFICERS AND TRUSTEES
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; Director, Executive Vice President and Manager, Safeguard
Scientifics, Inc.
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
21
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
The Scudder Family of Funds
<CAPTION>
<C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax Free Money Market+ Scudder Income Fund
Scudder Tax Free Money Fund Scudder International Bond Fund
Scudder California Tax Free Money Fund* Scudder Short Term Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Global Income Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Value Fund
Scudder Growth and Income Fund The Japan Fund
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(TM)++
<FN>
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from
the tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,(TM) an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.
</FN>
</TABLE>
22
<PAGE>
HOW TO CONTACT SCUDDER
<TABLE>
<S> <C>
Account Service and Information
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For account updates, prices, yields,
exchanges, and redemptions SCUDDER
AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
To receive information about the
Scudder funds, for additional
applications and prospectuses, or for
investment questions SCUDDER INVESTOR
RELATIONS 1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder For information on Scudder
Treasurers Trust,(TM) an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
<FN>
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
</FN>
</TABLE>
23
<PAGE>
Celebrating 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 36 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
