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
for the Funds dated August 1, 1996, as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103 or calling 1-800-225-2470. The
Statement, which is incorporated by reference into this prospectus, has been
filed with the Securities and Exchange Commission.
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, 1996
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.
<TABLE>
<CAPTION>
<S> <C>
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, 1995.
Investment management fee (after waiver) 0.43%**
12b-1 fees NONE
Other expenses 0.32%
----
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
</TABLE>
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 July 31, 1997, 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 reimburse operating expenses and waive a portion of its fee so
that the total annualized expenses of the Fund did not exceed 0% from
November 1, 1994 to February 28, 1995, 0.25% from March 1, 1995 to July 31,
1995 and 0.50% from August 1, 1995 to October 31, 1995, Fund expenses would
have been: investment management fee 0.60%, other expenses 0.32% and total
operating expenses 0.92% for the fiscal year ended October 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%.
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.
<TABLE>
<CAPTION>
<S> <C>
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, 1996.
Investment management fee 0.60%**
12b-1 fees NONE
Other expenses 0.16%
----
Total Fund operating expenses 0.76%**
====
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 $94
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."
** The Adviser waived a portion of its fee so that the Fund's total operating
expenses did not exceed 0.75% from January 1, 1995 to December 31, 1995.
The above table shows what the fees and expenses would have been if the
Adviser had not agreed to waive a portion of its fee. Actual total
operating expenses for the fiscal year ended March 31, 1996, with waiver,
equaled 0.75% of average daily net assets.
</TABLE>
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 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 October 31, 1995 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, YEAR ENDED (COMMENCEMENT
1996 OCTOBER 31 OF OPERATIONS) TO
(UNAUDITED) 1995 OCTOBER 31, 1994
----------- ---- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period ......... $12.02 $11.64 $12.00
------ ------ ------
Income from investment operations:
Net investment income (a) .................. .25 .54 .36
Net realized and unrealized gain (loss) on
investment transactions .................. (.08) .38 (.36)
------ ------ ------
Total from investment operations ........... .17 .92 .00
------ ------ ------
Less distributions from net
investment income ......................... (.25) (.54) (.36)
------ ------ ------
Net asset value, end of period ............... $11.94 $12.02 $11.64
====== ====== ======
TOTAL RETURN (%) (b) ......................... 1.45** 8.08 0.00**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ....... 61 55 36
Ratio of operating expenses, net to average
daily net assets (%) (a) ................... .59* .24 --
Ratio of net investment income to average
daily net assets (%) ..................... 4.24* 4.56 4.45*
Portfolio turnover rate (%) .................. 4.4* 27.4 26.3*
(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 ....................... $ .02 $ .07 $ .07
Operating expense ratio before
expense reductions (%) .................. .91* .92 1.44*
(b)Total returns are higher due to maintenance of
the Fund's expenses.
- ----------
<FN>
* 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, 1996 and may be obtained
without charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT OF
YEARS ENDED MARCH 31, OPERATIONS) TO
----------------------------------------------------------------------------- MARCH 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................ $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28 $12.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a) ..... .72 .74 .81 .84 .81 .83 .82 .81 .69
Net realized and unrealized
gain (loss) on investment
transactions ................ .37 .18 (.33) .96 .46 .19 .13 .22 .21
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................. 1.09 .92 .48 1.80 1.27 1.02 .95 1.03 .90
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income .... (.72) (.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 ............. (.72) (.75) (.93) (1.00) (.90) (.83) (.93) (1.08) (.62)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period .. $13.70 $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (c) ............ 8.28 7.37 3.37 14.59 10.46 8.60 7.89 9.50 7.73**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions) .................. 314 296 332 267 120 67 46 31 16
Ratio of operating expenses,
net to average daily net
assets (%) (a) ................ .75 .47 .07 -- .48 .60 .60 .51 .50*
Ratio of net investment
income to average daily
net assets (%) ................ 5.23 5.73 5.80 6.36 6.38 6.72 6.60 7.23 7.55*
Portfolio turnover rate (%) ..... 20.9 10.2 17.0 29.6 23.2 27.1 45.5 110.5 95.9*
(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
before expense
reductions(%) ............... .76 .77 .77 .83 .93 1.05 1.16 1.20 2.25*
<FN>
(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 $100 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
The Funds
o seek to provide double tax-free income exempt from both Massachusetts
personal and regular federal income tax
o active portfolio management by Scudder's professional team of credit
analysts and municipal bond market experts
o dividends declared daily and paid monthly
Scudder Massachusetts Limited Term Tax Free Fund
o average portfolio maturity limited to between one and five years
o invests primarily in shorter-term, investment-grade municipal securities
o free checkwriting
Scudder Massachusetts Tax Free Fund
o 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 24
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 fiscal year ended March 31, 1996 for Scudder Massachusetts Tax Free
Fund and October 31, 1995 for Scudder Massachusetts Limited Term Tax Free Fund,
the average monthly dollar-weighted market value of the bonds in each Fund's
portfolio rated lower than Baa by Moody's or BBB by S&P or Fitch, or their
equivalent was 0%.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds") have
produced higher yields 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>
<TABLE>
<CAPTION>
Summary of important features
- -----------------------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------------------
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.
COMBINED
TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7%
AND 9%, A TAXABLE INVESTMENT WOULD HAVE TO EARN*:
- ------------------------------------------------------------------------------------------------------------------------
1996 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
INDIVIDUAL
-----------------------------------------
$ 24,000-58,150 36.64% 7.89% 11.05% 14.20%
58,151-121,300 39.28 8.23 11.53 14.82
121,301-263,750 43.68 8.88 12.43 15.98
OVER 263,750 46.85 9.41 13.17 16.93
JOINT RETURN
-----------------------------------------
$ 40,100-96,900 36.64% 7.89% 11.05% 14.20%
96,901-147,700 39.28 8.23 11.53 14.82
147,701-263,750 43.68 8.88 12.43 15.98
OVER 263,750 46.85 9.41 13.17 16.93
* These illustrations assume a marginal federal income tax rate of 28% to 39.6% and that the federal alternative
minimum tax is not applicable. Upper income individuals may be subject to an effective federal income tax rate in
excess of the applicable marginal rate as a result of the phase-out of personal exemptions and itemized deductions
made permanent by the Revenue Reconciliation Act of 1993. Individuals subject to these phase-out provisions would
have to invest in taxable securities with a yield in excess of those shown on the table in order to achieve an after-tax
yield equivalent to the yield on a comparable tax-exempt security.
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Investment objectives 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, reverse repurchase agreements and stand-by commitments which may
involve certain expenses and risks, including credit risks. None of these
securities and techniques is expected to comprise a major portion of the Funds'
investments. In addition, each Fund may purchase indexed securities and may
engage in strategic transactions. 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 8.56% to receive after-tax income equal
to the 4.82% tax-free yield provided by Scudder Massachusetts Tax Free Fund for
the 30-day period ended March 31, 1996, or earn a taxable return of 7.40% to
receive after-tax income equal to the 4.17% tax-free yield provided by Scudder
Massachusetts Limited Term Tax Free Fund for the 30-day period ended October 31,
1995. In other words, it would be necessary to earn $1,775 from a taxable
10
<PAGE>
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
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 $50 billion in bonds, including $11
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, 1996.
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
11
<PAGE>
Additional information about policies and investments (cont'd)
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.
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. Scudder Massachusetts Limited Term
Tax Free Fund may not invest more than 10% of its total assets in restricted
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 focus on investments of Massachusetts issuers. Since 1989,
Massachusetts has experienced growth rates significantly below the national
average and an economic recession in 1990 and 1991 caused negative growth rates
in Massachusetts. 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, total Massachusetts employment showed positive annual
growth in 1993 and 1994. Employment in 1993 and 1994 increased in all sectors,
except manufacturing which has experienced declines in each year since 1985. The
unemployment rate for the Commonwealth as of May, 1996 was 4.9%, compared to a
national rate of 5.6%. 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, 1996.
When-issued securities
Each Fund may purchase securities on a when-issued or forward delivery basis,
for payment and delivery at a later date. The price and yield are generally
fixed on the date of commitment to purchase. During the period between purchase
and settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, 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.
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
12
<PAGE>
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 purchasing or selling particular securities.
(Continued on page 16)
13
<PAGE>
<TABLE>
<CAPTION>
Purchases
<S> <C> <C> <C> <C>
Opening
an account Minimum initial investment: $1,000; IRAs $500
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
o By Mail Send your completed and signed application and check
Make checks
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds Scudder Shareholder Service
P.O. Box 2291 Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612
o By Wire Please see Transaction information--Purchasing shares-- By
wire for details, including the ABA wire transfer number. Then call
1-800-225-5163 for instructions.
o In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing
additional shares Minimum additional investment: $100; IRAs $50
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to instruction including your account number and the
"The complete Fund name, to the appropriate address listed above.
Scudder Funds."
o By Wire Please see Transaction information--Purchasing shares-- By
wire for details, including the ABA wire transfer number.
-----------------------------------------------------------------------------------------------------------------------
o In Person Visit one of our Funds Centers to make an additional
investment in your Scudder fund account. Funds Center locations are
listed under Shareholder benefits.
o By Telephone Please see Transaction information--Purchasing shares-- By
AutoBuy or By telephone order for more details
o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call
1-800-225-5163 ($50 minimum) for more information and an
enrollment form.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Exchanges and redemptions
<S> <C> <C> <C> <C>
Exchanging shares Minimum investments: $1,000 to establish a new account;
$100 to exchange among existing accounts
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612
-----------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call
1-800-225-5163 from 8 a.m. to 8 p.m. eastern time or to access SAIL(TM),
Scudder's Automated Information Line, call 1-800-343-2890 (24 hours a day). You may
have redemption proceeds sent to your predesignated bank account, or redemption
proceeds of up to $50,000 sent to your address of record.
o By "Write- For Scudder Massachusetts Limited Term Tax Free
A-Check" Fund, you may redeem shares by writing checks against your account balance
as often as you like for at least $100, but not more than $5,000,000.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $50,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically. Call 1-800-225-5163
Withdrawal Plan for more information and an enrollment form.
</TABLE>
15
<PAGE>
Additional information about policies and investments (cont'd)
(Continued from page 13)
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 than a diversified investment company would. 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. The
Commonwealth ended fiscal 1992 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 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 Commonwealth
ended fiscal 1995 with an operating gain of $137 million and an ending fund
balance of $726 million. The fiscal 1997 budget calls for approximately $17.5
billion in expenditures.
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
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
16
<PAGE>
"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.
Illiquid investments. The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for a Fund to sell them promptly at an acceptable
price.
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
17
<PAGE>
Additional information about policies and investments (cont'd)
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 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 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
18
<PAGE>
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
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.
19
<PAGE>
Fund organization (cont'd)
The Funds' activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Trustees, changing
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 November 1, 1994 through February 28, 1995 the Adviser maintained the total
annualized expenses for Scudder Massachusetts Limited Term Tax Free Fund at 0%,
0.25% from March 1, 1995 to July 31, 1995 and 0.50% from August 1, 1995 to
October 31, 1995.
The Adviser continued to maintain the total annualized expenses through February
29, 1996 at 0.50% and has agreed to maintain the total annualized expenses for
Scudder Massachusetts Limited Term Tax Free Fund at 0.75% of the average daily
net assets of the Fund until July 31, 1997. For the fiscal year ended October
31, 1995, the Adviser received an investment management fee of 0.05% of the
Fund's average daily net assets on an annualized basis.
The Adviser maintained the total annualized expenses for Scudder Massachusetts
Tax Free Fund at 0.75% of average daily net assets from April 1, 1995 to
December 31, 1995.
For the fiscal year ended March 31, 1996, the Adviser received an investment
management fee of 0.60% of the Fund's average daily net assets on an annualized
basis.
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
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Funds.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Funds'
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of each Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Funds.
20
<PAGE>
Custodian
State Street Bank and Trust Company is the Funds' custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Funds' transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
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
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. 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.
By telephone order. To a limited extent, certain financial institutions may
place orders to purchase shares unaccompanied by payment prior to the close of
regular trading on the New York Stock Exchange (the "Exchange"), normally 4:00
p.m. eastern time, and receive that day's price. Please call 1-800-854-8525 for
more information, including the dividend treatment and method and manner of
payment for Fund shares.
By "AutoBuy." If you elected "AutoBuy" for your account, you can call toll-free
to purchase shares. The money will be automatically transferred from your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoBuy," call
1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
will be transferred from your bank checking account in two or three business
days following your call. For requests
21
<PAGE>
Transaction information (cont'd)
received by the close of regular trading on the New York Stock Exchange (the
"Exchange"), shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "AutoBuy" requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day.
If you purchase shares by "AutoBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "AutoBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.
Redeeming shares
The Funds allow you to redeem shares (i.e., sell them back to each Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL, by calling
1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Funds' transfer agent has received your completed and signed application.
In the event that you are unable to reach the Funds by telephone, you should
write to the Funds; see "How to contact Scudder" for the address.
By "AutoSell." If you elected "AutoSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoSell,"
call 1-800-225-5163 for more information.
To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "AutoSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
By "Write-A-Check." You may redeem shares of Scudder 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.
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $50,000 we require an original
22
<PAGE>
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.
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. Those requests received by the close of regular trading
on the Exchange are executed at the net asset value per share calculated at the
close of trading that day. Purchase and redemption requests received after the
close of regular trading on the Exchange will be executed the following business
day. Purchases made by federal funds wire before noon eastern time will begin
earning income that day; all other purchases received before the close of
regular trading on the Exchange will begin earning income the next business day.
Redeemed shares will earn income on the day on which the redemption request is
executed.
If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.
Each Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
Funds and Scudder Investor Services, Inc. each reserve the right to reject
purchases of Fund shares (including exchanges) for any reason including when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in 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.
23
<PAGE>
Transaction information (cont'd)
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.
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 16 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
24
<PAGE>
since 1988 for Scudder Massachusetts Tax Free Fund. Ms. Meany joined Scudder in
1988 and has 19 years of municipal investment and portfolio management
experience.
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact Scudder" for the
address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
25
<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.
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.
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager,
WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics; President, Driscoll
Associates
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
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
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>
Investment products and services
<TABLE>
<CAPTION>
<C> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder Global Bond Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax free money market+ Scudder High Yield Bond Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Discovery Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
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>
Account Service and Information: Please address all correspondence to:
<C> <C> <C>
For existing account Scudder Investor The Scudder Funds
service and transactions Relations P.O. Box 2291
1-800-225-5163 Boston, Massachusetts
02107-2291
For personalized Scudder Automated
information about your Information Line
Scudder accounts; (SAIL) Visit the Scudder World Wide Web Site at:
exchanges and 1-800-343-2890
redemptions; or http://funds.scudder.com
information on any
Scudder fund
Investment Information: Or Stop by a Scudder Funds Center:
Scudder Investor Many shareholders enjoy the personal, one-on-one
To receive information Relations service of the Scudder Funds Centers. Check for a
about the Scudder funds, 1-800-225-2470 Funds Center near you--they can be found in the
for additional applications following cities:
and prospectuses, or for
investment questions
For establishing 401(k) Scudder Defined Boca Raton New York
and 403(b) plans Contribution Boston Portland, OR
Services Chicago San Diego
1-800-323-6105 Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*,
institutional cash management service for corporations, funds designed to meet the broad investment
non-profit organizations and trusts which management and service needs of banks and
utilizes certain portfolios of Scudder Fund, Inc.* other institutions, call:
($100,000 minimum), call: 1-800-541-7703. 1-800-854-8525.
</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>
Scudder New York
Tax Free Money Fund
- ------------------------------
Scudder New York
Tax Free Fund
Prospectus
August 1, 1996
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.
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.
Because of its focus on New York tax-exempt investments, the Scudder New York
Tax Free Money Fund may have to concentrate a significant percentage of its
assets in a single issuer. An investment in this Fund may be riskier than an
investment in a money market fund that does not focus on investments from a
single state.
If you require more detailed information, a Statement of Additional Information
for the Funds dated August 1, 1996, as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103 or calling 1-800-225-2470. The
Statement, which is incorporated by reference into 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.
<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 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.
<TABLE>
<CAPTION>
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in either Fund for various transactions.
<C> <C>
Scudder New York Scudder New York
Tax Free Money Fund Tax Free Fund
Sales commissions to purchase shares (sales load) NONE NONE
Commissions to reinvest dividends NONE NONE
Redemption fees NONE* NONE*
Fees to exchange shares NONE NONE
2) Annual Fund operating expenses: Expenses paid by either Fund before it
distributes its net investment income, expressed as a percentage of its
average daily net assets for the fiscal year ended March 31, 1996.
Investment management fees 0.24%** 0.63%
12b-1 fees NONE NONE
Other expenses 0.36%** 0.19%
-------- -----
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, 1997, 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 0.36% and total
operating expenses 0.86% for the fiscal year ended March 31, 1996. To the
extent that expenses fall below 0.60% during the fiscal year, the Adviser
reserves the right to recoup, during the fiscal year incurred, amounts
reimbursed or waived during the period, but only to the extent that the
Fund's expenses do not exceed 0.60%.
2
<PAGE>
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, 1996 and may be obtained without charge by
writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT
YEARS ENDED MARCH 31, OF OPERATIONS)
---------------------------------------------------------------------------- TO MARCH 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income (a) ........ .031 .025 .017 .022 .035 .046 .052 .047 .033
Distributions from net
investment income .............. (.031) (.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 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (b) ............. 3.18 2.57 1.75 2.22 3.55 4.69 5.33 4.78 3.33**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions) ................... 58 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 .60 .53 .50*
Ratio of net investment income
to average daily net
assets (%) ..................... 3.13 2.56 1.73 2.19 3.46 4.57 5.21 4.76 4.08*
(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 $ .003 $ .004 $ .004 $ .004 $ .004 $ .004 $ .004 $ .004
Operating expense ratio
including expenses
reimbursed, management
fee and other expenses
not imposed (%) ................ .86 .89 .97 .97 1.01 1.08 1.08 .98 1.19*
<FN>
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
3
<PAGE>
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 audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated March 31, 1996 and may be obtained without charge by
writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........ $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39 $11.43 $11.19
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income .................... .53 .52 .54 .61 .65 .67 .69 .72 .73 .75
Net realized and unrealized
gain (loss) on investment
transactions .............. .29 .11 (.35) 1.03 .50 .13 .16 .14 (.84) .39
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................. .82 .63 .19 1.64 1.15 .80 .85 .86 (.11) 1.14
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income .................... (.53) (.52) (.54) (.61) (.65) (.67) (.69) (.72) (.73) (.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 .......... (.53) (.57) (1.27) (1.22) (.90) (.67) (.78) (.72) (.93) (.90)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period ............. $10.67 $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39 $11.43
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ............. 7.95 6.39 1.31 15.60 11.11 7.79 8.18 8.55 (.61) 10.71
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ........ 192 194 207 201 159 142 132 123 116 154
Ratio of operating
expenses, net to
average daily net
assets (%) ................. .82 .82 .82 .82 .87 .91 .89 .89 .95 .88
Ratio of net investment
income to average
daily net assets (%) ....... 4.91 5.13 4.80 5.36 5.96 6.29 6.39 6.89 7.05 6.70
Portfolio turnover
rate (%) ................... 80.5 83.8 158.0 201.4 168.2 224.9 114.3 132.1 44.2 71.9
</TABLE>
4
<PAGE>
A message from Scudder's chairman
Scudder, Stevens & Clark, Inc., investment adviser to the Scudder Family of
Funds, was founded in 1919. We offered America's first no-load mutual fund in
1928. Today, we manage in excess of $100 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
The Funds
o active portfolio management by Scudder's professional team of credit
analysts and municipal bond market experts
o dividends declared daily and paid monthly
Scudder New York Tax Free Money Fund
o capital stability and income exempt from New York state and New York City
personal income taxes and regular federal income tax
o 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
o income exempt from New York state and New York City personal income taxes
and regular federal income tax
o 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 11
Purchases 14
Exchanges and redemptions 15
Distribution and performance information 18
Fund organization 19
Transaction information 20
Shareholder benefits 24
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 4.95% to receive after-tax income equal to the 2.79%
tax-free yield provided by Scudder New York Tax Free Money Fund for the
seven-day period ended March 31, 1996, or earn a taxable return of 8.22% to
receive after-tax income equal to the 4.62% tax-free yield provided by Scudder
New York Tax Free Fund for the 30-day period ended March 31, 1996. 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 of shareholders.
<PAGE>
6
<PAGE>
<TABLE>
<CAPTION>
Summary of important features
<S> <C> <C> <C> <C> <C>
Investment objectives Investments Maturity Quality Dividends
and characteristics
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>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
1996 TAXABLE INCOME: COMBINED MARGINAL TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7% AND
TAX 9%, A TAXABLE INVESTMENT WOULD HAVE TO EARN*:
INDIVIDUAL JOINT RETURN RATE: 5% 7% 9%
-----------------------------------------------------------------------------------------------------------------------
$25,000-58,150 $45,000-96,900 36.30% 7.85% 10.99% 14.13%
58,151-60,000 96,901-108,000 38.95 8.19 11.47 14.74
60,001-121,300 108,001-147,700 38.99 8.20 11.47 14.75
121,301-263,750 147,701-263,750 43.41 8.84 12.37 15.91
OVER $263,750 OVER $263,750 46.60 9.36 13.11 16.85
</TABLE>
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.
7
<PAGE>
Why invest in these Funds? (cont'd)
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.
Scudder New York Tax Free Money Fund is concentrated in securities issued by New
York governments and related entities. Changes in the financial condition or
market assessment of the financial condition of these entities could have a
significant adverse impact on the Fund. Consequently, an investment in the Fund
may be riskier than an investment in a money market fund that does not
concentrate in securities issued by, or within, a single state.
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, 1996, the average monthly dollar-weighted market
value of the bonds in the Fund's portfolio rated lower than Baa by Moody's or
BBB by S&P or Fitch, or their equivalent, was 0%.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
9
<PAGE>
Scudder New York Tax Free Fund (cont'd)
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'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.
10
<PAGE>
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.
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 total assets, in the aggregate, in repurchase agreements maturing in more
than seven days, restricted securities or securities which are not readily
marketable. Scudder New York Tax Free Money Fund may not invest more than 10% of
its total assets in restricted securities. Scudder New York Tax Free Fund may
not invest more than 10% of its total assets in restricted securities.
In addition, up to 20% of each Fund's net assets may be held in cash or invested
in short-term taxable investments, including repurchase agreements, U.S.
Government and other money market instruments and in 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 focus
on investments of New York issuers.
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
11
<PAGE>
Additional information about policies and investments (cont'd)
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
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. 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 securities, 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.
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, 1996.
When-issued securities
Each Fund may purchase securities on a when-issued or forward delivery basis,
for payment and delivery at a later date. The price and yield are generally
fixed on the date of commitment to purchase. During the period between purchase
and settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, each
Fund may enter into repurchase agreements with selected banks and
broker/dealers. Under a repurchase agreement, a Fund acquires securities,
subject to the seller's agreement to repurchase 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.
12
<PAGE>
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.
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
(Continued on page 16)
13
<PAGE>
Purchases
<TABLE>
<CAPTION>
<S> <C>
Opening
an account Minimum initial investment: $1,000; IRAs $500
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
o By Mail Send your completed and signed application and check
Make checks by regular mail to: or by express, registered,
payable to "The or certified mail to:
Scudder Funds."
The Scudder Funds Scudder Shareholder Service
P.O. Box 2291 Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612
o By Wire Please see Transaction information--Purchasing shares-- By
wire for details, including the ABA wire transfer number. Then call
1-800-225-5163 for instructions.
o In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing
additional shares Minimum additional investment: $100; IRAs $50
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares-- By
wire for details, including the ABA wire transfer number.
o In Person Visit one of our Funds Centers to make an additional investment in your Scudder fund
account. Funds Center locations are listed under Shareholder benefits.
o By Telephone Please see Transaction information--Purchasing shares-- By
AutoBuy or By telephone order for more details.
o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
14
<PAGE>
Exchanges and redemptions
Exchanging shares Minimum investments: 1,000 to establish a new account;
$100 to exchange among existing accounts
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
certified mail to:
The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612
-----------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from 8 a.m. to 8 p.m.
eastern time or to access SAIL(TM), Scudder's Automated Information Line, call
1-800-343-2890 (24 hours a day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to $50,000 sent to your
address of record.
o By "Write- For Scudder New York Tax Free Money Fund, you may redeem shares by writing
A-Check" checks against your account balance as often as you like for at least $100, but
not more than $5,000,000.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $50,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically. Call
Withdrawal Plan 1-800-225-5163 for more information and an enrollment form.
15
</TABLE>
<PAGE>
Additional information about policies and investments (cont'd)
(Continued from page 13)
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 than a diversified
investment company would. Investment in the Fund may involve greater risk than
investment in a diversified fund.
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.
Securities backed by guarantees. The Scudder New York Tax Free Money Fund
invests in securities backed by guarantees from banks, insurance companies and
other financial institutions. The Fund's ability to maintain a stable share
price may depend upon such guarantees, which are not supported by federal
deposit insurance. Consequently, changes in the credit quality of these
institutions could have an adverse impact on securities they have guaranteed or
backed, which could cause losses to the Fund and affect its share price.
Debt securities. Scudder 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,
16
<PAGE>
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
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.
17
<PAGE>
Additional information about policies and investments (cont'd)
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, 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 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
18
<PAGE>
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
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, 1996, the Adviser received monthly an
investment management fee equal to 0.63% 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
19
<PAGE>
Fund organization (cont'd)
daily net assets. The Adviser has agreed to maintain the annualized expenses of
the Fund at not more than 0.60% of the average daily net assets of the Fund
until July 31, 1997.
For the fiscal year ended March 31, 1996, the Adviser received monthly an
investment management fee equal to 0.24% 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
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Funds.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Funds'
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of each Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Funds.
Custodian
State Street Bank and Trust Company is the Funds' custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Funds' transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.").
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone or by "Write-A-Check," in the case of Scudder 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. 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
20
<PAGE>
- -- 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.
By telephone order. To a limited extent, certain financial institutions may
place orders to purchase shares of Scudder New York Tax Free Fund unaccompanied
by payment prior to the close of regular trading on the New York Stock Exchange
(the "Exchange"), normally 4:00 p.m. eastern time, and receive that day's price.
Please call 1-800-854-8525 for more information, including the dividend
treatment and method and manner of payment for Fund shares.
By "AutoBuy." If you elected "AutoBuy" for your account, you can call toll-free
to purchase shares. The money will be automatically transferred from your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoBuy," call
1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
will be transferred from your bank checking account in two or three business
days following your call. For requests received by the close of regular trading
on the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "AutoBuy" requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day.
If you purchase shares by "AutoBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "AutoBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.
Redeeming shares
Each Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
elected telephone redemption to your bank on your application, you can call to
request that federal funds be sent to your authorized bank account. If you did
not elect telephone redemption to your bank on your application, call
1-800-225-5163 for more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL, by calling
1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Funds' transfer agent has received your completed and signed application.
21
<PAGE>
Transaction information (cont'd)
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.
By "AutoSell." If you elected "AutoSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoSell,"
call 1-800-225-5163 for more information.
To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "AutoSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
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
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<PAGE>
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
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. 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).
Purchase restrictions
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) for any reason including when a pattern of frequent purchases and
sales made in response to short-term fluctuations in the Fund's share price
appears evident.
Tax information
A redemption of shares of Scudder 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
23
<PAGE>
Transaction information (cont'd)
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. Each Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
Each Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $1,000, which amount
may be changed by the Board of Trustees. Each Fund reserves the right, following
60 days' written notice to shareholders, to redeem all shares in sub-minimum
accounts, including accounts of new investors, where a reduction in value has
occurred due to a redemption or exchange out of the account. Reductions in value
that result solely from market activity will not trigger an involuntary
redemption. Each Fund will mail the proceeds of the redeemed account to the
shareholder. The shareholder may restore the share balance to $1,000 or more
during the 60-day notice period and must maintain it at no lower than that
minimum to avoid involuntary redemption.
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.
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 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 12 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 15 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.
24
<PAGE>
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact Scudder" for the
address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
25
<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.
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.
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager,WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics; President,
Driscoll Associates
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
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
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>
Investment products and services
<TABLE>
<CAPTION>
<C> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder Global Bond Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax free money market+ Scudder High Yield Bond Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Discovery Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
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>
Account Service and Information: Please address all correspondence to:
<C> <C> <C>
For existing account Scudder Investor The Scudder Funds
service and transactions Relations P.O. Box 2291
1-800-225-5163 Boston, Massachusetts
02107-2291
For personalized Scudder Automated
information about your Information Line
Scudder accounts; (SAIL) Visit the Scudder World Wide Web Site at:
exchanges and 1-800-343-2890
redemptions; or http://funds.scudder.com
information on any
Scudder fund
Investment Information: Or Stop by a Scudder Funds Center:
Scudder Investor Many shareholders enjoy the personal, one-on-one
To receive information Relations service of the Scudder Funds Centers. Check for a
about the Scudder funds, 1-800-225-2470 Funds Center near you--they can be found in the
for additional applications following cities:
and prospectuses, or for
investment questions
For establishing 401(k) Scudder Defined Boca Raton New York
and 403(b) plans Contribution Boston Portland, OR
Services Chicago San Diego
1-800-323-6105 Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*,
institutional cash management service for corporations, funds designed to meet the broad investment
non-profit organizations and trusts which management and service needs of banks and
utilizes certain portfolios of Scudder Fund, Inc.* other institutions, call:
($100,000 minimum), call: 1-800-541-7703. 1-800-854-8525.
</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 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, 1996, as amended from time to time, may be obtained without
charge by writing Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103 or calling 1-800-225-2470. The Statement, which is
incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission.
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, 1996
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 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, 1996.
Investment management fee (after waiver) 0.21%**
12b-1 fees NONE
Other expenses 0.29%**
-----
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, 1997, 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 0.29% and total operating expenses 0.89% for the fiscal year
ended March 31, 1996. 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, 1996 and may be obtained
without charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
For the
Period
May 28, 1987
(commencement
Years Ended March 31, of operations)
----------------------------------------------------------------------------- to March 31
1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ................. $ 12.77 $ 12.68 $ 13.13 $ 12.47 $ 12.14 $ 11.97 $ 11.94 $ 11.65 $ 12.00
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income (a) ........... .69 .70 .70 .72 .75 .78 .82 .79 .66
Net realized and unrealized
gain (loss) on investment
transactions ...................... .30 .13 (.35) .85 .36 .23 .10 .36 (.40)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations .......................... .99 .83 .35 1.57 1.11 1.01 .92 1.15 .26
------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income ............... (.69) (.70) (.70) (.72) (.75) (.78) (.82) (.84) (.61)
Net realized gains on
investment transactions ........... (.12) -- (.08) (.19) (.03) (.06) (.07) (.02) --
In excess of net
realized gains .................... -- (.04) (.02) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ................... (.81) (.74) (.80) (.91) (.78) (.84) (.89) (.86) (.61)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period ........ $ 12.95 $ 12.77 $ 12.68 $ 13.13 $ 12.47 $ 12.14 $ 11.97 $ 11.94 $ 11.65
======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (%) (b) .................. 7.85 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) ........................ 84 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 .50*
Ratio of net investment income to
average daily net assets (%) ........ 5.30 5.59 5.23 5.61 6.05 6.50 6.74 7.13 7.17*
Portfolio turnover rate (%) ........... 19.6 19.9 12.2 34.7 13.2 22.6 15.9 35.7 105.5*
<FN>
(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 $ .05 $ .06 $ .07 $ .07 $ .07 $ .07 $ .05
Operating expense ratio
before expense
reductions (%) .................. .89 .91 .90 .95 1.03 1.21 1.62 2.14 4.51*
(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 $100 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/Daniel Pierce
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 15
Fund organization 16
Transaction information 17
Shareholder benefits 20
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, 1996, the average monthly dollar-weighted market
value of the bonds in the Fund's portfolio rated lower than Baa by Moody's or
BBB by S&P or Fitch, or their equivalent was 1.5%.
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*:
1996 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
INDIVIDUAL
---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0-24,000 18.79% 6.16% 8.62% 11.08%
24,001-40,000 31.21 7.27 10.18 13.08
40,001-58,150 31.74 7.33 10.26 13.19
58,151-80,000 34.59 7.64 10.70 13.76
80,001-100,000 35.10 7.70 10.79 13.87
100,001-121,300 35.76 7.78 10.90 14.01
121,301-200,000 40.42 8.39 11.75 15.11
200,001-263,750 40.80 8.45 11.82 15.20
OVER $263,750 44.13 8.95 12.53 16.11
JOINT RETURN
---------------------------------------
$ 0-40,000 18.79% 6.16% 8.62% 11.08%
40,001-40,100 19.42 6.20 8.69 11.17
40,101-80,000 31.74 7.33 10.25 13.18
80,001-96,900 32.28 7.38 10.34 13.29
96,901-100,000 35.10 7.70 10.79 13.87
100,001-147,700 35.76 7.78 10.90 14.01
147,701-200,000 40.42 8.39 11.75 15.11
200,001-263,750 40.80 8.45 11.82 15.20
OVER $263,750 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>
Investment objective and policies (cont'd)
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
7
<PAGE>
Why invest in the Fund? (cont'd)
of 8.46% to receive after-tax income equal to the 5.04% tax-free yield provided
by Scudder Ohio Tax Free Fund for the 30-day period ended March 31, 1996. 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.
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
focus on such issuers. 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 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
8
<PAGE>
Fund's Statement of Additional Information dated August 1, 1996.
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
rates, currency exchange rates, and broad or specific equity or fixed-income
9
<PAGE>
Additional information about policies and investments (cont'd)
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 than a diversified investment company would. 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 16% of total employment in
agribusiness. In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, for
the last five years the State rates were below the national rates (4.8% versus
5.6% in 1995). 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
(Continued on page 14)
11
<PAGE>
<TABLE>
<CAPTION>
Purchases
<S> <C>
Opening Minimum initial investment: $1,000; IRAs $500
an account Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send your completed and signed application and check
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds Scudder Shareholder Service
P.O. Box 2291 Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number. Then call
1-800-225-5163 for instructions.
o In Person Visit one of our Funds Centers to complete your application with the help
of a Scudder representative. Funds Center locations are listed under
Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
o In Person Visit one of our Funds Centers to make an additional investment in your
Scudder fund account. Funds Center locations are listed under Shareholder
benefits.
o By Telephone Please see Transaction information--Purchasing shares--
By AutoBuy for more details.
o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
12
<PAGE>
Exchanges and redemptions
Exchanging shares
Minimum investments: $1,000 to establish a new account;
$100 to exchange among existing accounts
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612
-----------------------------------------------------------------------------------------------------------------------
Redeeming shares o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day). You may have redemption
proceeds sent to your predesignated bank account, or redemption proceeds of up
to $50,000 sent to your address of record.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $50,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically. Call
Withdrawal Plan 1-800-225-5163 for more information and an enrollment form.
</TABLE>
13
<PAGE>
Additional information about policies and investments (cont'd)
(Continued from page 11)
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.
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.
14
<PAGE>
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 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.
15
<PAGE>
Distribution and performance information (cont'd)
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 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, 1997.
For the fiscal year ended March 31, 1996, the Adviser received an investment
management fee of 0.21% of the Fund's average daily net assets on an annual
basis.
16
<PAGE>
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
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Fund.
Underwriter
Scudder Investor Services, Inc., a 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 telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.
Custodian
State Street Bank and Trust Company is the Fund's custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone prior to the expiration of the seven-day period will not
be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By 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.
17
<PAGE>
Transaction information (cont'd)
By telephone order. To a limited extent, certain financial institutions may
place orders to purchase shares unaccompanied by payment prior to the close of
regular trading on the New York Stock Exchange (the "Exchange"), normally 4:00
p.m. eastern time, and receive that day's price. Please call 1-800-854-8525 for
more information, including the dividend treatment and method and manner of
payment for Fund shares.
By "AutoBuy." If you elected "AutoBuy" for your account, you can call toll-free
to purchase shares.
The money will be automatically transferred from your predesignated bank
checking account. Your bank must be a member of the Automated Clearing House for
you to use this service. If you did not elect "AutoBuy," call 1-800-225-5163 for
more information.
To purchase additional shares, call 1-800-225-5163. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
will be transferred from your bank checking account in two or three business
days following your call. For requests received by the close of regular trading
on the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "AutoBuy" requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day.
If you purchase shares by "AutoBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "AutoBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.
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 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.
By "AutoSell." If you elected "AutoSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoSell,"
call 1-800-225-5163 for more information.
To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
18
<PAGE>
the day of your call. "AutoSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
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. 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.
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).
19
<PAGE>
Transaction information (cont'd)
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of Fund shares (including exchanges) for any reason including when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in the Fund's share price appears evident.
Tax information
A redemption of shares, 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
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.
20
<PAGE>
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 16 years of
experience in municipal investing and portfolio management.
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact Scudder" for the
address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. Telephone and
fax redemptions and exchanges are subject to termination and their terms are
subject to change at any time by the Fund or the transfer agent. In some cases,
the transfer agent or Scudder Investor Services, Inc. may impose additional
conditions on telephone transactions.
Dividend reinvestment plan
You may have dividends and distributions automatically reinvested in additional
Fund shares. Please call 1-800-225-5163 to request this feature.
Shareholder statements
You receive a detailed account statement every time you purchase or redeem
shares. All of your statements should be retained to help you keep track of
account activity and the cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
21
<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.
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.
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics;
President, Driscoll Associates
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
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
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>
Investment products and services
<TABLE>
<CAPTION>
<S> <C> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder Global Bond Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax free money market+ Scudder High Yield Bond Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Discovery Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++ (a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
</TABLE>
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state and local taxes. *Not available
in all states. +++A no-load variable annuity contract provided by Charter
National Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470. #These funds, advised by Scudder, Stevens &
Clark, Inc., are traded on various stock exchanges. ++For information on
Scudder Treasurers Trust(TM), an institutional cash management service that
utilizes certain portfolios of Scudder Fund, Inc. ($100,000 minimum), call:
1-800-541-7703.
23
<PAGE>
<TABLE>
<CAPTION>
How to contact Scudder
<S> <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 personalized information Scudder Automated
about your Scudder accounts; Information Line
exchanges and redemptions; (SAIL) Visit the Scudder World Wide Web Site at:
or information on any 1-800-343-2890 http://funds.scudder.com
Scudder fund
Investment Information: Or Stop by a Scudder Funds Center:
To receive information about Scudder Investor Many shareholders enjoy the personal, one-on-one
the Scudder funds, for Relations service of the Scudder Funds Centers. Check for a
additional applications and 1-800-225-2470 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*,
institutional cash management service for corporations, funds designed to meet the broad investment
non-profit organizations and trusts which management and service needs of banks and
utilizes certain portfolios of Scudder Fund, Inc.* other institutions, call:
($100,000 minimum), call: 1-800-541-7703. 1-800-854-8525.
</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, 1996, as amended from time to time, may be obtained without
charge by writing Scudder Investor Services, Inc., Two International Place,
Boston, MA 02110-4103 or calling 1-800-225-2470. The Statement, which is
incorporated by reference into this prospectus, has been filed with the
Securities and Exchange Commission.
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.
Scudder
Pennsylvania
Tax Free Fund
Prospectus
August 1, 1996
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, 1996.
Investment management fee (after waiver) 0.19%**
12b-1 fees NONE
Other expenses 0.31%**
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, 1997, 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, 1996. 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, 1996 and
may be obtained without charge by writing or calling Scudder Investor
Services, Inc.
<TABLE>
<CAPTION>
For the
Period
May 28, 1987
(commencement
Years Ended March 31, of operations)
----------------------------------------------------------------------------- to March 31
1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............... $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80 $ 12.00
------ ------ ------ ------ ------ ------ ------ ------ -------
Income from investment operations:
Net investment income (a) ......... .71 .73 .75 .76 .77 .82 .84 .79 .65
Net realized and unrealized gain
(loss) on investment
transactions .................... .25 .15 (.36) .87 .52 .08 .20 .40 (.26)
------ ------ ------ ------ ------ ------ ------ ------ -------
Total from investment operations .... .96 .88 .39 1.63 1.29 .90 1.04 1.19 .39
------ ------ ------ ------ ------ ------ ------ ------ -------
Less distributions:
From net investment income ........ (.71) (.73) (.75) (.76) (.77) (.82) (.84) (.85) (.59)
From net realized gains on
investment transactions ......... (.07) (.03) (.09) (.21) (.07) -- (.01) (.06) --
------ ------ ------ ------ ------ ------ ------ ------ -------
Total distributions ................. (.78) (.76) (.84) (.97) (.84) (.82) (.85) (.91) (.59)
------ ------ ------ ------ ------ ------ ------ ------ -------
Net asset value, end of period ...... $13.31 $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $ 11.80
====== ====== ====== ====== ====== ====== ====== ====== =======
Total Return (%) (b) ................ 7.45 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) ...................... 76 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 .50*
Ratio of net investment income to
average daily net assets (%) ...... 5.30 5.74 5.42 5.79 6.05 6.67 6.78 7.09 7.16*
Portfolio turnover rate (%) ......... 11.1 26.2 17.4 29.2 11.2 7.8 2.0 13.5 97.6*
<FN>
(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 ........... $ .05 $ .06 $ .06 $ .07 $ .08 $ .07 $ .07 $ .07 $ .05
Operating expense ratio
before expense
reductions (%) ................ .91 .94 .95 1.02 1.13 1.43 1.84 2.43 5.75*
(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 $100 billion for many private accounts and
over 50 mutual fund portfolios. We manage the mutual funds in a special program
for the American Association of Retired Persons, as well as the fund options
available through Scudder Horizon Plan, a tax-advantaged variable annuity. We
also advise The Japan Fund and nine closed-end funds that invest in countries
around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds as well as IRAs,
401(k)s, Keoghs and other retirement plans.
Services available to all shareholders include toll-free access to the
professional service representatives of Scudder Investor Relations, easy
exchange among funds, shareholder reports, informative newsletters and the
walk-in convenience of Scudder Funds Centers.
All Scudder mutual funds are pure no-load(TM). This means you pay no commissions
to purchase or redeem your shares or to exchange from one fund to another. There
are no "12b-1" fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/ Daniel Pierce
Scudder Pennsylvania Tax
Free Fund
Investment objective
o income exempt from Pennsylvania personal
income tax and regular federal income tax
Investment characteristics
o primarily long-term investment-grade
municipal securities tax-exempt in
Pennsylvania
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
Distribution and performance information 10
Purchases 12
Exchanges and redemptions 13
Fund organization 14
Transaction information 15
Shareholder benefits 18
Trustees and Officers 21
Investment products and services 22
How to contact Scudder 23
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, 1996, the average monthly dollar-weighted market
value of the bonds in the Fund's portfolio rated lower than Baa by Moody's or
BBB by S&P or Fitch, or their equivalent, was 0%.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds"), have
produced higher yields 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,
5
<PAGE>
Investment objective and policies (cont'd)
that income from these obligations is exempt from both Pennsylvania personal
income tax and regular federal income tax ("Pennsylvania municipal securities").
These securities include municipal bonds, which meet longer-term capital needs
and generally have maturities of more than one year when issued. Municipal bonds
include general obligation bonds, which are secured by the issuer's pledge of
its faith, credit and taxing power for payment of principal and interest, and
revenue bonds, which may be issued to finance projects owned or used by either
private or public entities and which include bonds issued to finance industrial
enterprises and pollution control facilities. The Fund may invest in other
municipal securities such as variable rate demand instruments. The Fund may also
invest in municipal notes of issuers located in Pennsylvania and other
qualifying issuers. They are generally used to provide short-term capital needs
and have maturities of one year or less.
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>
TO EQUAL HYPOTHETICAL TAX-FREE YIELDS
OF 5%, 7% AND 9%, A TAXABLE INVESTMENT
COMBINED WOULD HAVE TO EARN*:
1996 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
INDIVIDUAL
--------------------------------------
<C> <C> <C> <C> <C>
$24,001-58,150 30.02% 7.15% 10.00% 12.86%
58,151-121,300 32.93 7.45 10.44 13.42
121,301-263,750 37.79 8.04 11.25 14.47
OVER $263,750 41.29 8.52 11.92 15.33
JOINT RETURN
--------------------------------------
$40,101-96,900 30.02% 7.15% 10.00% 12.86%
96,901-147,700 32.93 7.45 10.44 13.42
147,701-263,750 37.79 8.04 11.25 14.47
OVER $263,750 41.29 8.52 11.92 15.33
<FN>
* 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.
</FN>
</TABLE>
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 7.97% to receive after-tax income equal to the 4.96% tax-free
yield provided by Scudder Pennsylvania Tax Free Fund for the 30-day period ended
March 31, 1996. 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.
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 focus on investments of Pennsylvania issuers. 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, 1996.
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
8
<PAGE>
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 than a diversified investment company would. 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
investment-grade are commonly referred to as "junk bonds" and involve greater
price volatility and higher degrees of speculation with respect to the payment
9
<PAGE>
Additional information about policies and investments (cont'd)
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 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
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.
10
<PAGE>
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 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
(Continued on page 14)
11
<PAGE>
Purchases
<TABLE>
<CAPTION>
Opening
an account Minimum initial investment: $1,000; IRAs $500
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
<S> <C> <C> <C>
o By Mail Send your completed and signed application and check
Make checks
payable to "The
Scudder Funds."
by regular mail to: or by express, registered,
or certified mail to:
The Scudder Funds Scudder Shareholder
P.O. Box 2291 Service Center
Boston, MA 42 Longwater Drive
02107-2291 Norwell, MA
02061-1612
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
Then call 1-800-225-5163 for instructions.
o In Person Visit one of our Funds Centers to complete your application
with the help of a Scudder representative. Funds Center
locations are listed under Shareholder benefits.
- -----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
shares See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete
Scudder Funds." Fund name, to the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
o In Person Visit one of our Funds Centers to make an additional
investment in your Scudder fund account. Funds Center
locations are listed under Shareholder benefits.
o By Telephone Please see Transaction information--Purchasing shares--
By AutoBuy or By telephone order for more details.
o By Automatic You may arrange to make investments on a regular basis
Investment Plan through automatic deductions from your bank checking
($50 minimum) account. 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 account;
shares $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;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds Scudder Shareholder 1-800-821-6234
P.O. Box 2291 Service Center
Boston, MA 02107-2291 42 Longwater Drive
Norwell, MA
02061-1612
-----------------------------------------------------------------------------------------------------------------------
Redeeming o By Telephone To speak with a service representative, call 1-800-225-5163 from
shares 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
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;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $50,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
</TABLE>
13
<PAGE>
Distribution and performance information (cont'd)
(Continued from page 11)
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, 1997.
For the year ended March 31, 1996, 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
subsidiary of the Adviser is the transfer, shareholder servicing and
dividend-paying agent for the Fund.
Underwriter
Scudder Investor Services, Inc., a 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 telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
14
<PAGE>
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.
Custodian
State Street Bank and Trust Company is the Fund's custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone prior to the expiration of the seven-day period will not
be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By 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.
By telephone order. To a limited extent, certain financial institutions may
place orders to purchase shares unaccompanied by payment prior to the close of
regular trading on the New York Stock Exchange (the "Exchange"), normally 4:00
p.m. eastern time, and receive that day's price. Please call 1-800-854-8525 for
more information, including the dividend treatment and method and manner of
payment for Fund shares.
By "AutoBuy." If you elected "AutoBuy" for your account, you can call toll-free
to purchase shares. The money will be automatically transferred from your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoBuy," call
1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases must be for at
least $250 but not more than $250,000. Proceeds in the amount of your purchase
15
<PAGE>
Transaction information (cont'd)
will be transferred from your bank checking account in two or three business
days following your call. For requests received by the close of regular trading
on the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. "AutoBuy" requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day.
If you purchase shares by "AutoBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "AutoBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.
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 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.
By "AutoSell." If you elected "AutoSell" for your account, you can call
toll-free to redeem shares. The money will be automatically transferred to your
predesignated bank checking account. Your bank must be a member of the Automated
Clearing House for you to use this service. If you did not elect "AutoSell,"
call 1-800-225-5163 for more information.
To redeem shares, call 1-800-225-5163. Redemptions must be for at least $250.
Proceeds in the amount of your redemption will be transferred to your bank
checking account in two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "AutoSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"AutoSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
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,
16
<PAGE>
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. 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.
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).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of Fund shares (including exchanges) for any reason including when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in the Fund's share price appears evident.
Tax information
A redemption of shares, 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
17
<PAGE>
Transaction information (cont'd)
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
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 16 years of
experience in municipal investing and portfolio management.
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
18
<PAGE>
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 Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Funds Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Funds Centers in Boca Raton, Boston, Chicago,
Cincinnati, Los Angeles, New York, Portland (OR), San Diego, San Francisco and
Scottsdale.
T.D.D. service for the hearing impaired
Scudder's full range of investor information and shareholder services is
available to hearing impaired investors through a toll-free T.D.D. (Telephone
Device for the Deaf) service. If you have access to a T.D.D., call
1-800-543-7916 for investment information or specific account questions and
transactions.
19
<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.
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.
20
<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; Executive Fellow, Center for Business Ethics; President,
Driscoll Associates
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
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
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>
<C> <C>
The Scudder Family of Funds Income
Money market Scudder Emerging Markets Income Fund
Scudder Cash Investment Trust Scudder Global Bond Fund
Scudder U.S. Treasury Money Fund Scudder GNMA Fund
Tax free money market+ Scudder High Yield Bond Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Discovery Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
------------------------------------------------------------------------------------------------------------------------
Retirement Plans and Tax-Advantaged Investments
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan*+++(a variable annuity) Profit Sharing and
401(k) Plans Money Purchase Pension Plans
------------------------------------------------------------------------------------------------------------------------
Closed-end Funds#
The Argentina Fund, Inc. Scudder New Europe Fund, Inc.
The Brazil Fund, Inc. Scudder World Income Opportunities Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc. Institutional Cash Management
The Latin America Dollar Income Fund, Inc. Scudder Institutional Fund, Inc.
Montgomery Street Income Securities, Inc. Scudder Fund, Inc.
Scudder New Asia Fund, Inc. Scudder Treasurers Trust(TM)++
------------------------------------------------------------------------------------------------------------------------
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. +++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>
22
<PAGE>
How to contact Scudder
<TABLE>
<CAPTION>
Account Service and Information: Please address all correspondence to:
<S> <C> <C>
For existing account Scudder Investor The Scudder Funds
service and transactions Relations P.O. Box 2291
1-800-225-5163 Boston, Massachusetts
02107-2291
For personalized Scudder Automated
information about your Information Line
Scudder accounts; (SAIL) Visit the Scudder World Wide Web Site at:
exchanges and 1-800-343-2890
redemptions; or http://funds.scudder.com
information on any
Scudder fund
Investment Information: Or Stop by a Scudder Funds Center:
To receive information Scudder Investor Many shareholders enjoy the personal, one-on-one
about the Scudder funds, Relations service of the Scudder Funds Centers. Check for a
for additional applications Funds Center near you--they can be found in the
and prospectuses, or for 1-800-225-2470 following cities:
investment questions
For establishing 401(k) Scudder Defined Boca Raton New York
and 403(b) plans Contribution Boston Portland, OR
Services Chicago San Diego
1-800-323-6105 Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM), an For information on Scudder Institutional Funds*,
institutional cash management service for corpo- funds designed to meet the broad investment
rations, non-profit organizations and trusts which management and service needs of banks and
utilizes certain portfolios of Scudder Fund, Inc.* other institutions, call: 1-800-854-8525.
($100,000 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>
23
<PAGE>
<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, 1996
- --------------------------------------------------------------------------------
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, 1996, as amended from time to time, a copy of which may be
obtained without charge by writing to Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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
General Investment Objective and Policies of Scudder Massachusetts Tax Free Fund.............................2
Municipal Obligations........................................................................................2
Management Strategies........................................................................................5
Special Considerations.......................................................................................6
Trustees' Power to Change Objective and Policies............................................................19
Investment Restrictions.....................................................................................19
PURCHASES............................................................................................................23
Additional Information About Opening an Account.............................................................23
Checks......................................................................................................23
Wire Transfer of Federal Funds..............................................................................24
Additional Information About Making Subsequent Investments by AutoBuy.......................................24
Share Price.................................................................................................25
Share Certificates..........................................................................................25
Other Information...........................................................................................25
EXCHANGES AND REDEMPTIONS............................................................................................25
Exchanges...................................................................................................25
Redemption by Telephone.....................................................................................26
Redemption By AutoSell......................................................................................27
Redemption by Mail or Fax...................................................................................27
Redemption by Write-a-Check.................................................................................27
Other Information...........................................................................................28
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................28
The Pure No-Load(TM) Concept................................................................................28
Dividend and Capital Gain Distribution Options..............................................................29
Scudder Funds Centers.......................................................................................29
Reports to Shareholders.....................................................................................30
Transaction Summaries.......................................................................................30
THE SCUDDER FAMILY OF FUNDS..........................................................................................30
SPECIAL PLAN ACCOUNTS................................................................................................33
Automatic Withdrawal Plan...................................................................................33
Cash Management System -- Group Sub-Accounting Plan
for Trust Accounts, Nominees and Corporations..........................................................34
Automatic Investment Plan...................................................................................34
Uniform Transfers/Gifts to Minors Act.......................................................................34
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................35
PERFORMANCE INFORMATION..............................................................................................35
Average Annual Total Return.................................................................................35
Cumulative Total Return.....................................................................................36
Total Return................................................................................................36
Yield.......................................................................................................36
Tax-Equivalent Yield........................................................................................37
Comparison of Portfolio Performance.........................................................................37
ORGANIZATION OF THE FUNDS............................................................................................41
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER...................................................................................................41
Personal Investments by Employees of the Adviser............................................................44
TRUSTEES AND OFFICERS................................................................................................45
REMUNERATION.........................................................................................................47
DISTRIBUTOR..........................................................................................................48
TAXES................................................................................................................48
Federal Taxation............................................................................................49
State Taxation..............................................................................................52
PORTFOLIO TRANSACTIONS...............................................................................................52
Brokerage Commissions.......................................................................................52
Portfolio Turnover..........................................................................................53
NET ASSET VALUE......................................................................................................53
ADDITIONAL INFORMATION...............................................................................................54
Experts.....................................................................................................54
Shareholder Indemnification.................................................................................54
Ratings of Municipal Obligations............................................................................54
Commercial Paper Ratings....................................................................................55
Glossary....................................................................................................56
Other Information...........................................................................................57
FINANCIAL STATEMENTS.................................................................................................58
Massachusetts Limited Term Tax Free Fund....................................................................58
Massachusetts Tax Free Fund.................................................................................58
</TABLE>
ii
<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.
1
<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."
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.
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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 andspecial types of municipal obligations as well as numerous
differences in the security of municipal obligations both within and between the
two principal classifications above.
Each Fund may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
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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 (the "1933
Act") prior to offer and sale unless an exemption from such registration is
available, municipal obligations which are not publicly offered may nevertheless
be readily marketable. A secondary market exists for municipal obligations which
were not publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in a Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. In addition,
Stand-by Commitments and demand obligations also enhance marketability.
For the purpose of a Fund's investment restrictions, the identification
of the "issuer" of municipal obligations which are not general obligation bonds
is made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
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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 March 31, 1996 for Scudder Massachusetts
Tax Free Fund and October 31, 1995 for Scudder Massachusetts Limited Term Tax
Free Fund, the average monthly dollar-weighted market value of the bonds in each
Fund's portfolio rated lower than BBB by Moody's, S&P or Fitch, or their
equivalent was 0%.
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:
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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
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.
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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 May 1996 was 4.9% compared to a
national average of 5.6%. Comparisons between 1994 data and data for earlier
years are not advisable, due to the Current Population survey redesign. As of
December 31, 1995 the unemployment compensation trust fund was running a surplus
of $514 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.
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.
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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.
Fiscal 1995 tax revenue collections totaled $11.163 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $11.151 billion, and approximately $556 million, or
5.2%, above fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and
other sources, including non-tax revenues collected in fiscal 1995 totaled
$16.387 billion, approximately $837 million, or 5.4%, above fiscal 1994 budgeted
revenues of $15.550 billion. Budgeted expenditures and other uses of funds in
fiscal 1995 were approximately $16.251 billion, approximately $728 million, or
4.7% above fiscal 1994 budgeted expenditures and uses of $15.523 billion. The
Commonwealth ended fiscal 1995 with an operating gain of $137 million and an
ending fund balance of $726 million.
State Budget. Budgeted revenues and other sources to be collected in
fiscal 1996 are estimated by the Executive Office for Administration and Finance
to be approximately $19.762 billion. This amount includes estimated fiscal 1996
tax revenues of $11.604 billion, which is approximately $441 million, or 4.0%,
higher than fiscal 1995 tax revenues. The tax revenue projection is based upon
the consensus estimate of approximately $11.639 billion, adjusted for a revenue
reduction of $1.7 million resulting from bank tax reform enacted in July, 1995,
a reduction totaling $44 million resulting from the corporate excise tax reform
enacted in November, 1995 and a further reduction of $5 million projected to
result from additional corporate excise tax reform still pending before the
Legislature, as well as approximately $16 million from certain revenue
maximization initiatives. Through January, 1996, tax revenue collections have
totaled approximately $6.619 billion, approximately $337 million, or 6.0%,
greater than tax revenue collections for the same period in fiscal 1995.
Fiscal 1996 non-tax revenues are projected to total approximately
$5.158 billion, approximately $66 million, or 1.3% less, than fiscal 1995
non-tax revenues or approximately $5.224 billion. Federal reimbursements are
projected to decrease by approximately $1 million, from approximately $2.970
billion in fiscal 1995 to $2.969 billion in fiscal 1996, primarily as a result
of increased reimbursements for Medicaid spending, offset by a reduction in
reimbursements received in fiscal 1995 for one-time Medicaid expenses incurred
in fiscal 1994 and fiscal 1995.
On June 30, 1996, the Governor signed a $17.45 billion budget for the
1997 fiscal year, which is a 3.2% increase in spending over fiscal 1995. When
signed, the budget marked the seventh consecutive year in which the
Commonwealth's budget has been balanced without new taxes or deficit borrowing.
The fiscal 1997 budget is based on numerous spending and revenue
estimates, the achievement of which cannot be assured.
Debt Limits and Outstanding Debt. Growth of tax revenues in the
Commonwealth is limited by law. Tax revenues in each of fiscal years 1988 to
1992 were lower than the limits set by law. In addition, during each of the
fiscal years 1989 through 1991, the official tax revenue forecasts made at the
beginning of the year proved to be substantially more optimistic than the actual
results. The fiscal 1992 budget initially was based on the joint revenue
estimate of $8.292 billion, a 7% decrease from 1991, while actual tax revenues
were $9.484 billion, a 5.4% increase over fiscal 1991. The fiscal 1993 budget
initially was based on the joint revenue estimate of $9.685 billion, an increase
of 2.1% over 1992. The actual 1993 tax revenues were $9.930 billion, a 4.7%
increase over 1992. On May 13, 1993, the tax revenue forecast of the 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.
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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.
Fiscal 1995 tax revenue collections were approximately $11.163 billion. Fiscal
1996 tax revenue collections are projected to be approximately $11.653 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
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
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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. Fiscal 1995 expenditures for direct Local Aid
were $2.976 billion. It is estimated that fiscal 1996 expenditures for direct
Local Aid will be $3.241 billion, which is an increase of approximately 8.9%
above the fiscal 1995 level. The additional amount of indirect Local Aid
provided over and above direct Local Aid was approximately $2.069 billion in
fiscal 1994. Local aid payments explicitly remain subject to annual
appropriation, and fiscal 1992, 1993, 1994 and 1995 appropriations for local aid
did not meet, and fiscal 1996 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.
Fiscal 1995 Medicaid expenditures were approximately $3.398 billion. The
Executive Office for Administration and Finance estimates that fiscal 1996
Medicaid expenditures were approximately $3.387 billion. 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 $1.550 billion in fiscal 1995.
For fiscal 1996, 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.
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 $8.227 billion as of January 1, 1995,
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.
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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
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
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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
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
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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.
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities" or "not readily
marketable," i.e., securities which cannot be sold to the public without
registration under the Securities Act of 1933 or the availability of an
exemption from registration (such as Rules 144 or 144A) or because they are
subject to other legal or contractual delays in or restrictions on resale.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. A Fund may be deemed to be an "underwriter" for
purposes of the 1933 Act when selling restricted securities to the public, and
in such event the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading.
Repurchase Agreements. 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,
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
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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
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.
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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.
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
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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
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
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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.
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
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<PAGE>
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.
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
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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.
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.
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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;
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;
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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
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 10% of
the value of the Fund's total 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;
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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;
(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;
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(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 10% of the value of the Fund's total 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.
Scudder Massachusetts Tax Free Fund and Scudder Massachusetts Limited
Term Tax Free Fund each 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.
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.
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 cancellation. If the purchaser is a
shareholder, a Fund will have the authority, as agent of the shareholder, to
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<PAGE>
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 Scudder Investor Services, Inc. (the "Distributor")
pays 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.
Additional Information About Making Subsequent Investments by AutoBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the AutoBuy program, may purchase shares of a Fund by telephone. Through this
service shareholders may purchase up to $250,000 but not less than $250. To
purchase shares by AutoBuy, shareholders should call before 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. AutoBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
AutoBuy and redeem them within seven days of the purchase, the Fund may hold the
redemption proceeds for a period of up to seven business days. If you purchase
shares and there are insufficient funds in your bank account the purchase will
be canceled and you will be subject to any losses or fees incurred in the
transaction. Auto Buy transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
In order to request purchases by AutoBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish AutoBuy may so indicate on the application.
Existing shareholders who wish to add AutoBuy to their account may do so by
completing an AutoBuy Enrollment Form. After sending in an enrollment form
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
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<PAGE>
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 will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than 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 Corporation's 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 the
Distributor, that member may, at its discretion, charge a fee for that service.
The Trustees, Distributor and the Funds' principal underwriter, 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, at current net asset value, through
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Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
No commission is charged to the shareholder for any exchange described
above. An exchange into another Scudder fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder, and
the proceeds of such an exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. Each Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. Each Fund and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated.
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
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<PAGE>
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 AutoSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the AutoSell program may sell shares of a Fund by telephone. To sell shares by
AutoSell, shareholders should call before 4 p.m. eastern time. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be redeemed at the net asset value per share
calculated at the close of trading on the day of your call. AutoSell requests
received after the close of regular trading on the Exchange will begin their
processing and be redeemed at the net asset value calculated the following
business day. AutoSell transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
In order to request redemptions by AutoSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish AutoSell may so indicate on the application.
Existing shareholders who wish to add AutoSell to their account may do so by
completing an AutoSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
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 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
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<PAGE>
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) the SEC may by order permit such a suspension for the
protection of the Trust's shareholders; provided that applicable rules and
regulations of the SEC (or any succeeding governmental authority) shall govern
as to whether the conditions prescribed in (b) or (c) exist.
If transactions at any time reduce a shareholder's account balance in 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.
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 Rule 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
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<PAGE>
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 No-Load Fund with
YEARS Pure No-Load(TM) 8.50% Load Fund Load Fund with 0.25% 12b-1
Fund 0.75% 12b-1 Fee 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.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders 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 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 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 the Distributor
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
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<PAGE>
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 Fund's prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.
MONEY MARKET
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital, and consistent therewith, to maintain the liquidity of
capital and to provide current income through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.
INCOME
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued in
emerging markets.
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.
Scudder High Yield Bond Fund seeks to provide a high level of current
income and, secondarily, capital appreciation through investment
primarily in below investment grade domestic debt securities.
Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.
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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 Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with the minimization of
reinvestment risks through investments primarily in zero coupon
securities.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") is designed to provide investors
with income exempt from regular federal income tax while seeking
stability of principal. STFMF seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may
not be possible.
Scudder California Tax Free Money Fund* is designed to provide
California taxpayers income exempt from California state and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
Scudder New York Tax Free Money Fund* is designed to provide New York
taxpayers income exempt from New York state, New York City and regular
federal income taxes, and seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, although
in certain circumstances this may not be possible.
TAX FREE
Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in investment-grade
municipal securities.
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Managed Municipal Bonds seeks to provide income which is exempt
from regular federal income tax primarily through investments in
long-term municipal securities with an emphasis on high quality.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.
Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.
Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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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 Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Global Discovery Fund seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.
Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S. and
foreign issuers. Income is an incidental consideration.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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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 Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.
The Japan Fund, Inc. seeks capital appreciation through investment
in Japanese securities, primarily in common stocks of Japanese
companies.
The net asset values of most Scudder Funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder Funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; easy telephone exchanges
into other Scudder funds; shares redeemable at net asset value at any time.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By Automatic
Investment Plan" and "Exchanges and redemptions--By Automatic Withdrawal
Plan" in the Funds' prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to 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
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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.
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.
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.
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DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and performance information--Dividends and
capital gains distributions" in the Funds' 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):
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 Limited Term
Tax Free Fund for the one year period ended October 31, 1995, and life of the
Fund(1) are 8.08% and 4.66%, respectively.
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The average annual total return of Scudder Massachusetts Tax Free Fund
for the one and five year periods ended March 31, 1996, and life of the Fund(2)
are 8.28%, 8.75%, and 8.76%, respectively.
(1) For the period beginning February 15, 1994.
(2) For the period beginning May 28, 1987.
If the Adviser had not maintained Scudder Massachusetts Limited Term
Tax Free Fund expenses and had imposed a full management fee, the average annual
total return for the one year period and life of the Fund would have been lower.
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, 1995 the cumulative total return of Massachusetts
Limited Term Tax Free Fund for the one year period and life of the Fund(1) was
8.08%. If the Adviser had not maintained Massachusetts Limited Term Tax Free
Fund expenses and had imposed a full management fee, the cumulative total return
for the one year period and life of Fund would have been lower.
(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, 1996, and life of the Fund(2) were 8.28%,
52.12%, and 110.25%, 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.
Yield
Yield 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:
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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, 1995 was 4.17%.
The 30-day net-annualized SEC yield of Massachusetts Tax Free Fund for
the period ended March 31, 1996 was 4.82%.
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 7.40% to receive after-tax income equal to the 4.17%
tax-free yield of Massachusetts Limited Term Tax Free Fund for the 30-day period
ended October 31, 1995. 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 9.07% to receive after-tax income equal to the 4.82% tax-free yield of
Massachusetts Tax Free Fund for the 30-day period ended on March 31, 1996.
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.
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
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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.
Scudder's Theme: Build Create Provide. Marketing and fund literature may refer
to Scudder's theme: "Build Create Provide." This theme intends to encapsulate
the composition of a sound investment philosophy, one through which Scudder can
help provide investors appropriate avenues for pursuing dreams. Individuals
recognize the need to build investment plans that are suitable and directed at
achieving one's financial goals. The desired result from planning and a
long-term commitment to it is the ability to build wealth over time. While there
are no guarantees in the pursuit of wealth through investing, Scudder believes
that a sound investment plan can enhance one's ability to achieve financial
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goals that are clearly defined and appropriately approached. Wealth, while a
relative term, may be defined as the freedom to provide for those interests
which you hold most important -- your family, future, and/or your community.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
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.
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<PAGE>
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
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.
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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.
41
<PAGE>
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Scudder Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder Institutional Fund,
Inc., Scudder International Fund, Inc., Scudder Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Securities Trust, Scudder State Tax Free
Trust, Scudder Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S.
Treasury Money Fund, Scudder Variable Life Investment Fund, Scudder World Income
Opportunities Fund, Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The
First Iberian Fund, Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The
Latin America Dollar Income Fund, Inc. Some of the foregoing companies or trusts
have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $12 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.
In selecting the securities in which 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 8, 1995 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, 1996 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
42
<PAGE>
and assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of each Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Trust and makes available, without
expense to the Trust, the services of such Advisers, Directors, Officers, and
employees as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities and provides investment
advisory, research and statistical facilities and all clerical services relating
to research, statistical and investment work.
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 0.60 of 1% of the average daily net assets of
the Fund.
The Agreements provide that if a Fund's expenses, exclusive of taxes,
interest, and extraordinary expenses, exceed specified limits, such excess, up
to the amount of the management fee, will be paid by the Adviser. The Adviser
retains the ability to be repaid by a Fund if expenses fall below the specified
limit prior to the end of the fiscal year. These expense limitation arrangements
can decrease a Fund's expenses and improve its performance. For the 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. For the fiscal year ended October 31, 1995, pursuant
to these agreements, the investment management fee incurred by Massachusetts
Limited Term Tax Free Fund was $25,208. Had the Adviser imposed the management
fee for the period February 15, 1994 (commencement of operations) to October 31,
1994 and for the fiscal year ended October 31, 1995, the investment management
fee would have equaled $95,975 and $297,710, respectively. For the fiscal year
ended October 31, 1995 for Massachusetts Limited Term Tax Free Fund, the amount
to be reimbursed by the Adviser equaled $39,388.
The Adviser has agreed to maintain the annualized expenses of
Massachusetts Limited Term Tax Free Fund at not more than 0.75% of the average
daily net assets of the Fund until July 31, 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, 1994, 1995 and 1996, pursuant to these agreements, the
investment management fees incurred by Massachusetts Tax Free Fund were $85,149,
$925,856 and $1,826,799, respectively. Had the Adviser imposed a full investment
management fee for the fiscal years ended March 31, 1994, 1995 and 1996, the
investment management fees would have equaled $2,042,707, $1,853,862 and
$1,858,029, respectively. For the fiscal year ended March 31, 1996 for
Massachusetts Tax Free Fund, the amount not imposed by the Adviser equaled
$31,230.
The Adviser continued 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
43
<PAGE>
provides that the principal underwriter shall pay all expenses of offer and sale
of a Fund's shares except the expenses of preparation and filing of registration
statements under the Securities Act of 1933 and under state securities laws,
issue and transfer taxes, if any, and a portion of the prospectuses used by a
Fund. In the event that a Fund ceases to employ a principal underwriter to act
as the distributor of a Fund's shares, the expenses of distributing a Fund's
shares will be borne by the Adviser unless a Fund shall have adopted a plan
pursuant to Rule 12b-1 under the 1940 Act providing that a Fund shall be
responsible for some or all of such distribution expenses.
Each Agreement requires the Adviser to return to a Fund all or a
portion of advances of its management fee to the extent annual expenses of a
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which a Fund's shares are offered for sale.
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.
44
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
<S> <C> <C> <C>
David S. Lee (62)*+@ President and Managing Director of Scudder, President, Assistant
Trustee Stevens & Clark, Inc. Treasurer and Director
Henry P. Becton, Jr. (52) Trustee President and General Manager, --
WGBH WGBH Educational Foundation
125 Western Avenue
Allston, MA
Dawn-Marie Driscoll (49) Trustee Executive Fellow, Center for --
5760 Flamingo Drive Business Ethics; President,
Cape Coral, FL Driscoll Associates
Peter B. Freeman (64)@ Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI
Dudley H. Ladd (52)*+ Trustee Managing Director of Scudder, Senior Vice President
Stevens & Clark, Inc. and Director
Wesley W. Marple, Jr. (64)@ Trustee Professor of Business --
413 Hayden Hall Administration, Northeastern
360 Huntington Avenue University College of Business
Boston, MA Administration
Juris Padegs (64)*# Trustee Managing Director of Scudder, Vice President and
Stevens & Clark, Inc. Director
Daniel Pierce (62)*+@ Trustee Chairman of the Board and Vice President,
Managing Director of Scudder, Director and Assistant
Stevens & Clark, Inc. Treasurer
Jean C. Tempel (53) Trustee General Partner, --
Ten Post Office Square TL Ventures
Suite 1325
Boston, MA
Donald C. Carleton (62)+ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Philip G. Condon (45)+ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Jerard K. Hartman (63)# Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Thomas W. Joseph (57)+ Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer and
Assistant Clerk
45
<PAGE>
Jeremy L. Ragus (44)+ Vice President Principal of Scudder, Stevens & --
Clark, Inc.
Rebecca Wilson (34)+ Vice President Assistant Vice President of --
Scudder, Stevens & Clark, Inc.
Thomas F. McDonough (49)+ Vice President and Principal of Scudder, Stevens & Clerk
Secretary Clark, Inc.
Pamela A. McGrath (43)+ Vice President and Managing Director of Scudder, --
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell (51)# Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Coleen Downs Dinneen (35)+ Assistant Secretary Vice President of Scudder, Assistant Clerk
Stevens & Clark, Inc.
<FN>
* 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.
</FN>
</TABLE>
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of June 30, 1996 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, 1996 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, 1996 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
607,950 shares or 11.49% 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, 1996 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
2,242,654 shares or 9.63% 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, 1996, 287,612 shares in the aggregate, or 5.43% of the
outstanding shares, of Scudder Massachusetts Limited Term Tax Free Fund were
held in the nominees of Fiduciary Trust Company. Fiduciary Trust Company may be
46
<PAGE>
deemed to be beneficial owner of certain of these shares but disclaims any
beneficial ownership therein.
As of June 30, 1996, 2,295,998 shares in the aggregate, 9.86% 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, 1996 no person
owned beneficially more than 5% of either Fund's outstanding shares, except as
stated above.
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, 1995 such fees totaled $12,831 for
Scudder Massachusetts Limited Term Tax Free Fund, and for the fiscal year ended
March 31, 1996, such fees totaled $14,245 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, 1995
(1) (2) (3) (4) (5)
Pension or Total Compensation
Retirement Benefits Estimated Annual From Scudder State Tax
Name of Person, Aggregate Compensation from Accrued As Part of Benefits Upon Free Trust and Fund
Position Scudder State Tax Free Trust* Fund Expenses Retirement Complex Paid to Trustee
-------- ----------------------------- ------------- ---------- -----------------------
<S> <C> <C> <C> <C>
Henry P. Becton, Jr., $15,800 N/A N/A $82,800
Trustee (15 funds)
Dawn-Marie Driscoll, $16,100 N/A N/A $92,800
Trustee (16 funds)
Peter B. Freeman, $16,100 N/A N/A $126,750
Trustee (31 funds)
Wesley W. Marple, Jr., $16,100 N/A N/A $93,100
Trustee (15 funds)
Jean C. Tempel, $16,100 N/A N/A $92,200
Trustee (15 funds)
</TABLE>
47
<PAGE>
* 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 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, 1996, and
from year to year thereafter only if its continuance is approved annually by a
majority of the members of the Board of Trustees who are not parties to such
agreement or interested persons of any such party and either by vote of a
majority of the Board of Trustees or a majority of the outstanding voting
securities of the Trust. The underwriting agreement was last approved by the
Trustees on August 8, 1995.
Under the 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.
48
<PAGE>
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.
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, at least 98% of the excess of its capital gains over capital losses
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed. Each Fund has adjusted its distribution policies to minimize any
adverse impact from this tax or eliminate its application.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward or post-October loss of a fund.
Scudder Massachusetts Tax Free Fund and Massachusetts Limited Term Tax Free Fund
intend to offset realized capital gains by using their capital loss
carryforwards before distributing any gains. In addition, Scudder Massachusetts
Tax Free Fund intends to offset realized capital gains by using its post-October
loss before distributing gains. As of March 31, 1996, Scudder Massachusetts Tax
Free Fund had a net capital loss carryforward of approximately $1,283,000 which
may be applied against realized capital gains of each succeeding year until
fully utilized or until March 31, 2003, the expiration date, whichever occurs
first. In addition, Scudder Massachusetts Tax Free Fund, from November 1, 1995
through March 31, 1996, incurred approximately $111,000 of net realized capital
losses which the Fund intends to elect to defer and treat as arising in the year
ended March 31, 1997 as permitted by tax regulations. As of October 31, 1995,
Scudder Massachusetts Limited Term Tax Free Fund had a net capital loss
carryforward of approximately $26,000, which may be applied against realized
capital gains of each succeeding year until fully utilized or until October 31,
2002, the expiration date, 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
49
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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.
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 26% 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.
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Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Fund will not be deductible for federal income tax purposes. Under
rules used by the IRS to determine when borrowed funds are used for the purpose
of purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain governmental obligations to persons who are "substantial
users" (or persons related thereto) of facilities financed by such obligations.
Neither Fund has undertaken any investigation as to the users of the facilities
financed by bonds in such Fund's portfolio.
Distributions by each Fund result in a reduction in the net asset value
of a Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder, to the extent it is derived from other than tax-exempt interest, as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which, to the extent it is derived from other than tax-exempt
interest, will nevertheless be taxable to them.
All futures contracts entered into by a Fund and all listed nonequity
options written or purchased by a Fund (including options on futures contracts
and options on securities indices) will be governed by Section 1256 of the Code.
Absent a tax election to the contrary, gain or loss attributable to the lapse,
exercise or closing out of any such position generally will be treated as 60%
long-term and 40% short-term, and on the last trading day of a Fund's fiscal
year, all outstanding Section 1256 positions will be marked to market (i.e.
treated as if such positions were closed out at their closing price on such
day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term. 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
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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
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 Scudder Fund Accounting
Corporation for appraisal purposes, or who supply research, market and
statistical information to a Fund. The term "research, market and statistical
information" includes advice as to the value of securities, the advisability of
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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.
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 and 1995 were 26.3% and
27.4%, respectively. Massachusetts Tax Free Fund's portfolio turnover rate for
the fiscal periods ended March 31, 1994, 1995 and 1996 were 17.0%, 10.2% and
20.9%, 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
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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
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
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giving security to principal and interest adequate at present but may be
unreliable over any period of time. Such bonds have speculative elements as well
as investment-grade characteristics. Securities rated Ba or below by Moody's are
considered below investment grade, with factors giving security to principal and
interest inadequate and potentially unreliable over any period of time. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small. Such securities are
commonly referred to as "junk" bonds and as such they carry a high margin of
risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG-1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG-2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest quality ratings categories of S&P for municipal bonds
are AAA (Prime), AA (High-grade), A (Good-grade), BBB (Investment-grade) and BB
or B (Below investment-grade). Bonds rated AAA have the highest rating assigned
by S&P to a municipal obligation. Capacity to pay interest and repay principal
is extremely strong. Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only in a small
degree. Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. Bonds rated BBB have an adequate capacity
to pay interest and to repay principal. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds of this category than for bonds of higher rated
categories. Securities rated BB or below by S&P are considered below investment
grade, with factors 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
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with allowance made for unusual circumstances. Typically, the issuer's industry
is well established and the issuer has a strong position within the industry.
The reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
The rating F-1+ is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1+.
Relative strength or weakness of the above factors determine how the
issuer's commercial paper is rated within the above categories.
Glossary
1. Bond
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
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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.
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 Funds are held separately, pursuant to a
custodian agreement, by the Funds' Custodian, State Street Bank and
Trust Company.
The firm of Willkie Farr & Gallagher of New York is counsel for 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 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 fiscal year ended
October 31, 1995 was $24,000, the fee not imposed was $12,000. For the fiscal
year ended March 31, 1996, the amount charged to Scudder Massachusetts Tax Free
Fund by SFAC amounted to $58,015, of which $4,904 is unpaid at March 31, 1996.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a 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 fiscal year ended
October 31, 1995 was $23,065, the fee not imposed was $10,314. The fee incurred
by Massachusetts Tax Free Fund to Service Corporation for the year ended March
31, 1996 amounted to $184,353, of which $15,222 is unpaid at March 31, 1996.
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.
57
<PAGE>
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 Semiannual Report to the Shareholders of the Fund dated April 30, 1996,
and are hereby deemed to be a part of this Statement of Additional Information.
Massachusetts Tax Free Fund
The financial statements, including the investment portfolio, of
Massachusetts 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 March 31, 1996, and are
hereby deemed to be a part of this Statement of Additional Information.
58
<PAGE>
Scudder
Massachusetts
Tax Free Fund
Annual Report
March 31, 1996
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.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
<PAGE>
SCUDDER MASSACHUSETTS 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
15 Financial Statements
18 Financial Highlights
19 Notes to Financial Statements
23 Report of Independent Accountants
24 Tax Information
25 Officers and Trustees
26 Investment Products and Services
27 How to Contact Scudder
IN BRIEF
o For its fiscal year ended March 31, 1996, Scudder Massachusetts Tax Free
Fund posted a total return of 8.28%, earning the Fund the number one
ranking among the 48 Massachusetts tax-free funds tracked by Lipper
Analytical Services. The Fund also ranked number one among its peers for
the three-, four-, and five-year periods ended March 31, 1996. See page 6
for additional information on the Fund's rankings.
o As of March 31, 1996, the Fund's 30-day net annualized SEC yield was 4.82%,
equivalent to a 9.07% taxable yield for Massachusetts investors subject to
the 46.85% combined federal and state income tax rate.
30-Day Yield on March 31, 1996
--------------------------------------------------------------
Scudder Massachusetts Tax Free Fund 4.82%
--------------------------------------------------------------
Taxable yield needed to equal the Fund's 9.07%
yield
--------------------------------------------------------------
2
<PAGE>
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Widespread declines in U.S. interest rates helped create generally
hospitable conditions for bonds during the past 12 months. Scudder Massachusetts
Tax Free Fund wrapped up the fiscal year ended March 31, 1996, with a total
return of 8.28%, reflecting appreciation in the Fund's share price and an
attractive stream of double-tax-free income to investors. From a competitive
standpoint, these results were especially rewarding, as the Fund ranked number
one among similar Massachusetts tax-free funds over not only the one-year
period, but also the three-, four-, and five-year periods ended March 31, 1996,
as tracked by Lipper Analytical Services, Inc.
As bond markets regained strength during 1995, taxable bonds led the march
back, while tax-free municipal bonds recovered at a more leisurely pace. By
fall, municipal bonds had become attractively valued compared to Treasuries,
which helped renew investor interest and resulted in outperformance versus
taxable bonds.
Recent indicators raised concerns that the economy may be stronger than
originally believed, which unsettled the market. Still, ample evidence of slower
growth and the absence of mounting inflationary pressures suggests that the
economic expansion is indeed winding down. This latter scenario would be
beneficial to bonds. Given the current economic uncertainties, the Fund's
challenge is to not only stand ready to participate in potential price rallies
but also provide a measure of price stability should the market weaken instead,
while continuing to supply competitive levels of double tax-free income.
In closing, we wish to take this opportunity to announce that a new member
joined the Scudder Family of Funds as of May 8 -- Scudder Emerging Markets
Growth Fund. The new Fund focuses on the stock markets of developing nations
around the globe. For more information about Scudder Emerging Markets Growth
Fund and other Scudder products and services, please see page 26. For questions
about Scudder Massachusetts Tax Free Fund, please call a Scudder Investor
Relations representative at 1-800-225-2470.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Massachusetts Tax Free Fund
3
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
PERFORMANCE UPDATE as of March 31, 1996
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER MASSACHUSETTS TAX FREE FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,828 8.28% 8.28%
5 Year $15,212 52.12% 8.75%
Life of
Fund* $21,025 110.25% 8.76%
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,838 8.38% 8.38%
5 Year $14,745 47.45% 8.07%
Life of
Fund* $20,703 107.03% 8.58%
*The Fund commenced operations on
May 28, 1987. Index comparisons
begin on 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 $10,000
'88 $10,773
'89 $11,796
'90 $12,726
'91 $13,821
'92 $15,267
'93 $17,496
'94 $18,086
'95 $19,418
'96 $21,025
Lehman Brothers Municipal Bond Index
Year Amount
- ----------------------
5/31/87 $10,000
'88 $10,847
'89 $11,628
'90 $12,855
'91 $14,041
'92 $15,444
'93 $17,378
'94 $17,781
'95 $19,102
'96 $20,703
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 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>
1988* 1989 1990 1991 1992 1993 1994 1995 1996
-----------------------------------------------------------------------
NET ASSET VALUE... $12.28 $12.23 $12.25 $12.44 $12.81 $13.61 $13.16 $13.33 $13.70
INCOME DIVIDENDS.. $ .62 $ .88 $ .82 $ .83 $ .81 $ .84 $ .81 $ .74 $ .72
CAPITAL GAINS
AND OTHER
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 8.28
INDEX TOTAL
RETURN (%)........ 8.48 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased. 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, 1996
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Hospital/Health 19%
General Obligation 18%
Water/Sewer Revenue 13% We took advantage of the
Electric Utility Revenue 12% diversity of the state's
State Agency/Lease 8% economy to invest in a wide
Higher Education 7% variety of municipal bonds.
Housing Finance Authority 7%
Public Housing Authority 5%
Miscellaneous Municipal 11%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 36%
AA 4% Quality remains high, with
A 51% 91% of the Fund's portfolio
BBB 5% rated A or better.
Not Rated 4%
----
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 5%
1-5 years 2% We chose to lock in a
5-10 years 52% substantial income stream by
10-20 years 37% purchasing and holding 15- to
20 years or greater 4% 20-year noncallable bonds.
----
100%
====
Weighted average effective maturity: 10 years
- -----------------------------------------------------------------------
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,
Through the up and down periods the bond market experienced over its most
recent fiscal year, Scudder Massachusetts Tax Free Fund performed well and
continued to provide a high double tax-free yield. On March 31, 1996, the Fund's
30-day net annualized SEC was 4.82% -- equivalent to a 9.07% taxable yield for
shareholders subject to the 46.85% maximum combined state and federal income tax
rate. This translates into a clear yield advantage over taxable investments of
comparable maturity and credit quality. During the 12-month period ended March
31, 1996, the Fund's shareholders received $0.72 per share of income exempt from
both federal and Massachusetts state income taxes.
Scudder Massachusetts
Tax Free Fund:
Consistent Top Performer
(Returns for periods ended
March 31, 1996)
-----------------------------------
Period Rank Number of
Funds
-----------------------------------
1 year 1 of 48
-----------------------------------
2 years 2 of 38
-----------------------------------
3 years 1 of 27
-----------------------------------
4 years 1 of 22
-----------------------------------
5 years 1 of 19
-----------------------------------
Past performance does not guarantee future results.
Over the 12-month period, the Fund's share price increased $0.37 to $13.70
per share. The combination of share price appreciation and interest income of
$0.72 per share during the fiscal year enabled the Fund to post a positive total
return of 8.28% over the 12-month period. This return gives Scudder
Massachusetts Tax Free Fund the number one ranking for the one-year period ended
March 31, 1996, among the 48 Massachusetts tax-free funds tracked by Lipper
Analytical Services, Inc. The Fund also earned the number one ranking among its
peers for the three-, four- and five-year periods, as well as the number two
ranking for the two-year period.
Major Market Influences
During the Fund's 1995-1996 fiscal year, credit markets in general were
choppy as a result of alternating periods of increasing and declining interest
rates. As we mentioned in our September 1995 report, April through June 1995 was
marked by steadily rising bond prices and declining yields as a relatively slow
U.S. economy created the conditions for a rally. In July the Federal Reserve
made the first of three moves to ease interest rates, but the market reacted
with a two-month downturn, temporarily losing faith that the Fed would ease
further.
From there, other influences spurred a sustained rally. From August through
December the Republican majority in Congress staged a series of partial
government shutdowns in their efforts to achieve a balanced budget agreement on
their terms. Many bond market participants viewed these events as indications
that significant U.S. budget deficit reduction would now be possible. Another
plus for bonds during this period was the low yield level of Japanese short-term
6
<PAGE>
PORTFOLIO MANAGEMENT DISCUSSION
rates -- as low as 0.5%. Many arbitrageurs took this opportunity to borrow
Japanese yen inexpensively and then purchase U.S. Treasury securities in heavy
volume over the five-month period, providing an additional boost for U.S. bond
prices. In the first quarter of 1996, however, bonds were once again set back as
Congressional balanced budget efforts failed and the Japanese and U.S. economies
showed some signs of heating up.
Municipals Regain Momentum
The municipal market, which typically follows the Treasury market but at a
more moderate pace, was temporarily affected by Congressional discussions of
"flat tax" legislation beginning in the second quarter of 1995. For some
investors, the flat tax cloud overhanging the market did not completely lift
until the Presidential primaries were underway in early 1996, when additional
scrutiny from the press and public deflated the proposal.
Municipal bonds underperformed Treasuries during the first three quarters
of the Fund's fiscal year, as Treasury yields declined dramatically. During the
first quarter of 1996, municipal bonds performed better than Treasuries as most
taxable bonds were negatively affected by stronger-than-expected economic
indicators.
Locking In Higher Yields
During the past 12-month period, one of our principal strategies was to buy
and hold noncallable intermediate-maturity bonds (those with maturities of 15 to
20 years) to take advantage of some excellent opportunities to lock in a
substantial income stream for the Fund over an extended period of time. As of
March 31, 12% of the Fund's securities had maturities in this range. As another
measure to maintain a high yield while also further diversifying the Fund's
holdings, we increased slightly the number of BBB-rated and non-rated bonds in
the portfolio. These bonds, while carrying some additional credit risk,
generally exhibit less interest rate sensitivity than municipal bonds rated A
and above. As of March 31, the Fund held 9% of bonds in these two categories.
(For a summary of the Fund's quality, diversification, and maturity structure,
see page 5.) Lastly, despite a focus on 15- to 20-year bonds, the Fund's average
maturity declined from 12 to 10 years during the fiscal year for two reasons:
First, we pulled back the Fund's average maturity slightly late last fall
because bonds seemed fully valued given the existing market and economic
environment. Second, bonds the portfolio already held drew one year closer to
maturity.
7
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
Portfolio quality remains high, with 91% of the Fund's portfolio rated A or
better as of March 31. And the Fund continues to invest in a broad selection of
Massachusetts municipal bonds, including hospital/health, general obligation,
and water/sewer revenue bonds.
Longer-Term Strategy Unchanged
The Fund seeks to provide investors with a competitive level of federal and
state tax-exempt income while emphasizing total return. We pursue these
objectives by concentrating on three broad categories of Massachusetts municipal
bonds:
o Noncallable bonds, which an issuer cannot redeem before the maturity
date. When interest rates fall, bond issuers tend to reduce their borrowing
expenses by redeeming "callable" existing bonds and issuing new securities that
pay lower interest rates. Noncallable bonds provide a relatively stable stream
of income and solid price appreciation potential over time. During the period,
we sold bonds with weak call protection in favor of those with better call
protection. As of March 31, 44% of bonds the Fund held were noncallable.
o Deeply discounted callable bonds, which are unlikely to be subject to
early redemption at par value by their issuers because of their current low
prices.
o "Cushion" bonds. We balance the Fund's long-maturity bonds by
purchasing so-called cushion bonds -- bonds with high coupons that compensate
investors for the fact that they can be redeemed by their issuer in several
years.
A Diverse State Economy Fuels Growth
The Massachusetts economy has continued to grow in its fourth year,
following the 1990-1992 recession. Governor Weld has proposed a conservative
fiscal year 1997 budget, with a projected revenue increase of 4.4% over 1996
levels and only a 2.8% rise in expenditures. The state continues to benefit from
diversification among its traditional manufacturing, high technology, and
service industries. Unemployment was a moderate 5.3% as of October 1995, below
the national average of 5.5%. And overall, Massachusetts' economic climate is
still generally favorable for bond issuers and investors. The major uncertainty
facing the state's economy is a political one: Who becomes the new governor and
sets the fiscal tone for the state if Governor Weld is elected to the U.S.
Senate in November?
8
<PAGE>
PORTFOLIO MANAGEMENT DISCUSSION
Our Near-Term Outlook
Demand for municipals may improve now that the low-rate flat tax proposal
has disappeared from current political discourse. In terms of the U.S. economy,
we still believe that consumers' heavy debt loads could hinder momentum and
create a slowdown sometime later this year or early next year, which would
benefit bonds. But economic indicators are sufficiently mixed that it is unclear
to us when and to what extent this might occur. Meanwhile, the Federal Reserve
is in a neutral stance, neither easing nor tightening credit, and inflation
remains in check. Adding to the uncertainty is the wait until Presidential and
Congressional elections, which will play a significant role in how
optimistically the bond market will view the prospects for federal budget
deficit reduction. Market participants have applauded, however, as both parties
have claimed fiscal responsibility as part of their respective political
platforms.
For these reasons we are currently maintaining a neutral stance and average
effective maturity for the Fund, and will continue to do so until the direction
of the U.S. economy becomes clearer. In pursuit of Scudder Massachusetts Tax
Free Fund's objectives, we will continue to emphasize noncallable
intermediate-maturity municipal bonds. We will also pay close attention to
credit quality as we position the Fund to seek high double tax-free income and a
competitive total return.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Kathleen A. Meany
Philip G. Condon Kathleen A. Meany
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 16 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 19 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.
9
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
3.2% SHORT-TERM MUNICIPAL INVESTMENTS
------------------------------------------------------------------------------------------------
MASSACHUSETTS Boston, MA, Water and Sewer Commission,
Series A, Weekly Demand Note, 3.1%, 11/1/15* ...... 100,000 MIG1 100,000
Massachusetts General Obligation, Dedicated
Income Tax, Series B, Daily Demand Note,
3.5%, 12/1/97* .................................... 5,300,000 MIG1 5,300,000
Massachusetts Health & Educational Facilities
Authority, Capital Assets Program, Series 1989
G-1, Weekly Demand Note, 3%, 1/1/19 (d)* .......... 900,000 AAA 900,000
Massachusetts Health and Educational Facilities
Authority:
Harvard University, Series I, Weekly
Demand Note, 3.2%, 2/1/16* ...................... 250,000 A1+ 250,000
Series B, Daily Demand Note, 3.35%, 7/1/05 (d)* .. 100,000 A1+ 100,000
Series C, Daily Demand Note, 3.35%, 7/1/05 (d)* .. 100,000 A1+ 100,000
Massachusetts Industrial Finance Agency, Merritt
Care, Daily Demand Note, 3.8%, 4/1/09* ............ 500,000 MIG1 500,000
PUERTO RICO Puerto Rico, SAVRS, Series 1996, 3.56%,
7/1/11(d)* ........................................ 2,300,000 AAA 2,300,000
Puerto Rico Electric Power Authority, ARCS,
Series 1996, 3.32%, 7/1/23 (d)* ................... 300,000 AAA 300,000
----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $9,850,000) .................................. 9,850,000
----------
------------------------------------------------------------------------------------------------
96.8% LONG-TERM MUNICIPAL INVESTMENTS
------------------------------------------------------------------------------------------------
MASSACHUSETTS Boston, MA, General Obligation, Series A, 6.5%,
7/1/12 (d) ........................................ 2,320,000 AAA 2,498,524
Boston, MA, Industrial Development Authority,
Springhouse Project, 9.25%, 7/1/25 ................ 1,000,000 NR 1,021,470
Chicopee, MA, Electric System Revenue, ETM,
7.125%, 1/1/17*** ................................. 1,210,000 AAA 1,408,040
Dedham-Westwood, MA, Water District, General
Obligation, 5%, 10/15/08 (d) ...................... 1,035,000 AAA 1,009,559
Haverhill, MA, Unlimited Tax, General Obligation,
Series A, 7%, 6/15/12 (d) ......................... 600,000 AAA 660,312
Massachusetts Bay Transportation Authority:
Certificate of Participation, 7.75%, 1/15/06 ...... 1,000,000 A 1,148,870
General Transportation System:
Series A, 5.4%, 3/1/07 ........................... 13,325,000 A 13,302,614
Series 1996 A, 5.5%, 3/1/09 ...................... 1,000,000 A 1,001,790
Series A, 5.5%, 3/1/12 ........................... 3,000,000 A 2,971,620
Series B, 6.2%, 3/1/16 ........................... 2,100,000 A 2,213,673
Series C, 6.1%, 3/1/13 ........................... 1,250,000 A 1,312,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
--------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts General Obligation:
Consolidated Loan, Series A, 7.5%, 6/1/04 ........ 12,400,000 A 14,466,708
Hynes Convention Center, Zero Coupon, 9/1/04 ..... 2,000,000 A 1,306,500
Series A, 6.5%, 6/1/08 ........................... 5,500,000 A 5,931,035
Series B, 6.5%, 8/1/08 ........................... 5,400,000 A 5,986,116
Series C, Zero Coupon, 12/1/04 ................... 8,415,000 A 5,511,404
Series D, 5.125%, 11/1/10 (d) .................... 5,000,000 AAA 4,817,700
Massachusetts Health & Educational
Facilities Authority:
Anna Jaques Hospital, Series B, 6.875%,
10/1/12 ........................................ 2,000,000 BBB 2,049,720
Berkshire Health Systems, Series D, 5.6%,
10/1/08 (d) .................................... 1,760,000 AAA 1,801,993
Boston College, Series 1993 K, 5.25%, 6/1/09 .... 2,880,000 A 2,871,648
Charlton Memorial Hospital, Series B,
7.25%, 7/1/07 (b) .............................. 10,000,000 A 10,838,300
Community College Program, Series A,
6.5%, 10/1/09 (d) .............................. 1,000,000 AAA 1,076,670
Cooley Dickinson Hospital Inc.:
Issue A, 7.125%, 11/15/18, prerefunded
5/15/03** ..................................... 2,115,000 NR 2,408,816
Issue B, 5.25%, 11/15/10 (d) ................... 2,005,000 AAA 1,937,351
Deaconess Hospital, Series B, 6.625%,
4/1/12 (d) ..................................... 2,000,000 AAA 2,130,800
Faulkner Hospital, Series C, 6%, 7/1/13 ......... 2,650,000 BBB 2,496,433
Massachusetts General Hospital, Series F,
6.25%, 7/1/12 (d) .............................. 3,500,000 AAA 3,771,495
Medical Academic and Scientific, Series A,
6.5%, 1/1/09 ................................... 5,000,000 AAA 5,167,400
Medical Center of Central Massachusetts,
Series A, 7%, 7/1/12 (d) ....................... 3,600,000 AAA 3,919,716
Newton-Wellesley Hospital:
Series D, 7%, 7/1/15 (d) ....................... 1,500,000 AAA 1,628,895
Series E, 5.9%, 7/1/11 (d) ..................... 3,015,000 AAA 3,098,335
Northeastern University, Series E:
6.4%, 10/1/07 (d) .............................. 1,000,000 AAA 1,083,300
6.5%, 10/1/12 (d) .............................. 450,000 AAA 486,306
St. Luke's Hospital New Bedford, Series C,
Yield Curve Notes, 7.62%, 8/15/10 (d)**** ...... 3,400,000 AAA 3,310,750
South Shore Hospital, 6.5%, 7/1/10 (d) .......... 2,500,000 AAA 2,670,675
Stonehill College, Series E, 6.55%, 7/1/12 (d) .. 5,000,000 AAA 5,389,550
Suffolk University, Series 1996 C, 5.65%,
7/1/11 ......................................... 1,045,000 AAA 1,035,626
Tufts University, Series C, 7.4%, 8/1/18 ........ 530,000 A 572,898
Wellesley College, Series D, 5.1%, 7/1/09 ....... 1,800,000 AA 1,755,846
Massachusetts Housing Finance Agency:
Housing Project Refunding Revenue:
Series A, 6.3%, 10/1/13 ........................ 7,000,000 A 7,019,040
Series B, 6.05%, 12/1/09 (d) ................... 3,000,000 AAA 3,016,140
</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>
Housing Project Revenue, Series A,
6.375%, 4/1/21 .............................. 3,905,000 A 3,888,052
Residential Development, Series C, 6.875%,
11/15/11 .................................... 15,250,000 AAA 16,207,853
Single-Family Mortgage Revenue:
Series 2, 8.25%, 6/1/14 ..................... 240,000 AA 246,411
Series 3, 7.875%, 6/1/14 .................... 4,000,000 AA 4,138,520
Series 44, 5.9%, 12/1/13 .................... 3,000,000 AA 2,986,680
Massachusetts Industrial Finance Agency:
Edgewood Retirement Community, Series A,
9%, 11/15/25 ................................ 1,650,000 NR 1,645,793
First Mortgage, Evanswood Bethzatha, Series A,
7.875%, 1/15/20 ............................. 1,000,000 NR 1,024,640
Holy Cross College, Issue II, 6.375%,
11/1/09 ..................................... 1,000,000 A 1,069,790
Massachusetts Biomedical Research Corp.:
Series A, Zero Coupon, 8/1/00 ............... 2,860,000 A 2,321,118
Series A, Zero Coupon, 8/1/01 ............... 3,650,000 A 2,793,856
Series A, Zero Coupon, 8/1/02 (b) ........... 3,650,000 A 2,641,030
Pollution Control Revenue:
Boston Edison Company, Series A,
5.75%, 2/1/14 .............................. 2,000,000 BBB 1,889,480
Eastern Edison Company Project,
5.875%, 8/1/08 ............................. 4,750,000 BBB 4,639,325
Provider Lease Program, Series 1988 A-1,
8.4%, 7/15/08 ............................... 1,930,000 NR 2,000,889
Resource Recovery, North Andover Solid Waste,
Series A, 6.3%, 7/1/05 ...................... 6,500,000 BBB 6,713,070
Solid Waste Disposal, Peabody Monofil Project,
9%, 9/1/05 (e) .............................. 3,000,000 NR 3,085,770
Sturdy Memorial Hospital, 7.9%, 6/1/09 ....... 1,895,000 A 2,031,630
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue:
Series A, 5%, 7/1/05 (d) .................... 2,020,000 AAA 2,009,496
Series A, 5.1%, 7/1/06 (d) .................. 8,980,000 AAA 8,929,712
Series A, 6.75%, 7/1/06 ..................... 2,855,000 A 3,109,038
Series A, 5.1%, 7/1/08 (d) .................. 840,000 AAA 823,443
Series A, 5%, 7/1/12 (d) .................... 1,000,000 AAA 938,460
Series A, 5%, 7/1/17 (d) .................... 3,610,000 AAA 3,243,188
Series B, 6.75%, 7/1/08 ..................... 9,000,000 A 9,770,760
Series B, 4.95%, 7/1/09 (d) ................. 1,575,000 AAA 1,515,890
Series C, 6.625%, 7/1/10 (d) ................ 3,500,000 AAA 3,743,705
Series C, 6.625%, 7/1/10 .................... 1,000,000 A 1,074,100
Massachusetts Port Authority Revenue,
Tax Exempt Receipts, ETM, Zero Coupon,
7/1/13*** .................................... 1,000,000 AAA 855,020
</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> <C>
Massachusetts Special Obligation:
Series 1996 A, 5.5%, 6/1/11 (d) ............... 5,000,000 AAA 4,933,850
Series A, 5.8%, 6/1/14 ........................ 2,000,000 AA 1,997,580
Massachusetts Water Pollution Abatement Trust,
Pooled Loan Program:
Series 2, 5.625%, 2/1/10 ..................... 2,820,000 AAA 2,851,697
Series 2, 5.7%, 2/1/15 ....................... 1,150,000 AAA 1,149,368
Massachusetts Water Resource Authority:
Series A, 6.5%, 7/15/09 ....................... 15,000,000 A 16,564,350
Series A, 6.5%, 7/15/19 ....................... 3,000,000 A 3,270,210
Series B, 6%, 11/1/08 ......................... 5,785,000 A 6,008,648
General Revenue, Series C, 5.25%, 12/1/08 ..... 2,705,000 A 2,648,466
General Revenue, Series C, 5.25%, 12/1/15 ..... 4,030,000 A 3,798,638
Nantucket, MA, General Obligation, 6.8%, 12/1/11 1,000,000 A 1,089,480
New England Educational Loan Marketing
Corporation, Massachusetts Student Loan
Revenue, 5.7%, 7/1/05 ......................... 6,250,000 A 6,348,188
South Essex, MA, Sewer District, Series B,
6.75%, 6/1/13, prerefunded 6/1/04 (d)** ....... 1,000,000 AAA 1,138,910
University of Massachusetts, Building Authority
Revenue, Series B:
6.625%, 5/1/09 ............................... 2,415,000 A 2,711,731
6.625%, 5/1/10 ............................... 2,575,000 A 2,885,957
6.75%, 5/1/11 ................................ 2,745,000 A 3,099,599
6.875%, 5/1/14 ............................... 1,300,000 A 1,472,523
Worcester, MA, General Obligation:
6.9%, 5/15/05, prerefunded 5/15/02 (d)** ...... 1,850,000 AAA 2,096,457
6.9%, 5/15/06, prerefunded 5/15/02 (d)** ...... 1,500,000 AAA 1,699,830
PUERTO RICO Puerto Rico Aqueduct and Sewer Authority,
Refunding Revenue, 6%, 7/1/09 ................. 1,000,000 A 1,037,930
Puerto Rico Highway and Transportation Authority,
Highway Revenue, Series 1996 Y, 6.25%,
7/1/14 ........................................ 2,000,000 A 2,107,160
-----------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $288,820,883) ........................... 302,353,029
-----------
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $298,670,883) (a) ....................... 312,203,029
===========
</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 $298,670,883. At March 31,
1996, net unrealized appreciation for all securities based on tax cost was
$13,532,146. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $14,688,036 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,155,890.
(b) At March 31, 1996 these securities, in part, have been pledged to cover
initial margin requirements for open futures contracts.
<TABLE>
AT MARCH 31, 1996, OPEN FUTURES CONTRACTS PURCHASED LONG WERE AS FOLLOWS
(NOTE A):
<CAPTION>
Aggregate
Futures Expiration Contracts Face Value($) Market Value($)
------- ---------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
Muni Bond Index June 1996 70 7,930,388 7,879,375
--------- ---------
Total net unrealized depreciation on open futures contracts purchased long (51,013)
=========
</TABLE>
(c) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings
shown are assigned by either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or Fitch Investors Service, Inc. Unrated securities
(NR) have been determined to be of comparable quality to rated eligible
securities.
(d) Bond is insured by one of these companies: AMBAC, Connie Lee, FGIC, FSA or
MBIA.
(e) Restricted Security -- Security which has not been registered with the
Securities and Exchange Commission under the Securities Act of 1933.
Information concerning such restricted security at March 31, 1996 is as
follows:
Security Acquisition Date Cost($)
-------- ---------------- -------
MIFA, Solid Waste, Peabody Monofil 12/30/94 3,000,000
* 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 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, 1996.
The accompanying notes are an integral part of the financial statements.
----
14
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
MARCH 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $298,670,883)
(Note A) ....................................... $312,203,029
Cash ............................................... 59,441
Receivables:
Interest ....................................... 5,036,669
Fund shares sold ............................... 221,291
Daily variation margin on open futures contracts
(Note A) ................................... 37,188
------------
Total assets ............................... 317,557,618
LIABILITIES
Payables:
Investments purchased .......................... $2,119,194
Dividends ...................................... 587,938
Fund shares redeemed ........................... 326,835
Accrued management fee (Note C) ................ 158,239
Other accrued expenses (Note C) ................ 80,486
----------
Total liabilities .......................... 3,272,692
------------
Net assets, at market value ........................ $314,284,926
============
NET ASSETS
Net assets consist of:
Unrealized appreciation (depreciation) on:
Investments ................................ 13,532,146
Futures .................................... (51,013)
Accumulated net realized loss .................. (3,605,166)
Shares of beneficial interest .................. 229,423
Additional paid-in capital ..................... 304,179,536
------------
Net assets, at market value ........................ $314,284,926
============
NET ASSET VALUE, offering and redemption price
per share ($314,284,926 [Divided by] 22,942,284
outstanding shares of beneficial interest, $.01
par value, unlimited number of shares
authorized) .................................... $ 13.70
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
15
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest ............................................. $18,492,382
Expenses:
Management fee (Note C) .............................. $1,858,029
Services to shareholders (Note C) .................... 238,141
Custodian and accounting fees (Note C) ............... 111,599
Trustees' fees and expenses (Note C) ................. 14,245
Reports to shareholders .............................. 47,008
Auditing ............................................. 36,005
Legal ................................................ 16,575
State registration ................................... 9,412
Other ................................................ 17,380
----------
Total expenses before reductions ..................... 2,348,394
Expense reductions (Note C) .......................... (31,230)
----------
Expenses, net ........................................ 2,317,164
-----------
Net investment income ................................ 16,175,218
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS
Net realized gain from:
Investments ....................................... 529,642
Futures ........................................... 51,931 581,573
----------
Net unrealized appreciation (depreciation)
during the period on:
Investments ....................................... 7,388,834
Futures ........................................... (24,013) 7,364,821
------------------------
Net gain on investments .............................. 7,946,394
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . $24,121,612
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
16
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ...................... $ 16,175,218 $ 17,734,143
Net realized gain (loss) from investment
transactions ............................ 581,573 (2,995,407)
Net unrealized appreciation on
investment transactions during the period 7,364,821 4,923,078
------------ -------------
Net increase in net assets resulting from
operations .............................. 24,121,612 19,661,814
------------ -------------
Distributions to shareholders:
From net investment income ($.72 and $.74
per share, respectively) ................ (16,175,218) (17,734,143)
------------ -------------
In excess of net realized gains
($.01 per share) ........................ -- (348,200)
------------ -------------
Fund share transactions:
Proceeds from shares sold .................. 58,182,143 80,817,626
Net asset value of shares issued to
shareholders in reinvestment
of distributions ........................ 9,475,939 11,772,714
Cost of shares redeemed .................... (57,794,885) (129,761,019)
------------ -------------
Net increase (decrease) in net assets from
Fund share transactions ................. 9,863,197 (37,170,679)
------------ -------------
INCREASE (DECREASE) IN NET ASSETS .......... 17,809,591 (35,591,208)
Net assets at beginning of period .......... 296,475,335 332,066,543
------------ -------------
NET ASSETS AT END OF PERIOD ................ $314,284,926 $ 296,475,335
============ =============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period .. 22,236,389 25,223,573
------------ -------------
Shares sold ................................ 4,245,322 6,244,742
Shares issued to shareholders in
reinvestment of distributions ........... 690,492 905,250
Shares redeemed ............................ (4,229,919) (10,137,176)
------------ -------------
Net increase (decrease) in Fund shares ..... 705,895 (2,987,184)
------------ -------------
Shares outstanding at end of period ........ 22,942,284 22,236,389
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
17
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
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 OF
YEARS ENDED MARCH 31, OPERATIONS) TO
----------------------------------------------------------------------------- MARCH 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................ $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28 $12.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a) ..... .72 .74 .81 .84 .81 .83 .82 .81 .69
Net realized and unrealized
gain (loss) on investment
transactions ................ .37 .18 (.33) .96 .46 .19 .13 .22 .21
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................. 1.09 .92 .48 1.80 1.27 1.02 .95 1.03 .90
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income .... (.72) (.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 ............. (.72) (.75) (.93) (1.00) (.90) (.83) (.93) (1.08) (.62)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period .. $13.70 $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (c) ............ 8.28 7.37 3.37 14.59 10.46 8.60 7.89 9.50 7.73**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions) .................. 314 296 332 267 120 67 46 31 16
Ratio of operating expenses,
net to average daily net
assets (%) (a) ................ .75 .47 .07 -- .48 .60 .60 .51 .50*
Ratio of net investment
income to average daily
net assets (%) ................ 5.23 5.73 5.80 6.36 6.38 6.72 6.60 7.23 7.55*
Portfolio turnover rate (%) ..... 20.9 10.2 17.0 29.6 23.2 27.1 45.5 110.5 95.9*
(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
before expense
reductions(%) ............... .76 .77 .77 .83 .93 1.05 1.16 1.20 2.25*
<FN>
(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 Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
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. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
RESTRICTED SECURITIES. The Fund may not purchase restricted securities (for
these purposes, restricted security means a security which cannot be sold to the
public without registration under the Securities Act of 1933 or the availability
of an exemption from registration, or which is subject to other legal or
contractual delays in or restrictions on resale), if, as a result thereof, more
than 10% of the value of the Fund's total assets would be invested in restricted
securities. The aggregate fair value of restricted securities at March 31, 1996
amounted to $3,085,770 which represents 1.0% of net assets.
FUTURES CONTRACTS. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the year ended
March 31, 1996, the Fund purchased interest rate futures to manage the duration
of the portfolio and sold interest rate futures to hedge against declines in the
value of portfolio securities.
----
19
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the 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 a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
FEDERAL INCOME TAXES. The 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, 1996, the Fund had a net tax basis capital loss carryforward of
approximately $1,283,000 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, 1995 through March 31, 1996, the Fund incurred
approximately $111,000 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 year ending March 31, 1997.
----
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 the earlier of the call or maturity
date.
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
During the year ended March 31, 1996, purchases and sales of municipal
securities (excluding short-term investments) aggregated $68,151,323 and
$62,200,274, respectively.
The aggregate face value of future contracts opened and closed during the year
ended March 31, 1996 was $30,542,656 and $27,063,393, 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 December 31, 1995 and
during
----
21
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
- --------------------------------------------------------------------------------
such period to maintain the annualized expenses of the Fund at not more than
0.75% of average daily net assets. For the year ended March 31, 1996, the
Adviser imposed fees amounting to $1,826,799 and the portion not imposed
amounted to $31,230.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Fund. For the
year ended March 31, 1996, the amount charged to the Fund by SSC aggregated
$184,353, of which $15,222 is unpaid at March 31, 1996.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
March 31, 1996, the amount charged to the Fund by SFAC aggregated $58,015, of
which $4,904 is unpaid at March 31, 1996.
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, 1996,
Trustees' fees and expenses charged to the Fund aggregated $14,245.
----
22
<PAGE>
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,
1996, 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 eight 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, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Massachusetts Tax Free Fund as of March 31, 1996, 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 eight 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 16, 1996
----
23
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
TAX INFORMATION
- --------------------------------------------------------------------------------
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 1996, 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.
----
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; General Partner, TL Ventures
Philip G. Condon*
Vice President
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
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>
<C> <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 Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Discovery Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
- -----------------------------------------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
- -----------------------------------------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income Opportunities Fund, Inc.
Institutional Cash Management
- -----------------------------------------------------------------------------------------------------------------
Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
</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 personalized information about your Scudder accounts; exchanges
and redemptions; or information on any Scudder fund
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
- -------------------------------------------------------------------------------
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
- -------------------------------------------------------------------------------
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
- -------------------------------------------------------------------------------
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you-- they can be
found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder For information on Scudder
Treasurers Trust,(TM) an Institutional Funds,* funds
institutional cash management designed to meet the broad
service for corporations, investment management and
non-profit organizations service needs of banks and
and trusts that uses certain other institutions, call
portfolios of Scudder Fund, Inc.* 1-800-854-8525.
($100,000 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.
27
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 38 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
<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
Massachusetts
Limited Term
Tax Free Fund
Semiannual Report
April 30, 1996
- - 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 3.91% on April 30, 1996, equivalent to
a 7.36% taxable yield for shareholders subject to the 46.85% combined
federal and state income tax rate.
BAR CHART TITLE
30-Day Yields as of April 30, 1996
CHART DATA:
Scudder Massachusetts IBC/Donoghue's
Limited Term Taxable Equivalent Taxable Money Fund
Tax Free Fund Yield Average
------------- ----- -------
3.91% 7.36% 4.75%
- - The Fund returned 1.45% for the six-month period ended April 30, 1996. By
comparison, the 35 short/intermediate state municipal debt funds tracked by
Lipper Analytical Services returned 1.02% on average. The Fund also outpaced
the Lipper average of similar funds over one- and two-year periods ended
April 30.
2
<PAGE>
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
For bonds, investment results over the past six months have been mixed.
During the latter part of 1995, municipal bonds were attractively valued versus
U.S. Treasuries, which helped renew investor interest and resulted in their
outperformance. This year, indicators have raised concerns that the economy may
be stronger than originally believed, which has unsettled investors. Still,
evidence in some sectors of slower economic growth and the absence of mounting
inflationary pressures suggests that the economic expansion could wind down in
1996. While the timing and extent of any slowdown is difficult to predict,
history shows that slow growth has been beneficial to bonds. Until economic
trends become more clear, however, the Fund's challenge is to provide as much
price stability as possible should the market weaken further, while continuing
to supply competitive levels of tax-free income.
In closing, we would like to take this opportunity to announce that a
new member joined the Scudder Family of Funds as of May 8--Scudder Emerging
Markets Growth Fund. The new Fund focuses on the stock markets of developing
nations around the globe. For more information about Scudder products and
services, please see page 22. For questions about Scudder Massachusetts Limited
Term Tax Free Fund, please call a Scudder Investor Relations representative at
1-800-225-2470.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Massachusetts Limited Term Tax Free Fund
3
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
PERFORMANCE UPDATE as of April 30, 1996
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
4/30/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,560 5.60% 5.60%
Life of
Fund* $10,964 9.64% 4.26%
LB MUNICIPAL BOND INDEX (3 YEAR)
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
4/30/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,626 6.26% 6.26%
Life of
Fund* $11,051 10.51% 4.72%
*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* $10,000
4/94 $ 9,912
7/94 $10,071
10/94 $10,030
1/95 $10,150
4/95 $10,414
7/95 $10,677
10/95 $10,840
1/96 $11,096
4/96 $10,997
Lehman Brothers Municipal
Bond Index (3 year)
Year Amount
- ----------------------
2/94* $10,000
4/94 $ 9,938
7/94 $10,070
10/94 $10,056
1/95 $10,165
4/95 $10,399
7/95 $10,695
10/95 $10,862
1/96 $11,062
4/96 $11,051
The 3-year Lehman Brothers 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 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
1994* 1995 1996
--------------------------
NET ASSET VALUE.............. $11.76 $11.81 $11.94
INCOME DIVIDENDS............. $ .10 $ .53 $ .52
FUND TOTAL RETURN (%)........ -1.18 5.07 5.60
INDEX TOTAL RETURN (%)....... -.62 4.64 6.26
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, 1996
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Hospital/Health 28%
General Obligation 25%
Electric Utility Revenue 10% Scudder Massachusetts Limited
Higher Education 9% Term Tax Free Fund is broadly
State Agency/Lease 8% diversified, and holds a large
Pollution Control/ percentage of pre-refunded bonds
Industrial Development 5% which offer the highest quality
Resource Recovery 4% available in the municipal
Water/Sewer Revenue 4% marketplace.
Housing Finance Authority 4%
Miscellaneous Municipal 3%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 79%
AA 8% The Fund's overall credit quality
A 7% remains high, with 94% or its
BBB 6% portfolio rated A or better.
----
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 19% We continued to emphasize both
1 - 5 years 43% ends of the fund's limited
5 - 10 years 38% maturity range -- shorter
---- maturities for safety and the
100% longest maturities for higher
==== yields and capital appreciation
potential.
Weighted average effective maturity: 5 years
- -----------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 10.
5
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Amid a U.S. economy that seems to keep "chugging along," and ongoing
uncertainty over the near-term direction of interest rates, Scudder
Massachusetts Limited Term Tax Free Fund continued to provide investors with
lower share-price volatility than would be available from a longer-maturity
tax-exempt fund, as well as an attractive double-tax-free yield.
For shareholders subject to the 46.85% maximum combined federal and
Massachusetts income tax rate, the Fund's 30-day net annualized SEC yield of
3.91% as of April 30, 1996, was equivalent to a 7.36% yield on a taxable bond,
higher than current yields provided by comparable taxable investments. The
Fund's tax-equivalent yield compares favorably with the 5.21% average yield of
two-year Massachusetts bank certificates of deposit as of April 30, 1996. Of
course, unlike fixed-rate CDs, which are FDIC-insured up to certain limits, the
Fund's yield and share price fluctuate. Also, principal investments in the Fund
are not insured.
As the graph below shows, over the past 12 months, the Fund's
tax-equivalent yield has been consistently higher than the yields of the average
two-year CD tracked nationally.
LINE CHART TITLE:
Scudder Massachusetts Limited Term Tax Free Fund's
Tax-Equivalent Yield* vs. National Two-Year CD Rates
CHART PERIOD: May 1995-April 1996
CHART DATA:
Scudder Massachusetts
National Average of Limited Term Tax-
Two-Year CD Yields Equivalent Yield
------------------ ----------------
5.62% 8.58%
6/30/95 5.23% 8.05%
5.02% 8.05%
5.10% 7.81%
9/30/95 5.08% 7.66%
5.06% 7.85%
5.01% 7.75%
12/30/95 4.82% 7.60%
4.68% 7.22%
4.48% 7.07%
3/31/96 4.73% 7.04%
4.83% 7.36%
Source of CD data: BanxQuote.
* Tax equivalent yield is for the 46.85% maximum combined federal and state
income tax.
6
<PAGE>
For the six months ended April 30, 1996, the Fund's net asset value
declined $0.08 to $11.94 per share, and the Fund provided $0.25 per share in
income distributions, contributing to a total return of 1.45%. This return
compares favorably with the average return of the 35 similar state municipal
bond funds tracked by Lipper Analytical Services, Inc. As shown in the chart
below, the Fund's total return also surpassed its respective Lipper average for
one- and two-year periods:
Strong Relative Performance
Returns for periods ended April 30, 1996
Fund's Lipper
Average Average Number of
Annual Annual Funds
Period Return Return Rank Tracked
------ ------ ------ ---- -------
Six months 1.45% 1.02% 2 35
1 year 5.60 5.03 6 34
2 years 5.33 4.81 3 19
Past performance does not guarantee future results.
Major Market Influences
From October through December 1995 bonds rallied as the Republican
majority in Congress staged a series of partial government shutdowns in their
efforts to achieve a balanced budget agreement on their terms. Many bond market
participants viewed these events as indications that significant U.S. budget
deficit reduction would now be possible. In the first four months of 1996,
however, bonds were once again set back as Congressional balanced budget efforts
failed and the Japanese and U.S. economies showed some signs of heating up.
The municipal market, which typically follows the Treasury market but
at a more moderate pace, was temporarily affected by ongoing Congressional
discussions of "flat tax" legislation in 1995. For some investors, the flat tax
cloud overhanging the market did not completely lift until the Presidential
primaries were underway in early 1996, when additional scrutiny from the press
and public deflated the proposal.
7
<PAGE>
Municipal bonds generally underperformed Treasuries duing 1995 as
Treasury yields declined dramatically. During the first four months of 1996, the
more richly priced taxable bonds, including Treasuries, gave up more ground than
municipals as the market reacted to stronger-than-expected economic indicators.
A Consistent Strategy
Over the past six-month period we emphasized both ends of the Fund's
limited maturity range: the shortest maturities for safety and the longest
maturities (maximum of 10 years) for higher yields and possible capital
appreciation. We continue to pursue this strategy because we believe bonds with
five- to 10-year maturities currently offer the most attractive after-tax yields
and total return potential of any maturities in which the Fund is permitted to
invest.
The Fund continues to hold several types of Massachusetts general
obligation (G.O.) bonds. These bonds offer attractive value, high overall
quality, and relative stability. In addition, we hold a large percentage (30% as
of April 30) of pre-refunded 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. These bonds offer the highest quality available in
the municipal marketplace, yet are typically priced lower than similar bonds of
slightly lower quality. The Fund's overall credit quality remains high, with 79%
of the bonds in its portfolio rated AAA.
A Diverse State Economy Fuels Growth
The Massachusetts economy continues to grow for a fourth year,
following the 1990-1992 recession. Governor Weld has proposed a conservative
fiscal-year 1997 budget, with a projected revenue increase of 4.4% over 1996
levels and only a 2.8% rise in expenditures. The state continues to benefit from
diversification among its traditional manufacturing, high technology, and
service industries. Unemployment was a moderate 5.2% as of January 1996, below
the national average of 5.8%. And overall, Massachusetts' economic climate is
still generally favorable for bond issuers and investors. The major uncertainty
facing the state's economy is a political one: Who becomes the new governor and
sets the fiscal tone for the state if Governor Weld is elected to the U.S.
Senate in November?
8
<PAGE>
Our Near-Term Outlook
As stated in David Lee's letter preceding this discussion, the
direction of the U.S. economy and interest rates is currently unclear, although
many market participants are preparing themselves for the possibility of some
economic acceleration and increases in rates. We will consider lowering the
average effective maturity of the Fund (five years as of April 30) somewhat if
we think further caution is warranted. However, because U.S. inflation remains
muted, we believe any increase in interest rates will be short-lived. Scudder
Massachusetts Limited Term Tax Free Fund can be a suitable investment for those
who want to earn double-tax-free yields but are seeking a higher degree of share
price stability in light of the uncertain economic environment.
We will continue to maintain a conservative investment strategy,
including holding premium bonds, diversifying broadly, and maintaining the
Fund's high credit quality. With the help of our team of investment analysts, we
will search for attractive value by weighing the maturity characteristics,
credit quality, and income potential of each bond we consider for purchase.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Kathleen A. Meany
Philip G. Condon Kathleen A. Meany
9
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
INVESTMENT PORTFOLIO as of April 30, 1996 (Unaudited)
- -------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
18.9% SHORT-TERM MUNICIPAL INVESTMENTS
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MASSACHUSETTS Massachusetts Bay Transportation Authority,
Series B, 4.75%, 9/6/96 .......................... 5,000,000 SP1 5,017,200
Massachusetts Education Loan Authority Revenue,
Issue E, Series 1996A, Weekly Demand Note,
3.8%, 7/1/14* .................................... 1,200,000 A1+ 1,200,000
Massachusetts General Obligation, Dedicated
Income Tax:
Series B, Daily Demand Note, 3.9%, 12/1/97* .... 200,000 MIG1 200,000
Series E, Daily Demand Note, 3.9%, 12/1/97* .... 1,900,000 MIG1 1,900,000
Massachusetts Health and Educational Facilities
Authority:
Brigham and Women's Hospital, Series A,
Weekly Demand Note, 4%, 7/1/17* ........... 900,000 AA 900,000
Harvard University, Series I, Weekly Demand Note,
3.9%, 2/1/16* ............................. 900,000 A1+ 900,000
Massachusetts Industrial Finance Agency, Resource
Recovery, Ogden Haverhill Project, Weekly
Demand Note, 3.75%, 12/1/06* ..................... 1,600,000 MIG1 1,600,000
----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $11,710,851) ............................... 11,717,200
----------
----------------------------------------------------------------------------------------
81.1% INTERMEDIATE-TERM MUNICIPAL INVESTMENTS
----------------------------------------------------------------------------------------
MASSACHUSETTS Lowell, MA, General Obligation, 8.3%, 2/15/05,
prerefunded 2/15/01** ............................ 1,635,000 AAA 1,927,108
Massachusetts Educational Loan Authority, Issue E,
Series A, 6.7%, 1/1/02 (c) ....................... 460,000 AAA 493,930
Massachusetts General Obligation:
Series A, 5.25%, 2/1/01 (c) ...................... 3,000,000 AAA 3,078,330
Series A, 5.2%, 6/1/04 ........................... 1,000,000 AA 1,013,790
Series C, 7.5%, 12/1/07, prerefunded 12/1/00** ... 750,000 AAA 851,813
Series C, 7% 12/1/10, prerefunded 12/1/00** ...... 775,000 AAA 852,082
Massachusetts Health & Educational Facilities
Authority:
Berkshire Health System, Series D,
5.3%, 10/1/03 (c) .............................. 1,350,000 AAA 1,380,672
Central Massachusetts Medical Center, Series B,
6%, 7/1/02 (c) ................................. 500,000 AAA 530,580
Daughters of Charity, Carney Hospital, 7.5%,
7/1/05, prerefunded 7/1/00** ................... 1,000,000 AAA 1,126,160
Daughters of Charity, Series D, 4.9%, 7/1/00 .... 850,000 AA 852,168
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical Academic and Scientific, Series A:
5.9%, 1/1/00 ................................... 500,000 A 511,345
6%, 1/1/01 ..................................... 1,000,000 A 1,026,870
6.1%, 1/1/02 ................................... 500,000 A 515,870
St. Joseph's Hospital, Series C, 9.5%, 10/1/20,
prerefunded 10/1/99** .......................... 3,375,000 AAA 3,826,170
Valley Regional Health System, Series C,
5.3%, 7/1/00 (c) ............................... 1,500,000 AAA 1,523,970
Wheaton College, Series B, 7.2%, 7/1/09,
prerefunded 7/1/99** ........................... 590,000 AAA 647,572
Massachusetts Housing Finance Agency Multi-Family
Housing Project, 1988 Series A, Subject to AMT,
8.7%, 4/1/14, prerefunded 4/1/98** ............... 1,465,000 AAA 1,621,579
Massachusetts Housing Finance Agency Revenue,
Housing Project, Series A, 5.2%, 10/1/00 ......... 575,000 A 583,533
Massachusetts Industrial Finance Agency:
Boston Museum of Fine Arts, Series 1996,
5.125%, 1/1/04 (c) .............................. 1,000,000 AAA 1,015,450
Cape Cod Health Systems, Series 1990, 8.5%,
11/15/20, prerefunded 11/15/00** ................ 2,150,000 AAA 2,527,970
College of the Holy Cross, Series 1996,
5.5%, 3/1/06 (c) ................................ 1,000,000 AAA 1,027,450
Leominister Hospital, Series 1989A, 8.625%,
8/1/09, prerefunded 8/1/99** .................... 2,000,000 AAA 2,281,440
Milton Academy, Revenue Refunding, Series A,
7.25%, 9/1/19, prerefunded 9/1/99 (c)** ......... 700,000 AAA 771,946
Resource Recovery, North Andover Solid Waste,
Series A:
6.15%, 7/1/02 .................................. 750,000 BBB 761,168
6.3%, 7/1/05 ................................... 2,750,000 BBB 2,819,520
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue:
Series A, 5%, 7/1/05 (c) ........................ 5,000,000 AAA 4,952,550
Series B, 6.3%, 7/1/00 .......................... 345,000 A 363,916
Series B, 6.375%, 7/1/01 ........................ 1,000,000 A 1,062,810
Massachusetts Turnpike Authority, Bond Anticipation
Notes, Series 1996A, 5%, 6/1/99 .................. 2,000,000 AA 2,033,620
Massachusetts Water Resource Authority, Series A,
6.75%, 7/15/12, prerefunded 7/15/02** ............ 1,000,000 AAA 1,120,720
Nantucket, MA, General Obligation, 6.25%,
12/1/02 .......................................... 250,000 A 269,665
South Essex, MA, Sewer District, Series B, 6.75%,
6/1/13, prerefunded 6/1/04 (c)** ................. 1,000,000 AAA 1,131,450
Southeastern Massachusetts University Building,
Series A, 5.5%, 5/1/04 (c) ....................... 1,010,000 AAA 1,044,986
Worcester, MA, General Obligation, Revenue
Refunding, Series G, 6%, 7/1/01 (c) .............. 2,000,000 AAA 2,118,880
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PUERTO RICO Puerto Rico Public Building Authority,
6.75%, 7/1/04 (c) ............................... 2,250,000 AAA 2,536,965
----------
TOTAL INTERMEDIATE-TERM MUNICIPAL INVESTMENTS
(Cost $49,578,741) ............................... 50,204,048
----------
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $61,289,592) (a) ........................... 61,921,248
==========
<FN>
- ----------
(a) The cost for federal income tax purposes was $61,301,199. At April 30,
1996, net unrealized appreciation for all securities was $620,049.
This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost
of $730,399 and aggregate gross unrealized depreciation for all
investment securities in which there was an excess of tax cost over
market value of $110,350.
(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.
(c) Bond is insured by one of these companies: AMBAC, Connie Lee, 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
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------
APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $61,289,592)
(Note A) ........................................... $61,921,248
Receivables:
Interest ........................................... 1,049,866
Fund shares sold ................................... 229,572
Deferred organization expenses (Note A) .............. 15,711
-----------
Total assets ....................................... 63,216,397
LIABILITIES
Payables:
Due to custodian bank .............................. $ 31,752
Dividends .......................................... 68,236
Fund shares redeemed ............................... 1,626,338
Accrued management fee (Note C) .................... 35,545
Other accrued expenses (Note C) .................... 30,952
----------
Total liabilities ................................ 1,792,823
-----------
Net assets, at market value .......................... $61,423,574
===========
NET ASSETS
Net assets consist of:
Unrealized appreciation on investments ............. $ 631,656
Accumulated net realized loss ...................... (39,523)
Shares of beneficial interest ...................... 51,462
Additional paid-in capital ......................... 60,779,979
-----------
Net assets, at market value .......................... $61,423,574
===========
NET ASSET VALUE, offering and redemption price per
share ($61,423,574 / 5,146,237 outstanding
shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) ............. $11.94
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
- --------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------
SIX MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest ............................................. $1,411,900
Expenses:
Management fee (Note C) ............................... $176,526
Custodian and accounting fees (Note C) ................ 25,074
Services to shareholders (Note C) ..................... 24,824
Trustees' fees and expenses (Note C) .................. 6,400
Auditing .............................................. 11,522
Reports to shareholders ............................... 5,391
State registration .................................... 4,023
Federal registration .................................. 3,620
Amortization of organization expense (Note A) ......... 2,805
Other ................................................. 6,392
--------
Total expenses before reductions ...................... 266,577
Expense reductions (Note C) ........................... (94,332)
--------
Expenses, net ......................................... 172,245
----------
Net investment income ................................. 1,239,655
----------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENT TRANSACTIONS
Net realized loss from investments .................... (2,642)
Net unrealized depreciation on investments during
the period .......................................... (516,733)
----------
Net loss on investments ............................... (519,375)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .. $ 720,280
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------
SIX MONTHS
ENDED
APRIL 30, YEAR ENDED
1996 OCTOBER 31,
INCREASE (DECREASE) IN NET ASSETS (UNAUDITED) 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ......................... $ 1,239,655 $ 2,266,506
Net realized gain (loss) on investments ....... (2,642) 52,320
Net unrealized appreciation (depreciation)
on investments during the period ............ (516,733) 1,598,035
------------ ------------
Net increase in net assets resulting
from operations ............................. 720,280 3,916,861
------------ ------------
Distributions to shareholders from net
investment income ($.25 and $.54
per share, respectively) .................... (1,239,655) (2,266,506)
------------ ------------
Fund share transactions:
Proceeds from shares sold ..................... 21,027,737 51,219,003
Net asset value of shares issued to
shareholders in reinvestment of
distributions ............................... 813,201 1,558,937
Cost of shares redeemed ....................... (15,391,152) (34,483,113)
------------ ------------
Net increase in net assets from Fund share
transactions ................................ 6,449,786 18,294,827
------------ ------------
INCREASE IN NET ASSETS ........................ 5,930,411 19,945,182
Net assets at beginning of period ............. 55,493,163 35,547,981
------------ ------------
NET ASSETS AT END OF PERIOD ................... $ 61,423,574 $ 55,493,163
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period ..... 4,615,167 3,052,899
------------ ------------
Shares sold ................................... 1,742,858 4,365,476
Shares issued to shareholders in
reinvestment of distributions ............... 67,395 131,715
Shares redeemed ............................... (1,279,183) (2,934,923)
------------ ------------
Net increase in Fund shares ................... 531,070 1,562,268
------------ ------------
Shares outstanding at end of period ........... 5,146,237 4,615,167
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
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, YEAR ENDED (COMMENCEMENT
1996 OCTOBER 31 OF OPERATIONS) TO
(UNAUDITED) 1995 OCTOBER 31, 1994
----------- ---- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period ......... $12.02 $11.64 $12.00
------ ------ ------
Income from investment operations:
Net investment income (a) .................. .25 .54 .36
Net realized and unrealized gain (loss) on
investment transactions .................. (.08) .38 (.36)
------ ------ ------
Total from investment operations ........... .17 .92 .00
------ ------ ------
Less distributions from net
investment income ......................... (.25) (.54) (.36)
------ ------ ------
Net asset value, end of period ............... $11.94 $12.02 $11.64
====== ====== ======
TOTAL RETURN (%) (b) ......................... 1.45** 8.08 0.00**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ....... 61 55 36
Ratio of operating expenses, net to average
daily net assets (%) (a) ................... .59* .24 --
Ratio of net investment income to average
daily net assets (%) ..................... 4.24* 4.56 4.45*
Portfolio turnover rate (%) .................. 4.4* 27.4 26.3*
(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 ....................... $ .02 $ .07 $ .07
Operating expense ratio before
expense reductions (%) .................. .91* .92 1.44*
(b)Total returns are higher due to maintenance of
the Fund's expenses.
- ----------
<FN>
* Annualized
** Not annualized
</FN>
</TABLE>
16
<PAGE>
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 Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
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. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Trustees. Short-term
investments having a maturity of sixty days or less are valued at amortized
cost.
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, 1995, the Fund had a net tax basis capital loss carryforward of
approximately $26,000 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
17
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
- --------------------------------------------------------------------------------
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. 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 the call
or maturity date.
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
For the six months ended April 30, 1996, purchases and sales of investments
(excluding short-term) aggregated $7,969,300 and $1,040,000, 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
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 amount of the management fee, will be
paid by the Adviser. For the period August 1, 1995 to February 29, 1996, the
Adviser agreed to maintain the annualized expenses at 0.50% of average daily net
assets. Effective March 1, 1996, the Adviser agreed to maintain the annualized
expenses at 0.75% of average daily net assets until July 31, 1996. For the six
months ended April 30, 1996, the Adviser imposed fees amounting to $82,194 and
the portion not imposed amounted to $94,332 at April 30, 1996.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
six months ended April 30, 1996, the amount charged to the Fund by SSC
aggregated $17,365 of which $3,079 is unpaid at April 30, 1996.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the six months
ended April 30, 1996, the amount charged to the Fund by SFAC aggregated $18,000,
of which $3,000 was unpaid at April 30, 1996.
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 six months ended April 30, 1996,
Trustees' fees and expenses charged to the Fund aggregated $6,400.
19
<PAGE>
(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; General Partner, TL Ventures
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson
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>
<CAPTION>
The Scudder Family of Funds
-----------------------------------------------------------------------------------------------------------------
<C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Discovery Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
-----------------------------------------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
-----------------------------------------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
-----------------------------------------------------------------------------------------------------------------
Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
-----------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,(TM) an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.
</TABLE>
22
<PAGE>
HOW TO CONTACT SCUDDER
<TABLE>
<CAPTION>
Account Service and Information
-------------------------------------------------------------------------------------------------------------
<S> <C>
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For personalized information about your
Scudder accounts; exchanges and
redemptions; or information on any
Scudder fund SCUDDER AUTOMATED
INFORMATION LINE (SAIL) 1-800-343-2890
Investment Information
-------------------------------------------------------------------------------------------------------------
To receive information about the
Scudder funds, for additional
applications and prospectuses, or for
investment questions SCUDDER INVESTOR
RELATIONS 1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
-------------------------------------------------------------------------------------------------------------
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
-------------------------------------------------------------------------------------------------------------
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
-------------------------------------------------------------------------------------------------------------
For information on Scudder For information on Scudder
Treasurers Trust,(TM)an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
-------------------------------------------------------------------------------------------------------------
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
<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 Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven Clark,
Scudder, Stevens & Clark was the first independent investment counsel firm in
the United States. Since its birth, Scudder's pioneering spirit and commitment
to professional long-term investment management have helped shape the investment
industry. In 1928, we introduced the nation's first no-load mutual fund. Today
we offer 38 pure no load(TM) funds, including the first international mutual
fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
<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, 1996
- --------------------------------------------------------------------------------
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, 1996, as amended from time to time, a copy of which may be obtained
without charge by writing to Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objectives and Policies of Scudder 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.......................................................................................13
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.......................................................38
Investment Restrictions of Scudder Pennsylvania Tax Free Fund...............................................40
PURCHASES............................................................................................................42
Additional Information About Opening An Account.............................................................42
Checks......................................................................................................42
Wire Transfer of Federal Funds..............................................................................42
Additional Information About Making Subsequent Investments by AutoBuy.......................................43
Share Price.................................................................................................43
Share Certificates..........................................................................................43
Other Information...........................................................................................43
EXCHANGES AND REDEMPTIONS............................................................................................44
Exchanges...................................................................................................44
Redemption by Telephone.....................................................................................45
Redemption By AutoSell......................................................................................45
Redemption by Mail or Fax...................................................................................46
Redemption by Write-A-Check.................................................................................46
Other Information...........................................................................................46
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................47
The Pure No-Load(TM) Concept................................................................................47
Dividend Reinvestment Plan..................................................................................48
Scudder Funds Centers.......................................................................................48
Reports to Shareholders.....................................................................................48
Transaction Summaries.......................................................................................48
THE SCUDDER FAMILY OF FUNDS..........................................................................................49
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................53
PERFORMANCE INFORMATION..............................................................................................54
Average Annual Total Return.................................................................................54
Cumulative Total Return.....................................................................................54
Total Return................................................................................................55
Yield.......................................................................................................55
Effective Yield.............................................................................................56
Tax-Equivalent Yield........................................................................................56
ORGANIZATION OF THE FUNDS............................................................................................60
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER...................................................................................................61
Scudder New York Tax Free Fund..............................................................................62
Scudder New York Tax Free Money Fund........................................................................63
Scudder Ohio Tax Free Fund..................................................................................64
Scudder Pennsylvania Tax Free Fund..........................................................................65
Personal Investments by Employees of the Adviser............................................................66
TRUSTEES AND OFFICERS................................................................................................66
REMUNERATION.........................................................................................................69
DISTRIBUTOR..........................................................................................................69
TAXES................................................................................................................70
Federal Taxation............................................................................................70
State Taxation..............................................................................................74
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund.....................................74
Scudder Ohio Tax Free Fund..................................................................................74
Scudder Pennsylvania Tax Free Fund..........................................................................75
PORTFOLIO TRANSACTIONS...............................................................................................75
Brokerage Commissions.......................................................................................75
Portfolio Turnover..........................................................................................76
NET ASSET VALUE......................................................................................................76
ADDITIONAL INFORMATION...............................................................................................77
Experts.....................................................................................................77
Shareholder Indemnification.................................................................................78
Ratings of Municipal Obligations............................................................................78
Commercial Paper Ratings....................................................................................79
Glossary....................................................................................................79
Other Information...........................................................................................80
FINANCIAL STATEMENTS.................................................................................................81
</TABLE>
ii
<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. Because of its focus on New York tax-exempt
investments, the Scudder New York Tax Free Money Fund will have a more limited
number of investment options available to it than a fund that does not focus on
investments from a single state. Consequently, the Fund may need to invest a
significant percentage of its assets in single issuer. Changes in the financial
condition or market assessment of such an issuer could have a significant
adverse impact on the Fund. Therefore an investment in this Fund may be riskier
than an investment in a money market fund that does not focus on investments
from a single state.
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. The Scudder New York
Tax Free Money Fund is concentrated in securities issued by New York governments
and related entities. Changes in the financial condition or market assessment of
the financial condition of these entities could have a significant adverse
impact on the Fund. Consequently, an investment in the Fund may be riskier than
an investment in a money market fund that does not concentrate in securities
issued by, or within, a single state.
Under normal market conditions, the Fund's portfolio securities will
consist of New York municipal securities. In addition, the Fund may make
temporary taxable investments as described below, and may hold cash. Generally,
the Fund may purchase only securities which are rated, or issued by an issuer
rated, within the two highest quality ratings categories of two or more of the
following rating agencies: Moody's Investors Service, Inc. ("Moody's") (Aaa and
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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
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
2
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shareholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00 the
Trustees have the authority (1) to reduce or increase the number of shares
outstanding on a pro rata basis, and (2) to offset each shareholder's pro rata
portion of the deviation between net asset value per share and $1.00 from the
shareholder's accrued dividend account or from future dividends. The Fund may
hold cash for the purpose of stabilizing its net asset value per share. Holdings
of cash, on which no return is earned, would tend to lower the yield of the
Fund.
Securities backed by guarantees. The Scudder New York Tax Free Money Fund
invests in securities backed by guarantees from banks, insurance companies and
other financial institutions. The Fund's ability to maintain a stable share
price may depend upon such guarantees, which are not supported by federal
deposit insurance. Consequently, changes in the credit quality of these
institutions could have an adverse impact on securities they have guaranteed or
backed, which could cause losses to the Fund and affect its share price.
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.
3
<PAGE>
Securities rated below BBB are commonly referred to as "junk bonds" and involve
greater price volatility and higher degrees of speculation with respect to the
payment of principal and interest than higher-quality fixed-income securities.
In addition, the trading market for these securities is generally less liquid
than for higher-rated securities and the Funds may have difficulty disposing of
these securities at the time they wish to do so. The lack of a liquid secondary
market for certain securities may also make it more difficult for the Funds to
obtain accurate market quotations for purposes of valuing their portfolios and
calculating their net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
the Fund will be purchased upon issuance, which may involve special risks
because the securities so acquired are new issues. In such instances the Fund
may be a substantial purchaser of the issue and therefore have the opportunity
to participate in structuring the terms of the offering. Although this may
enable the Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
During the year ended March 31, 1996, the average monthly
dollar-weighted market value of the bonds in the Fund's portfolio rated lower
than Baa by Moody's or BBB by S&P or Fitch, or their equivalent, was 0%.
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
4
<PAGE>
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.
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)
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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
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
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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
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
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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.
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.
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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
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
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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
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 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 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 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 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 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.
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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 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
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
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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.
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.
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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,
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.
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1996-97 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 was 19.2% above the 1994
estimated national average of $21,809. During the recent past, 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
was 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 was the first to be enacted in the
administration of the Governor. It was the first budget in over half a century
which proposed and, as enacted, projected an absolute year-over-year decline in
disbursements in the General Fund, the State's principal operating fund.
Spending for State operations was projected to drop even more sharply, by 4.6%.
Nominal spending from all State spending sources (i.e., excluding Federal aid)
was 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.
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The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, and subsequently amended it. There can be no assurance
that the Legislature will enact the Executive Budget into law or that the
projections set forth in the Executive Budget will not differ materially and
adversely from actual results.
The Governor's Executive Budget projected balance on a cash basis in
the General Fund. It reflected a continuing strategy of substantially reduced
State spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. The 1996-1997 Executive
Budget proposed $3.9 billion in actions to balance the 1996-97 State Financial
Plan. The Executive Budget proposed to close this gap primarily through a series
of spending reductions and cost containment measures. The Executive Budget
projected (i) over $1.8 billion in savings from cost containment and other
actions in social welfare programs, including Medicaid, welfare and various
health and mental health programs; (ii) $1.3 billion in savings from a reduced
State General Fund share of Medicaid made available from anticipated changes in
the Medicaid program, including an increase in the Federal share of Medicaid;
(iii) over $450 million in savings from reforms and cost avoidance in
educational services (including school aid and higher education), while
providing fiscal relief from certain State mandates that increase local
spending; and (iv) $350 million in savings from efficiencies and reductions in
other State programs. The State has noted that there is considerable uncertainty
as to the ultimate composition of the Federal budget, including uncertainties
regarding major Federal entitlement reforms.
The State Division of the Budget has noted that the economic and
financial condition of the State may be affected by various financial, social,
economic and political factors. Those factors can be very complex, can vary from
fiscal year to fiscal year, and are frequently the result of actions taken not
only by the State but also by entities, such as the Federal government, that are
outside the State's control. Because of the uncertainty and unpredictability of
changes in these factors, their impact cannot be fully included in the
assumptions underlying the State's projections. There can be no assurance that
the State economy will not experience results that are worse than predicted,
with corresponding material and adverse effects on the State's financial
projections.
To make progress toward addressing recurring budgetary imbalances, the
1996-97 Executive Budget proposed significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be no
assurance that the Legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in future fiscal years. The 1996-97
Executive Budget included actions that will have an impact on receipts and
disbursements in future fiscal years. The net impact of these actions is
expected to produce a potential imbalance in the 1997-98 fiscal year of $1.4
billion and in the 1998-99 fiscal year of $2.5 billion, assuming implementation
of the 1996-97 Executive Budget recommendations. It is expected that the
Governor will propose to close these budget gaps with future spending
reductions.
Uncertainties with regard to both the economy and potential decisions
at the Federal level add further pressure on future budget balance in New York
State. For example, various proposals relating to Federal tax and spending
policies could, if enacted, have a significant impact on the State's financial
condition in the current and future fiscal years. Specifically, the assumption
of $1.3 billion in savings in the State fiscal year 1996-97 from a reduced State
General Fund share of Medicaid is contingent upon anticipated changes to Federal
provisions, including an increase in the Federal share of Medicaid from 50 to 60
percent. Other budget and tax proposals under consideration at the Federal level
but not included in the State's 1996-97 Executive Budget forecast could also
have a disproportionately negative impact on the longer-term outlook for the
State's economy as compared to other states. A significant risk to the State's
projections arises from tax legislation under consideration by Congress and the
President. Congressionally adopted retroactive changes to Federal tax treatment
of capital gains would flow through automatically to the State personal income
tax. Such changes, if ultimately enacted, could produce revenue losses in the
1996-1997 fiscal year. In addition, changes in Federal aid programs, currently
pending in Congress, could result in prolonged interruptions in the receipt of
Federal grants.
On March 15, 1996, the Governor announced that additional projected
resources had been identified for the State fiscal year 1996-97, which could be
used for additional program needs if the Federal government enacts welfare and
Medicaid reform in the near future, or which could be used as part of a
contingency plan, if such reform is not enacted in the State fiscal year
1996-97, to offset the loss of welfare and Medicaid reform benefits to the State
assumed in the 1996-97 Executive Budget.
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In the State's 1996 fiscal year and in certain recent fiscal years, the
State has failed to enact a budget prior to the beginning of the State's fiscal
year. The State budget for the 1997 fiscal year was not adopted by the statutory
deadline of April 1, 1996.
The projections and assumptions contained in the 1996-97 Executive
Budget are subject to revision which may involve substantial change, and no
assurance can be given that these estimates and projections will be realized.
Recent Financial Results. The General Fund is the principal operating fund of
the State and is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund and
receives almost all State taxes and other resources not dedicated to particular
purposes.
The State reported a General Fund operating deficit of $1.426 billion
for the 1994-95 fiscal year, as compared to an operating surplus of $914 million
for the prior fiscal year. The 1994-95 fiscal year deficit was caused by several
factors, including the use of $1.026 billion of the 1993-94 cash-based surplus
to fund operating expenses in 1994-95 and the adoption of changes in accounting
methodologies by the State Comptroller. These factors were offset by net
proceeds of $315 million in bonds issued by the Local Government Assistance
Corporation.
On April 3, 1996, the State announced that the General Fund for the
State's 1996 fiscal year is expected to be balanced on a cash basis, with an
operating surplus of $445 million.
Total revenues for 1994-95 were $31.455 billion. Revenues decreased by
$173 million over the prior fiscal year, a decrease of less than one percent.
Total expenditures for 1994-95 totaled $33.079 billion, an increase of $2.083
billion, or 6.7 percent over the prior fiscal year.
The State's financial position on a GAAP (generally accepted accounting
principles) basis as of March 31, 1995 showed an accumulated deficit in its
combined governmental funds of $1.666 billion, reflecting liabilities of $14.778
billion and assets of $13.112 billion.
Debt Limits and Outstanding Debt. There are a number of methods by which the
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the 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
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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.
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 could be presented to the
voters for their consideration, it had to be passed by a separately elected
legislature. The amendment was passed by the Senate and Assembly in June 1995.
The Amendment was thereafter submitted to voters in November 1995, where it was
defeated.
On January 13, 1992, Standard & Poor's Corporation ("Standard &
Poor's") reduced its ratings on the State's general obligation bonds from A to
A- and, in addition, reduced its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. Standard & Poor's also
continued its negative rating outlook assessment on State general obligation
debt. On April 26, 1993, Standard & Poor's revised the 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 Investors Service, Inc. ("Moody's") reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness.
The State anticipated that its capital programs would be financed, in
part, by State and public authorities borrowings in 1995-96. The State expected
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 had 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.
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 were 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 were 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 were 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)
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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; (7)
challenges to certain aspects of petroleum business taxes; (8) action alleging
damages resulting from the failure by the State's Department of Environmental
Conservation to timely provide certain data; (9) a challenge to the
constitutionality of the treatment of certain moneys held in a Supplemental
Reserve Fund; and (10) a challenge to the constitutionality of a State lottery
game.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $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 was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year.
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 1996-97 State Financial
Plan. An adverse decision in any of these proceedings could exceed the amount of
the 1996-97 State Financial Plan reserve for the payment of judgments and,
therefore, could affect the ability of the State to maintain a balanced 1996-97
State Financial Plan. In its audited financial statements for the fiscal year
ended March 31, 1995, the State reported its estimated liability for awarded and
anticipated unfavorable judgments to be $676 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
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payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities. The fiscal health of the State 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 the public credit markets. The City was not able to sell
short-term notes to the public again until 1979.
In 1975, Standard & Poor's suspended its A rating of City bonds. This
suspension remained in effect until March 1981, at which time the City received
an investment grade rating of BBB from Standard & Poor's. On July 2, 1985,
Standard & Poor's revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On 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 July 10, 1995, Standard & Poor's downgraded its rating
on the City's $23 billion of outstanding general obligation bonds to "BBB+" from
"A-", citing to the City's chronic structural budget problems and weak economic
outlook. Standard & Poor's stated that New York City's reliance on one-time
revenue measures to close annual budget gaps, a dependence on unrealized labor
savings, overly optimistic estimates of revenues and state and federal aid and
the City's continued high debt levels also contributed to its decision to lower
the rating. Moody's currently has the City's rating under review for a possible
downgrade.
New York City is heavily dependent on New York State and Federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future Federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do not
constitute an enforceable obligation or debt of either the State or the City. As
of December 31, 1995, MAC had outstanding an aggregate of approximately $4.684
billion of its bonds. MAC is authorized to issue bonds and notes to refunds its
outstanding bonds and notes and to fund certain reserves, without limitation as
to principal amount, and to finance certain capital commitments to the Transit
Authority and the New York City School Construction Authority for the 1992
through 1997 fiscal years in the event the City fails to provide such financing.
The City and MAC have reached an agreement in principle under which MAC
will develop and implement a debt restructuring program which will provide the
City with $125 million in budget relief in fiscal year 1996, in addition to the
$20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in each of the four fiscal years starting in fiscal
year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions.
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
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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.
From time to time, the Control Board staff, OSDC, the City comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services.
On January 31, 1996, the City published the financial plan for the
1996-1999 fiscal years (the "City Financial Plan"), which is a modification to a
financial plan submitted to the Control Board on July 11, 1995. The City
Financial Plan set forth proposed actions by the City for the 1996 fiscal year
to close substantial projected budget gaps resulting from lower than projected
tax receipts and other revenues and greater than projected expenditures. In
addition to substantial proposed agency expenditure reductions, the Financial
Plan reflected a strategy to substantially reduce spending for entitlements for
the 1996 and subsequent fiscal years, and to decrease the City's costs for
Medicaid in the 1997 fiscal year and thereafter by increasing the Federal share
of Medicaid costs otherwise paid by the City. This strategy has been the subject
of substantial debate, and implementation of this strategy will be significantly
affected by State and Federal budget proposals currently being considered. It is
likely that the City Financial Plan will be changed significantly in connection
with the preparation of the Executive Budget for the 1997 fiscal year as a
result of the status of State and Federal budget proposals and other factors.
The City Financial Plan also set forth projections for the 1997 through
1999 fiscal years and outlined a proposed gap-closing program to eliminate a
projected gap of $2.0 billion for the 1997 fiscal year, and to reduce projected
gaps of $3.3 billion and $4.1 billion for the 1998 and 1999 fiscal years,
respectively, assuming successful implementation of the gap-closing program for
the 1996 fiscal year.
The proposed gap-closing actions for the 1997 through 1999 fiscal years
included: (i) additional agency actions, totaling between $643 million and $691
million in each of the 1997 through 1999 fiscal years; (ii) additional savings
resulting from State and Federal aid and cost containment in entitlement
programs to reduce City expenditures and increase revenues by $650 million in
the 1997 fiscal year and by $727 million in each of the 1998 and 1999 fiscal
years; (iii) additional proposed Federal aid of $50 million in the 1997 fiscal
year and State aid of $100 million in each of the 1997 through 1999 fiscal
years; (iv) the receipt of $300 million in the 1997 fiscal year from
privatization or other initiatives, certain of which actions is expected to
require legislative action by the City Council; and (v) the assumed receipt of
revenues relating to rent payments for the City's airports, totaling $244
million, $226 million and $70 million in the 1997 through 1999 fiscal years,
respectively, which are currently the subject of a dispute with the Port
Authority and the collection of which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's remedies
under the leases through pending legal actions. The City was also preparing an
additional contingency gap-closing program for the 1997 fiscal year to be
comprised of $200 million in additional agency actions.
The Federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The nature and extent of the impact on the City of the Federal and
State budgets, when adopted, is uncertain, and no assurance can be given that
Federal or State actions included in the Federal and State adopted budgets may
not have a significant adverse impact on the City's budget and the City
Financial Plan.
The projections for the 1996 through 1999 fiscal years reflected the
costs of the proposed settlement with the teachers union and the recent
settlement with a coalition of municipal unions, and assumed that the City will
reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements.
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The City's financial plans have been the subject of extensive public
comment and criticism. The City comptroller has issued reports identifying risks
ranging between $440 million and $560 million in the 1996 fiscal year before
taking into account the availability of $160 million in the general reserve, and
between $2.05 billion and $2.15 billion in the 1997 fiscal year after
implementation of the City's proposed gap-closing actions. With respect to the
1997 fiscal year, the report noted that the City Financial Plan assumed the
implementation of highly uncertain State and Federal actions, most of which are
unlikely to be implemented, that would provide between $1.2 billion and $1.4
billion in relief to the City, and identified additional risks. The report
concluded that the magnitude of the budget risk for the 1997 fiscal year, after
two years of large agency cutbacks and workforce reductions, indicated the
seriousness of the City's continuing budget difficulties, and that the City
Financial Plan would require substantial revision in order to provide a credible
program for dealing with the large projected budget gap for the 1997 fiscal
year.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations in fiscal year 1996 to finance the City's current estimate of its
seasonal cash flow needs for the 1996 fiscal year. Seasonal financing
requirements for the 1995 fiscal year increased to $2.2 billion from $1.75
billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.
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 State's projections of its receipts and disbursements.
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.
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
economic, political 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.
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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 1994 is 11,102,000.
State Economy. While diversifying more into the service and other
non-manufacturing areas, the Ohio economy continues to rely in part on durable
goods manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the economy, with over half the State's area devoted to
farming and approximately 16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, for
the last five years the State rates were below the national rates (4.8% versus
5.6% in 1995). 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
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). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State
finances, successfully addressed. 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 that FY, both in light of a continuing uncertain nationwide economic
situation, there was projected--and then timely addressed--an FY 1992 imbalance
in GRF resources and expenditures. In response, the Governor ordered most State
agencies to reduce GRF spending in the last six months of FY 1992 by a total of
approximately $184 million; the $100.4 million BSF balance and additional
amounts from certain other funds were transferred late in the FY to the GRF; and
adjustments were made in the timing of certain tax payments.
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A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to BSF replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed
for debt service or lease rentals on any State obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million was transferred into the BSF (which had an
April 3, 1996 balance of over $828 million).
The GRF appropriations act for the 1995--96 biennium was passed on June
28, 1995 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. In accordance with
the appropriations act, the significant June 30, 1995 GRF fund balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, was
transferred to the BSF and other funds including school assistance funds and, in
anticipation of possible federal program changes, a human services stabilization
fund.
Debt Limits and Outstanding Debt. The State's incurrence or assumption
of debt without a vote of the people is, with limited exceptions, prohibited by
current State constitutional provisions. The State may incur debt, limited in
amount to $750,000, to cover casual deficits or failures in revenues or to meet
expenses not otherwise provided for. The Constitution expressly precludes the
State from assuming the debts of any local government or corporation. (An
exception is made in both cases for any debt incurred to repel invasion,
suppress insurrection or defend the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio voters
have authorized the incurrence of State debt and the pledge of taxes or excises
to its payment. At April 3, 1996, $892 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding. The
only such State debt at that date still authorized to be incurred were portions
of the highway bonds, and the following: (a) up to $100 million of obligations
for coal research and development may be outstanding at any one time ($39.6
million outstanding); and (b) $240 million of obligations previously authorized
for local infrastructure improvements, no more than $120 million of which may be
issued in any calendar year ($805.4 million outstanding); and (c) up to $200
million in general obligation bonds for parks, recreation and natural resources
purposes which may be outstanding at any one time ($47.2 million outstanding,
with no more than $50 million to be issued in any one year, and none have yet
been issued).
The electors approved in November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, authorizes not more than $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly
that would submit a constitutional amendment relating to certain other aspects
of State debt. The proposal would authorize, among other things, the issuance of
State general obligations debt for a variety of purposes debt service on all
State general obligation debt and GRF-supported obligations would not exceed 5%
of the preceding fiscal year's GRF expenditures.
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 $4.8 billion of
which was outstanding at April 17, 1996.
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
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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 that would submit 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 to submission 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 approximately 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.
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 appealed and a court of
appeals reversed the trail court's findings for plaintiff districts. The case is
now pending on appeal in the Ohio Supreme Court. 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. Recent borrowings under this program
totaled $94.5 million for 27 districts (including $75 million for one) in FY
1993, and $41.1 million for 28 districts in FY 1994, and $71.1 million for 29
districts in FY 1995.
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.
Since inception in 1979, these procedures have been applied to 23 cities and
villages; for 19 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
unvoiced 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.
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As of June 30, 1995, outstanding general obligation bonds of the
Commonwealth of Pennsylvania are rated AA- by S&P and A1 by Moody's.
The portfolio of the Fund may contain different issues of long-term
debt obligations issued by or on behalf of the Commonwealth of Pennsylvania and
counties, municipalities and political subdivisions or public authorities.
Some of the debt obligations acquired by the Fund may be General
Obligation Bonds of the issuer. Others may be Industrial Revenue Bonds or
Revenue Bonds of municipal utilities, housing authorities, hospital authorities,
parking authorities, school districts or educational institutions which are
dependent upon the revenues from the facility.
Prospective investors should consider the financial difficulties and
pressures which the Commonwealth of Pennsylvania and certain of its municipal
subdivisions have undergone. Without intending to be complete, the following
briefly summarizes some of these difficulties and the current financial
situation, as well as some of the complex factors affecting the financial
situation in the Commonwealth. It is derived from sources that are generally
available to investors and is based in part on information obtained from various
state and local agencies in Pennsylvania. No independent verification has been
made of the following information. Both the Commonwealth and the City of
Philadelphia have historically experienced significant revenue shortfalls. There
can be no assurance that the Commonwealth will not experience further declines
in economic conditions or that portions of the municipal obligations purchased
by the Fund will not be affected by such declines.
State Economy. 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 1995 level of 82.1 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 1995, manufacturing employment represented 17.9 percent of all
nonagricultural employment in Pennsylvania while the services sector accounted
for 30.4 percent and the trade sector accounted for 22.8 percent.
The Commonwealth recently experienced a slowdown in its economy.
Moreover, economic strengths and weaknesses vary in different parts of the
Commonwealth. For February, 1996, the seasonally adjusted unemployment rate in
Pennsylvania was 5.5% compared to 5.5% for the United States. During 1995, the
annual average seasonally adjusted unemployment rate in Pennsylvania was 5.9%
compared to 5.6% for the United States.
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
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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 Conditions. 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, and a return to a positive fund
balance. The fund balance for the governmental fund types, as restated, has
increased during the 1993, 1994 and 1995 fiscal years. At June 30, 1995, the
fund balance totaled $1,927.6 million including an unreserved-undesignated fund
balance of $104.8 million.
Financial Results for Recent Fiscal Years. For the five-year period
from fiscal 1991 through fiscal 1995, total revenues and other sources rose at a
9.1 percent average annual rate while total expenditures and other uses grew by
7.4 percent annually. Over two-thirds of the increase in total revenues and
other sources during this period occurred during fiscal 1992 when a $2.7 billion
tax increase was enacted to address a fiscal 1991 budget deficit and to fund
increased expenditures for fiscal 1992. For the four-year period from fiscal
1992 through fiscal 1995, total revenues and other sources increased at an
annual average of 3.3 percent, less than one-half the rate of increase for the
five-year period beginning with fiscal 1991. This slower rate of growth was due,
in part, to tax rate reductions and other tax law revisions that restrained the
growth of tax receipts for fiscal years 1993, 1994 and 1995.
Expenditures and other uses followed a pattern similar to that for
revenues, although with smaller growth rates, during the fiscal 1991 through
fiscal 1995 period. Program areas having the largest increase in costs for the
fiscal 1991 to fiscal 1995 period related to protection of persons and property,
an expansion of state prisons, and public health and welfare. Recently, efforts
to restrain the rapid expansion of public health and welfare program costs have
resulted in expenditure increases at or below the total rate of increase for
total expenditures in each fiscal year.
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
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$74.4 million below estimate. The shortfall in the personal income tax was
largely due to shortfalls in income not subject to withholding such as interest,
dividends and other income. Expenditures, excluding pooled financing
expenditures and net of all fiscal 1994 appropriation lapses, totaled $14,934.4
million representing a 7.2 percent increase over fiscal 1993 expenditures.
Medical assistance and prisons spending contributed to the rate of spending
growth for the 1994 fiscal year. The Commonwealth maintained an operating
balance on a budgetary basis for fiscal 1994 producing a fiscal year ending
unappropriated surplus of $335.8 million.
Fiscal 1995 Financial Results. Commonwealth revenues for the 1995
fiscal year were above estimate and exceeded fiscal year expenditures and
encumbrances. Fiscal 1995 was the fourth consecutive fiscal year the
Commonwealth reported an increase in the fiscal year-end unappropriated balance.
Prior to reserves for transfer to the Tax Stabilization Reserve Fund, the fiscal
1995 closing unappropriated surplus was $540.0 million, an increase of $204.2
million over the fiscal 1994 closing unappropriated surplus prior to transfers.
Commonwealth revenues during the 1995 fiscal year were $459.4 million,
2.9 percent, above the estimate of revenues used at the time the 1995 fiscal
year budget was enacted. Corporation taxes contributed $329.4 million of the
additional receipts largely due to higher receipts from the corporate net income
tax. Fiscal 1995 revenues from the corporate net income tax were 22.6 percent
over collections in fiscal 1994 and include the effects of the reduction of the
tax rate from 12.25 percent to 11.99 percent that became effective with tax
years beginning on and after January 1, 1994. The sales and use tax and
miscellaneous revenues also showed strong year-over-year growth that produced
above-estimate revenue collections. Sales and use tax revenues were $5,526.9
million, $128.8 million above the enacted budget estimate and 7.9 percent over
fiscal 1994 collections. Tax receipts from both motor vehicle and non-motor
vehicle sales contributed to the higher collections. Miscellaneous revenue
collections for fiscal 1995 were $183.5 million, $44.9 million above estimate
and were largely due to additional investment earnings, escheat revenues and
other miscellaneous revenues.
Fiscal 1996 Budget. On June 30, 1995, the Governor signed a $16.2
billion general fund budget, an increase of approximately 2.7 percent over the
total appropriations from Commonwealth revenues in the fiscal 1995 budget. The
appropriations increase for fiscal 1996 is one of the lowest rates in recent
years. Areas receiving the largest budgetary increases are medical assistance
and basic education. In addition, the budget accelerated corporate net income
tax rate reductions, eliminated the inheritance tax paid by a surviving spouse
on jointly owned property, and made other business tax reductions.
Fiscal 1997 Budget. In February 1996, the Governor presented his
proposed fiscal 1997 budget to the General Assembly. Proposed appropriations
from General Fund Commonwealth revenues total $16,189.9 million, a reduction
from the estimated $16,219.9 million (including proposed supplemental
appropriations) for fiscal 1996. The proposed reduction represents a decline of
approximately 0.2 percent in appropriations from the prior fiscal year. Revenue
receipts are estimated to increase by $403.9 million, or 2.5 percent, over
anticipated receipts for fiscal 1996. The anticipated increased revenues,
together with the projected $140 million of appropriation lapses during fiscal
1996 and the proposed drawdown of approximately $95 million of surplus provide
the funding sources for the proposed budget. The proposed drawdown of the fiscal
1996 unappropriated surplus produces a projected 1997 fiscal year end surplus of
under $5 million, without any consideration of possible appropriation lapses for
fiscal 1997. The decline in appropriation authority over the prior fiscal year
in the proposed budget relies on several program changes, including $329 million
of cost containment efforts in public health and welfare programs. Other
significant cost restraints include reductions to appropriations for the
state-aided colleges and universities and no increases for the state-related
colleges and universities.
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.
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 29, 1996
Auditor General certificate, the average annual tax revenues deposited in all
funds in the five fiscal years ended June 30, 1995 was approximately $17.7
billion, and, therefore, the net debt limitation for the 1996 fiscal year is
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$30.9 billion. Outstanding net debt totaled $3.9 billion at June 30, 1995,
approximately equal to the net debt at June 30, 1994. On February 28, 1994, the
amount of debt authorized by law to be issued, but not yet incurred was $16.5
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 for
the City. 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 empowered the authority to issue notes and bonds
on behalf of Philadelphia and also authorized Philadelphia to levy a one-percent
sales tax the proceeds of which would be used to pay off the bonds. In return
for 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 17, 1995. Technical modifications were made to that
plan as of July 12, 1995 and the revised plan, incorporating such technical
modifications, was approved by PICA on July 18, 1995. As of November 15, 1995,
PICA has issued approximately $1,418.7 million of its Special Tax Revenue Bonds.
No further PICA bonds are to be issued by PICA for the purpose of
financing a capital project or deficit as the authority for such bond sales
expired on December 31, 1994. PICA's authority to issue debt for the purpose of
financing a cash flow deficit expires on December 31, 1996. Its ability to
refund existing outstanding debt is unrestricted.
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. Philadelphia's preliminary unaudited General Fund
financial statements at June 30, 1995 projects a surplus approximating $59.6
million.
S&P's rating on Philadelphia's general obligation bonds is "B-."
Moody's rating is currently "BBB."
Litigation. The Commonwealth is a party to numerous lawsuits in which
an adverse final decision could materially affect the Commonwealth's
governmental operations and consequently its ability to pay debt service on its
obligations. The Commonwealth also faces tort claims made possible by the
limited waiver of sovereign immunity effected by Act 152, approved September 28,
1978, as amended. Under the Act, damages for any loss are limited to $250,000
per person and $1 million for each accident.
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
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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.
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.
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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
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.
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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
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.
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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
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.
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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
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
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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.
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
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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.
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;
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(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
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 10% of
the value of the Fund's total 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);
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(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;
(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;
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(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 10% 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
(15) make securities loans unless all loans of portfolio securities
are fully collateralized and marked to market daily.
The Trust, on behalf of Scudder New York Tax Free Money Fund and
Scudder New York 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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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.
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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<PAGE>
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 10% of the value of the Fund's total 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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<PAGE>
Scudder Ohio Tax Free Fund 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.
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:
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<PAGE>
(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, 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
10% of the value of the Fund's total 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.
Scudder Pennsylvania Tax Free Fund 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.
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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.
Additional Information About Making Subsequent Investments by AutoBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the AutoBuy program, may purchase shares of a Fund by telephone. Through this
service shareholders may purchase up to $250,000 but not less than $250. To
purchase shares by AutoBuy, shareholders should call before 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. AutoBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
AutoBuy and redeem them within seven days of the purchase, the Fund may hold the
redemption proceeds for a period of up to seven business days. If you purchase
shares and there are insufficient funds in your bank account the purchase will
be canceled and you will be subject to any losses or fees incurred in the
transaction. Auto Buy transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
In order to request purchases by AutoBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish AutoBuy may so indicate on the application.
Existing shareholders who wish to add AutoBuy to their account may do so by
completing an AutoBuy Enrollment Form. After sending in an enrollment form
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
Share Price
Purchases 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
43
<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 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
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.
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<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 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
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 AutoSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the AutoSell program may sell shares of a Fund by telephone. To sell shares by
AutoSell, shareholders should call before 4 p.m. eastern time. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be redeemed at the net asset value per share
calculated at the close of trading on the day of your call. AutoSell requests
received after the close of regular trading on the Exchange will begin their
processing and be redeemed at the net asset value calculated the following
business day. AutoSell transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
In order to request redemptions by AutoSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
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<PAGE>
New investors wishing to establish AutoSell may so indicate on the application.
Existing shareholders who wish to add AutoSell to their account may do so by
completing an AutoSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
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
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").
46
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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-Loado 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
constant 10% rate of return over the time periods indicated and reinvestment of
dividends and distributions.
47
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
======================== ====================== ====================== ====================== ======================
No-Load Fund with
YEARS Pure No-Loado Fund 8.50% Load Fund Load Fund with 0.75% 0.25% 12b-1 Fee
12b-1 Fee
======================== ====================== ====================== ====================== ======================
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
======================== ====================== ====================== ====================== ======================
15 41,772 38,222 37,698 40,371
======================== ====================== ====================== ====================== ======================
20 67,275 61,557 58,672 64,282
======================== ====================== ====================== ====================== ======================
</TABLE>
Investors are encouraged to review the fee tables 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.
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.
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<PAGE>
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Fund's prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
Initial purchases in each Scudder fund must be at least $1,000 or $500 in the
case of IRAs. Subsequent purchases must be for $100 or more. Minimum investments
for special plan accounts may be lower.
MONEY MARKET
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital, and consistent therewith, to maintain the liquidity of
capital and to provide current income through investment in a
supervised portfolio of short-term debt securities. SCIT intends to
seek to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible.
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and consistent therewith to provide current income
through investment in a supervised portfolio of U.S. Government and
U.S. Government guaranteed obligations with maturities of not more than
762 calendar days. The Fund intends to seek to maintain a constant net
asset value of $1.00 per share, although in certain circumstances this
may not be possible.
INCOME
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued in
emerging markets.
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder GNMA Fund seeks to provide investors with high current income
from a portfolio of high-quality GNMA securities.
Scudder High Yield Bond Fund seeks to provide a high level of current
income and, secondarily, capital appreciation through investment
primarily in below investment grade domestic debt securities.
Scudder Income Fund seeks to earn a high level of income consistent
with the prudent investment of capital through a flexible investment
program emphasizing high-grade bonds.
Scudder International Bond Fund seeks to provide income from a
portfolio of high-grade bonds denominated in foreign currencies. As a
secondary objective, the Fund seeks protection and possible enhancement
of principal value by actively managing currency, bond market and
maturity exposure and by security selection.
Scudder Short Term Bond Fund seeks to provide a higher and more stable
level of income than is normally provided by money market investments,
and more price stability than investments in intermediate- and
long-term bonds.
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 Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Global Discovery Fund seeks above-average capital appreciation
over the long term by investing primarily in the equity securities of
small companies located throughout the world.
Scudder Global Fund seeks long-term growth of capital primarily through
a diversified portfolio of marketable equity securities selected on a
worldwide basis. It may also invest in debt securities of U.S. and
foreign issuers. Income is an incidental consideration.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder International Fund seeks long-term growth of capital through
investment principally in a diversified portfolio of marketable equity
securities selected primarily to permit participation in non-U.S.
companies and economies with prospects for growth. It also invests in
fixed-income securities of foreign governments and companies, with a
view toward total investment return.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Quality Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Value Fund seeks long-term growth of capital through investment
in undervalued equity securities.
The Japan Fund, Inc. seeks capital appreciation through investment
in Japanese securities, primarily in common stocks of Japanese
companies.
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<PAGE>
The net asset values of most Scudder Funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder Funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; easy telephone exchanges
into other Scudder funds; shares redeemable at net asset value at any time.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By
Automatic Investment Plan" and "Exchanges and redemptions--By Automatic
Withdrawal Plan" in the Funds' 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.
52
<PAGE>
Cash Management System-- Group Sub-Accounting Plan
for Trust Accounts, Nominees and Corporations
To minimize record-keeping by fiduciaries and corporations,
arrangements have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund 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.
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.
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Distributions of net short-term and net long-term capital gains realized during
each fiscal year, if any, will be made annually. 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.
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, 1996
<S> <C> <C> <C> <C>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
Scudder New York Tax Free Money Fund 3.18% 2.65% -- 3.54%(1)
Scudder New York Tax Free Fund 7.95 8.37 7.61% --
Scudder Ohio Tax Free Fund 7.85 7.85 -- 7.77(1)
Scudder Pennsylvania Tax Free Fund 7.45 8.17 -- 8.09(1)
(1) For the period May 28, 1987 (commencement of operations) to March 31, 1996.
</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
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<PAGE>
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the
end of the applicable period, of a hypothetical
$1,000 investment made at the beginning of the
applicable period.
<TABLE>
<CAPTION>
Cumulative Total Return for periods ended March 31, 1996
<S> <C> <C> <C> <C>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
Scudder New York Tax Free Money Fund 3.18% 13.98% -- 36.06%(1)
Scudder New York Tax Free Fund 7.95 49.46 108.18% --
Scudder Ohio Tax Free Fund 7.85 45.90 -- 93.92(1)
Scudder Pennsylvania Tax Free Fund 7.45 48.08 -- 98.96(1)
(1) For the period May 28, 1987 (commencement of operations) to March 31, 1996.
</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, 1996 was 2.79%.
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.
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30-day net annualized SEC yield for the period ended March 31, 1996:
Scudder New York Tax Free Fund 4.62%
Scudder Ohio Tax Free Fund 5.04%
Scudder Pennsylvania Tax Free Fund 4.96%
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, 1996:
Scudder New York Tax Free Money Fund 2.79%
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 in the highest combined state and federal income tax
bracket would need to earn a taxable yield of 5.25% to receive after-tax income
equal to the 2.79% tax-free effective yield of Scudder New York Tax Free Money
Fund for the seven day period ended March 31, 1996.
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 in the highest combined state and federal income tax bracket would
need to earn a taxable yield of 8.70% to receive after-tax income equal to the
4.62% tax-free yield of Scudder New York Tax Free Fund for the thirty-day period
ended March 31, 1996.
For Scudder Ohio Tax Free Fund, taxpayers in the highest combined state
and federal income tax bracket would need to earn a taxable yield of 9.02% to
receive after-tax income equal to the 5.04% tax-free yield of Scudder Ohio Tax
Free Fund for the 30-day period ended on March 31, 1996.
For Scudder Pennsylvania Tax Free Fund, taxpayers in the highest
combined state and federal income tax bracket would need to earn a taxable yield
of 8.45% to receive after-tax income equal to the 4.96% tax-free yield of
Scudder Pennsylvania Tax Free Fund for the 30-day period ended on March 31,
1996.
Quotations of a Fund's performance are historical, show the performance
of a hypothetical investment and are not intended to indicate future
performance. Performance of the Fund will vary based on changes in market
conditions and the level of the Fund's expenses. An investor's shares when
redeemed, may be worth more or less than their original cost.
Investors should be aware that the principal of each Fund is not
insured.
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<PAGE>
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.
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
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<PAGE>
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.
Scudder's Theme: Build Create Provide. Marketing and fund literature may refer
to Scudder's theme: "Build Create Provide." This theme intends to encapsulate
the composition of a sound investment philosophy, one through which Scudder can
help provide investors appropriate avenues for pursuing dreams. Individuals
recognize the need to build investment plans that are suitable and directed at
achieving one's financial goals. The desired result from planning and a
long-term commitment to it is the ability to build wealth over time. While there
are no guarantees in the pursuit of wealth through investing, Scudder believes
that a sound investment plan can enhance one's ability to achieve financial
goals that are clearly defined and appropriately approached. Wealth, while a
relative term, may be defined as the freedom to provide for those interests
which you hold most important -- your family, future, and/or your community.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
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<PAGE>
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.
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.
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<PAGE>
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication 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.
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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.
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 over $12 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust and AARP Cash
Investment Funds.
In selecting the securities in which the Funds may invest, the
conclusions and investment decisions of the Adviser with respect to the Funds
are based primarily on the analyses of its own research department. The Adviser
receives published reports and statistical compilations of the issuers
themselves, as well as analyses from 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
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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, 1996. The Agreement was last approved by
the Trustees on August 8, 1995 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
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, 1994, 1995 and 1996 the investment
management fees incurred by Scudder New York Tax Free Fund were $1,367,695,
1,251,453 and $1,215,011, respectively.
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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.
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 8,
1995, and by shareholders of that Fund on December 8, 1987. The Agreement will
remain in effect until September 30, 1996 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, 1994, 1995
and 1996, investment management fees incurred by Scudder New York Tax Free Money
Fund were $50,984, $107,615 and $277,273, 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,
1997. For the fiscal year ended March 31, 1996, the Adviser did not impose a
portion of its fee amounting to $142,485 and the portion imposed amounted to
$134,788.
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
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<PAGE>
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, 1994, 1995 and 1996 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,
1994, 1995 and 1996 were 0.82%, 0.82% and 0.82%, respectively.
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, 1996, 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 8, 1995 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, 1994, 1995 and 1996, the investment management fees incurred by the
Fund were $158,146, $150,790 and $172,284, respectively. Had the Adviser imposed
a full investment management fee for the fiscal years ended March 31, 1994, 1995
and 1996, the investment management fees would have equaled $480,674, $317,609
and $486,363, 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,
1997.
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.
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<PAGE>
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, 1996, 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 8, 1995 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% percent on an
annual basis) of the average daily net assets of the Fund. For the fiscal year
ended March 31, 1994, 1995 and 1996, the Adviser did not impose a portion of its
management fees amounting to $319,172, $312,807 and $308,030, respectively; the
portion imposed amounted to $108,861, $114,361 and $145,682, 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, 1997.
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.
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<PAGE>
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
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
<S> <C> <C> <C>
Position with
Underwriter, Scudder
Principal Occupation** Investor Services,
Name, Age and Address Position with Trust and Affiliations Inc.
- --------------------- ------------------- ---------------- ----
David S. Lee (62)*#++ President and Trustee Managing Director of Scudder, President, Assistant
Stevens & Clark, Inc. Treasurer and Director
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<PAGE>
Position with
Underwriter, Scudder
Principal Occupation** Investor Services,
Name, Age and Address Position with Trust and Affiliations Inc.
- --------------------- ------------------- ---------------- ----
Henry P. Becton, Jr. (52) Trustee President and General --
WGBH Manager, WGBH Educational
125 Western Avenue Foundation
Allston, MA
Dawn-Marie Driscoll (49) Trustee Executive Fellow, Center for --
5760 Flamingo Drive Business Ethics; President,
Cape Coral, FL Driscoll Associates
Peter B. Freeman (64)++ Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI
Dudley H. Ladd (52)*# Trustee Managing Director of Scudder, Senior Vice President
Stevens & Clark, Inc. and Director
Wesley W. Marple, Jr. (64)++ Trustee Professor of Business --
413 Hayden Hall Administration, Northeastern
360 Huntington Avenue University College of
Boston, MA Business Administration
Juris Padegs (64)*+ Trustee Managing Director of Scudder, Vice President and
Stevens & Clark, Inc. Director
Daniel Pierce (62)*#++ Trustee Chairman of the Board and Vice President,
Managing Director of Scudder, Director and
Stevens & Clark, Inc. Assistant Director
Jean C. Tempel (53) Trustee General Partner, TL Ventures --
Ten Post Office Square
Suite 1325
Boston, MA
Donald C. Carleton (62)# Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Philip G. Condon (45)# Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Jerard K. Hartman (63)+ Vice President Managing Director of Scudder, --
Stevens & Clark, Inc.
Thomas W. Joseph (57)# Vice President Principal of Scudder, Stevens Vice President,
& Clark, Inc. Director, Treasurer
and Assistant Clerk
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<PAGE>
Position with
Underwriter, Scudder
Principal Occupation** Investor Services,
Name, Age and Address Position with Trust and Affiliations Inc.
- --------------------- ------------------- ---------------- ----
Jeremy L. Ragus (44)# Vice President Principal of Scudder, Stevens --
& Clark, Inc.
Rebecca Wilson (34)# Vice President Assistant Vice President of --
Scudder, Stevens & Clark, Inc.
Thomas F. McDonough (49)# Vice President and Principal of Scudder, Stevens Clerk
Secretary & Clark, Inc.
Pamela A. McGrath (43)# Vice President and Managing Director of Scudder, --
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell (51)+ Vice President and Principal of Scudder, Stevens Assistant Treasurer
Assistant Treasurer & Clark, Inc.
Coleen Downs Dinneen (35)# 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.
** 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, 1996 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, 1996 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
1,031,148 shares of Scudder New York Tax Free Fund or 5.85% 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, 1996 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
681,731 shares of Scudder Pennsylvania Tax Free Fund or 11.97% 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, 1996 no person
owned beneficially more than 5% of each Fund's outstanding shares, except as
noted 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,
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, 1996,
such fees totaled $14,241 for Scudder New York Tax Free Fund, $14,241 for
Scudder New York Tax Free Money Fund, $14,214 for Scudder Ohio Tax Free Fund and
$14,176 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.
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1995
<S> <C> <C> <C> <C>
===================== ============================== ==================== ===================== =========================
(1) (2) (3) (4) (5)
Pension or Total Compensation From
Retirement Estimated Annual Scudder State Tax Free
Name of Person, Aggregate Compensation from Benefits Accrued Benefits Upon Trust and Fund Complex
Position Scudder State Tax Free Trust* As Part of Fund Retirement Paid to Trustee
Expenses
===================== ============================== ==================== ===================== =========================
Henry P. Becton, Jr., $15,800 N/A N/A $82,800
Trustee (15 funds)
Dawn-Marie Driscoll, $16,100 N/A N/A $92,800
Trustee (16 funds)
Peter B. Freeman, $16,100 N/A N/A $126,750
Trustee (31 funds)
Wesley W. Marple, Jr., $16,100 N/A N/A $93,100
Trustee (15 funds)
Jean C. Tempel, $16,100 N/A N/A $92,200
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
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<PAGE>
agreement dated June 1, 1987 will remain in effect until September 30, 1996 and
from year to year thereafter only if its continuance is approved annually by a
majority of the members of the Board of Trustees who are not parties to such
agreement or interested persons of any such party and either by vote of a
majority of the Board of Trustees or a majority of the outstanding voting
securities of the Trust. The underwriting agreement was last approved by the
Trustees on August 8, 1995.
Under the 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
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
70
<PAGE>
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.
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,
1996, New York Tax Free Fund had a net capital loss carryforward of
approximately $6,317,000, which may be applied against realized capital gains of
each succeeding year until fully utilized or until March 31, 2003, $3,937,000
expires March 31, 2003 and $2,380,000 expires March 31, 2004. New York Tax Free
Money Fund had a capital loss carryforward of approximately $53,000, which may
be applied against realized capital gains of each succeeding year until fully
utilized or until March 31, 2000 ($1,000), March 31, 2001 ($2,000), March 31,
2002 ($4,000) and March 31, 2003 ($43,000), and March 31, 2004 ($3,000), the
respective expiration dates, whichever occurs first.
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.
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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.
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.
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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
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
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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.
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.
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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.
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 Scudder Fund Accounting
Corporation for appraisal purposes, or who supply research, market and
statistical information to the Trust or the Adviser. The term "research, market
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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.
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.
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, 1994, 1995 and 1996 were 158.0%,
83.8% and 80.5%, respectively.
The portfolio turnover rates for Scudder Ohio Tax Free Fund for the
fiscal periods ended March 31, 1994, 1995 and 1996 were 12.2%, 19.9% and 19.6%,
respectively. The portfolio turnover rates for Scudder Pennsylvania Tax Free
Fund for the fiscal periods ended March 31, 1994, 1995 and 1996 were 17.4%,
26.2% and 11.1%, 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
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possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
Scudder 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
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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
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
78
<PAGE>
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 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.
79
<PAGE>
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.
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 subsidiary of the Adviser, computes net
asset value per share for each Fund. Scudder New York Tax Free Money Fund pays
SFAC an annual fee equal to 0.020% of the first $150 million of average daily
net assets, 0.0060% of the next $850 million of such assets and 0.0035% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. The fee incurred by Scudder New York Tax Free Money Fund for the fiscal
year ended March 31, 1996 amounted to $30,000. Scudder New York Tax Free Money
Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund each pay
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 Scudder New York Tax Free Fund for the fiscal year
ended March 31, 1996 amounted to $53,141. For the fiscal year ended March 31,
1996, the amount charged to Scudder Ohio Tax Free Fund by SFAC amounted to
$36,000, of which $3,000 was unpaid at March 31, 1996. For the fiscal year ended
March 31, 1996, the amount charged to Scudder Pennsylvania Tax Free Fund by SFAC
amounted to $36,000, of which $3,000 was unpaid at March 31, 1996.
80
<PAGE>
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a 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,
1996 amounted to $124,088, $60,783, $58,847 and $62,311, respectively, of which
$10,151, $5,060, $4,831 and $5,167, respectively, were unpaid at March 31, 1996.
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, 1996, and are deemed to be a part of
this Statement of Additional Information.
Scudder New York Tax Free Money Fund
The financial statements, including the Investment Portfolio, of
Scudder New York Tax Free Money Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements, are
incorporated by reference and attached in the Annual Report to the shareholders
of the Fund dated March 31, 1996, 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, 1996, 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, 1996, and are deemed to be a part of
this Statement of Additional Information.
81
<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, 1996
o For investors seeking triple-tax-free income exempt from New York City,
state, and regular federal income taxes.
o Pure no-load(TM) funds with no commissions to buy, sell, or exchange shares.
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
SCUDDER NEW YORK TAX FREE FUND
CONTENTS
2 In Brief
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
11 Scudder New York Tax Free Money Fund Investment Portfolio
14 Scudder New York Tax Free Money Fund Financial Statements
17 Scudder New York Tax Free Money Fund Financial Highlights
18 Scudder New York Tax Free Fund Investment Portfolio
23 Scudder New York Tax Free Fund Financial Statements
26 Scudder New York Tax Free Fund Financial Highlights
27 Notes to Financial Statements
33 Report of Independent Accountants
34 Tax Information
37 Officers and Trustees
38 Investment Products and Services
39 How to Contact Scudder
IN BRIEF
Scudder New York Tax Free Money Fund
o Scudder New York Tax Free Money Fund offered a 7-day effective yield of
2.79% on March 31, 1996, equivalent to a 5.25% taxable yield for investors
in the top federal and state income tax brackets.
Seven-Day Effective Yields on March 31, 1996
------------------------------------------
Scudder New York Taxable
Tax Free Money Equivalent
Fund Yield
------------------------------------------
2.79% 5.25%
------------------------------------------
Scudder New York Tax Free Fund
o Scudder New York Tax Free Fund provided a 4.62% 30-day net annualized SEC
yield on March 31, 1996.
o For shareholders subject to the 46.88% maximum combined federal and state
income tax rate, the Fund's yield was equal to a taxable yield of 8.70%.
30-Day Yield on March 31, 1996
------------------------------------------
Scudder New York Taxable
Tax Free Money Equivalent
Fund Yield
------------------------------------------
4.62% 8.70%
------------------------------------------
o Scudder New York Tax Free Fund exceeded the average performance of New York
tax-exempt funds over one-, two-, three-, four-, five-, and 10-year
periods, according to Lipper.
2
<PAGE>
LETTER FROM THE FUNDS' PRESIDENT
Dear Shareholders,
Widespread declines in U.S. interest rates helped create generally
hospitable conditions for bonds during the past 12 months. Scudder New York Tax
Free Fund wrapped up the fiscal year ended March 31, 1996, with a total return
of 7.95%, reflecting appreciation in the Fund's share price and an attractive
stream of double-tax-free income to investors. From a competitive standpoint,
these results were especially rewarding, as the Fund outpaced the average
performance of similar New York tax-free funds over all time periods tracked by
Lipper Analytical Services, Inc. In addition, despite rate declines, Scudder New
York Tax Free Money Fund posted a 5.25% tax equivalent yield as of the close of
the period for investors in the highest state and federal tax brackets.
As bond markets regained strength during 1995, taxable bonds led the
march back, while tax-free municipal bonds recovered at a more leisurely pace.
By fall, municipal bonds had become attractively valued compared to Treasuries,
which helped renew investor interest and resulted in outperformance versus
taxable bonds.
Recent indicators raised concerns that the economy may be stronger than
originally believed, which unsettled investors. Still, ample evidence of slower
economic growth and the absence of mounting inflationary pressures suggests that
the economic expansion is indeed winding down. This latter scenario would be
beneficial to bonds. Given the current economic uncertainties, the Fund's
challenge is to stand ready to participate in potential price rallies but also
provide a measure of price stability should the market weaken instead, while
continuing to supply competitive levels of double-tax-free income.
In closing, we would like to take this opportunity to announce that a
new member joins the Scudder Family of Funds as of May 8 -- Scudder Emerging
Markets Growth Fund. The new Fund focuses on stocks in developing nations around
the globe. For more information about Scudder Emerging Markets Growth Fund and
other Scudder products and services, see page 38. For questions about Scudder
New York Tax Free Fund or New York Tax Free Money Fund, please call a Scudder
Investor Relations representative at 1-800-225-2470.
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, 1996
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER NEW YORK TAX FREE FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,795 7.95% 7.95%
5 Year $14,946 49.46% 8.37%
10 Year $20,818 108.18% 7.61%
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,838 8.38% 8.38%
5 Year $14,745 47.45% 8.07%
10 Year $21,713 117.13% 8.05%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED MARCH 31
Scudder New York Tax Free Fund
Year Amount
- ----------------------
'86 $10,000
'87 $11,071
'88 $11,004
'89 $11,945
'90 $12,922
'91 $13,929
'92 $15,477
'93 $17,892
'94 $18,126
'95 $19,285
'96 $20,818
Lehman Brothers Municipal Bond Index
Year Amount
- ----------------------
'86 $10,000
'87 $11,097
'88 $11,376
'89 $12,196
'90 $13,482
'91 $14,726
'92 $16,197
'93 $18,225
'94 $18,648
'95 $20,034
'96 $21,713
The unmanaged Lehman Brothers Municipal Bond Index is a market value-
weighted measure of municipal bonds issued across the United States.
Index issues have a credit rating of at least Baa and a maturity
of at least two years. Index returns assume reinvestment of dividends
and, unlike Fund returns, do not reflect any fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
YEARLY PERIODS ENDED MARCH 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
--------------------------------------------------------------------------------
NET ASSET VALUE... $11.43 $10.39 $10.53 $10.60 $10.73 $10.98 $11.40 $10.32 $10.38 $10.67
INCOME DIVIDENDS.. $ .75 $ .73 $ .72 $ .69 $ .67 $ .65 $ .61 $ .54 $ .52 $ .53
CAPITAL GAINS
AND OTHER
DISTRIBUTIONS..... $ .15 $ .20 $ -- $ .09 $ -- $ .25 $ .61 $ .73 $ .05 $ --
FUND TOTAL
RETURN (%)........ 10.71 -.61 8.55 8.18 7.79 11.11 15.60 1.31 6.39 7.95
INDEX TOTAL
RETURN (%)........ 10.97 2.52 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38
</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, 1996
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
State Agency/Lease 20%
Pollution Control/
Industrial Development 12%
Higher Education 12% We continue to
Core Cities/Lease 10% emphasize careful
Water/Sewer Revenue 9% overall credit selection
Hospital Health 8% and portfolio
Other General diversification.
Obligation/Lease 8%
Housing Finance Authority 7%
Port/Airport Revenue 5%
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 44% We increased somewhat
AA 6% the percentage of BBB
A 16% and non-rated bonds in
BBB 27% the Fund's portfolio to
Not Rated 7% enhance yield while
---- maintaining our
100% higher-quality
==== orientation.
Weighted average quality: AA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
EFFECTIVE MATURITY
- --------------------------------------------------------------------------
Less than 1 year 7% Bonds with effective
1 - 5 years 12% maturities from five to
5 - 10 years 23% 20 years represented
10 - 20 years 45% 68% of the Fund's
Greater than 20 years 13% portfolio as of the close
---- of its fiscal year,
100% compared with 49% a
==== year earlier.
Weighted average effective maturity: 12 years
- -----------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 18.
5
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
During the course of Scudder New York Tax Free Money Fund's most recent
fiscal year, short-term interest rates generally declined. As fears of renewed
inflation diminished following the Federal Reserve's series of 1994 interest
rate increases, the Fed lowered interest rates in July and December of 1995, and
most recently in January 1996. These rate decreases fueled a strong recovery in
the bond markets. Since then, intermediate- and long-term yields have risen on
news of stronger-than-expected economic growth. Short-term interest rates held
firm, however, as sellers of long-term issues seeking a temporary haven created
strong demand for money market securities. The short-term New York municipal
market was marked by heavy issuance of New York City securities and moderate
issuance by other New York tax-exempt entities. As a result, New York City
securities offered the best overall value for investors with ample liquidity and
relatively attractive yields, as well as top-tier short-term credit ratings.
In this environment, our strategy has been to seek a relatively high
yield by maintaining an average maturity slightly longer than Scudder New York
Tax Free Money Fund's peers. As of March 31, 1996, the Fund's average maturity
stood at 69 days, compared with 47 days on March 31, 1995. The Fund's 7-day
effective yield as of March 31, 1996, was 2.79%. For investors in the highest
combined state and federal income tax bracket, the Fund's yield equaled a 5.25%
compounded taxable yield, higher than the 4.76% average for taxable money funds,
according to IBC/Donoghue, Inc., an independent firm that tracks money fund
performance. The Fund provided a total return of 3.18% for the 12 months ended
March 31, 1996, assuming reinvestment of all income distributions, which totaled
$0.031 during the period.
If you have any questions about the Fund or your investments, please
call a Scudder Investor Relations representative at 1-800-225-2470. Page 39
provides more information on how to contact Scudder. Thank you for choosing
Scudder New York Tax Free Money Fund to help meet your investment needs.
Sincerely,
Your Portfolio Management Team
/s/Rebecca Wilson /s/K. Sue Cote
Rebecca Wilson K. Sue Cote
Scudder 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 10 years of experience in municipal investing and research.
Rebecca assumed responsibility for the Fund in 1987 after joining Scudder in
1986. K. Sue Cote, Portfolio Manager, joined the Fund's team in 1987 and has
spent 12 years working with short-term fixed-income investments.
6
<PAGE>
SCUDDER NEW YORK TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Through the up and down periods the bond market experienced over its
most recent fiscal year, Scudder New York Tax Free Fund performed well and
continued to provide a high double-tax-free yield. On March 31, 1996, the Fund's
30-day net annualized SEC was 4.62% -- equivalent to a taxable yield of 8.70%
for shareholders subject to the 46.88% maximum combined federal and state income
tax rate. With such a yield, the Fund has a clear advantage over yields provided
by taxable investments of comparable credit quality. During the 12-month period
ended March 31, 1996, the Fund's shareholders received $0.53 per share of income
exempt from both federal and New York State income taxes.
Over the period, the Fund's share price increased $0.29 to $10.67 per
share. The combination of share price appreciation and interest income of $0.53
per share enabled the Fund to post a positive total return of 7.95% over the
12-month period. This return compares favorably with the 6.90% average total
return of the 94 New York municipal bond funds tracked by Lipper Analytical
Services for the same period.
Scudder New York Tax Free Fund also exceeded the average performance of
New York tax-exempt funds over one-, two-, three-, four-, five-, and 10-year
periods. The chart below provides the Fund's specific rankings over these
periods:
Scudder New York Tax Free Fund's Average Annual Return
Versus Lipper Average of All New York Tax-Free Funds
(Returns for periods ended March 31, 1996)
-------------------------------------------------------------------
Lipper
Scudder New Average Number
Tax York Free Annual of Funds
Period Fund Return Return Rank Tracked
-------------------------------------------------------------------
1 year 7.95% 6.90% 17 94
-------------------------------------------------------------------
2 years 7.17 6.14 9 67
-------------------------------------------------------------------
3 years 5.18 4.72 17 55
-------------------------------------------------------------------
4 years 7.69 7.03 8 45
-------------------------------------------------------------------
5 years 8.37 7.79 7 41
-------------------------------------------------------------------
10 years 7.61 7.17 3 16
-------------------------------------------------------------------
Past performance does not guarantee future results.
7
<PAGE>
Major Market Influences
During the Fund's 1995-1996 fiscal year, credit markets in general were
choppy as a result of alternating periods of increasing and declining interest
rates. As we mentioned in our September 1995 report, April through June 1995 was
marked by steadily rising bond prices and declining yields as a relatively slow
U.S. economy created the conditions for a rally. In July the Federal Reserve
made the first of three moves to ease interest rates, but the market reacted
with a two-month downturn, temporarily losing faith that the Fed would ease
further.
From there, other influences spurred a sustained rally. From August
through December the Republican majority in Congress staged a series of partial
government shutdowns in their efforts to achieve a balanced budget agreement on
their terms. Many bond market participants viewed these events as indications
that significant U.S. budget deficit reduction would now be possible. Another
plus for bonds during this period was low Japanese borrowing rates -- as low as
0.5%. With these rates in mind, many arbitrageurs took the opportunity to borrow
Japanese yen inexpensively and then purchase U.S. Treasury securities in heavy
volume over the five-month period, providing an additional boost for U.S. bond
prices. In the first quarter of 1996, however, bonds were once again set back as
Congressional balanced budget efforts failed and the Japanese and U.S. economies
showed some signs of heating up.
Municipals Regain Momentum
The municipal market, which typically follows the Treasury market but
at a more moderate pace, was significantly affected by Congressional discussions
of "flat tax" legislation beginning in the second quarter of 1995. The flat tax
cloud overhanging the market did not completely lift until the Presidential
primaries were underway in early 1996, when additional scrutiny from the press
and public deflated the proposal. As a result, municipal bonds underperformed
Treasuries during the first three quarters of the Fund's fiscal year, but more
than made up lost ground during the first quarter of 1996, when Treasuries and
many taxable bonds were negatively affected by stronger-than-expected economic
indicators.
Near- and Long-Term Strategy
To take advantage of the fact that municipals were undervalued compared
to Treasuries for most of the Fund's fiscal year, we generally maintained an
average effective maturity slightly longer than the average New York tax free
8
<PAGE>
fund. Additionally, to maintain as high a yield as possible given the Fund's
broad diversification and conservative strategy, we increased somewhat the
number of BBB-rated and non-rated bonds in the Fund's portfolio. These bonds,
while carrying some additional credit risk, generally exhibit less price
volatility than municipal bonds rated A and above. As of March 31, the Fund's
portfolio held 34% of bonds in these two categories. (For a summary of the
Fund's quality, diversification, and maturity structure, see page 5.)
The Fund's longer-term investment strategy continues to focus on four
basic elements: (1) purchasing bonds with effective maturities of less than 20
years; (2) purchasing noncallable bonds at yields close to those of callable
bonds with comparable maturities; (3) purchasing high-yielding callable bonds,
and (4) diversifying investments based on careful credit selection.
Bonds with effective maturities of at least five but less than 20 years
represented almost 68% of the portfolio on March 31, 1996, compared with
approximately 49% a year earlier. Bonds in this maturity range currently offer
good value and provide attractive yields with less price volatility than
longer-term bonds. These bonds are also generally less price sensitive to
changes in interest rates because of their shorter maturities.
While shorter-maturity bonds and noncallable bonds offer a relative
degree of price stability, they also typically yield less than longer-maturity,
callable debt instruments. In order to enhance the portfolio's overall yield, we
selectively purchased higher-coupon bonds that can be called by their issuer in
a relatively short time. Typically, these bonds provide yields three quarters to
one percentage point higher than bonds maturing on similar dates.
Scudder New York Tax Free Fund continues to emphasize careful overall
credit selection and portfolio diversification, investing in a variety of
issues, including state agency/lease, pollution control/industrial development,
and higher education bonds as of March 31, 1996. The Fund's average credit
quality at the close of its fiscal year was AA.
New York Posts Modest Growth
For the twelfth consecutive year New York State failed to pass a budget
by April 1, the start of the state's fiscal year. This happened principally
because Governor Pataki's proposed budget for fiscal year 1997 was based on
9
<PAGE>
expected relief of some of the state's welfare and Medicaid costs by the federal
government, which has not yet occurred. Ongoing state budget negotiations could
be protracted. While the state's current budget problems are disheartening, its
1996 fiscal year had a positive ending -- New York finished the year with a $445
million cash surplus. The surplus was the result of tax receipts that were $270
million higher than anticipated, with lower spending representing the balance.
Our Near-Term Outlook
As we stated earlier, demand for municipals has improved now that the
low-rate flat tax proposal has disappeared from current political discourse. In
terms of the U.S. economy, we still believe that consumers' heavy debt loads
could hinder momentum and create a slowdown sometime later this year or early
next year, which would benefit bonds. But economic indicators are sufficiently
mixed that it is unclear to us when and to what extent this might occur.
Meanwhile, the Federal Reserve is in a neutral stance, neither easing nor
tightening credit, and inflation remains in check. Adding to the uncertainty is
the wait until Presidential and Congressional elections, which will play a
significant role in how optimistically the bond market will view the prospects
for federal budget deficit reduction. Market participants have applauded,
however, as both parties have claimed fiscal responsibility as part of their
respective political platforms.
For these reasons we are currently maintaining a neutral stance and
average effective maturity for the Fund, and will continue to do so until the
direction of the U.S. economy becomes clearer. In pursuit of Scudder New York
Tax Free Fund's objectives, we will continue to emphasize noncallable bonds with
effective maturities between five and 15 years. We will also pay close attention
to credit quality as we position the Fund to seek high double-tax-free income
and a competitive total return.
Sincerely,
Your Portfolio Management Team
/s/Jeremy L. Ragus /s/Donald C. Carleton
Jeremy L. Ragus Donald C. Carleton
Scudder 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 15 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.
10
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE MONEY FUND
INVESTMENT PORTFOLIO as of March 31, 1996
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
---------------------------------------------------------------------------------------------
100.0% MUNICIPAL INVESTMENTS
---------------------------------------------------------------------------------------------
NEW YORK Albany, NY, City School District Tax Anticipation
Notes, Series 1996, 4%, 10/16/96 ..................... 1,000,000 SS&C 1,002,521
Brighton, NY, Central School District,
Bond Anticipation Notes, 3.875%, 6/17/96 ............. 2,015,000 SS&C 2,016,726
Buffalo, NY, Revenue Anticipation Notes,
Series 1995/1996A, 4.2%, 7/16/96 ..................... 1,200,000 MIG1 1,202,727
Copaigue Union Free School District, Suffolk County,
NY, Tax Anticipation Notes for 1995-1996,
4.5%, 6/28/96 ........................................ 1,000,000 MIG1 1,001,161
Erie County, NY, Water Authority, Waterworks
System Revenue, Weekly Demand Bonds,
3.35%, 12/1/16 (c)* .................................. 2,000,000 A1 2,000,000
Glen Cove, NY, General Obligation Bonds,
6.75%, 6/15/96 (c) ................................... 255,000 AAA 256,404
Harrison, NY, Central School District Bond
Anticipation Notes, General Obligation Unlimited,
Series 1996, 4%, 3/20/97 ............................. 1,000,000 SS&C 1,004,671
Hempstead Union Free School District, Nassau
County, NY, Tax Anticipation Notes, 4.5%, 6/28/96 .... 1,000,000 SS&C 1,001,389
Islip, NY, Bond Anticipation Notes, 4.25%, 7/26/96 ..... 1,000,000 SS&C 1,001,065
Levittown, NY, Union Free School District, Tax
Anticipation Notes, 4.5%, 6/26/96 .................... 925,000 SS&C 926,254
Longwood, NY, Central School District at Middle
Island, Tax Anticipation Notes, 4.5%, 6/26/96 ........ 1,000,000 MIG1 1,001,128
Monroe County, NY, Industrial Development Agency,
Office Building Associates, Series 1992, Weekly
Demand Note, 3.2%, 10/1/00* .......................... 1,599,000 P1 1,599,000
Nassau County, NY, General Obligation Unlimited
General Improvement, Series 1996 S, 5%, 3/1/97 (c) ... 1,500,000 AAA 1,524,112
New York City Municipal Water Finance Authority:
New York City, Series 3, 3.1%, 10/24/96 .............. 1,000,000 A1+ 1,000,000
Water & Sewer System Revenue, Series 1995, Daily
Demand Note, 3.75%, 6/15/25 (c)* ................... 600,000 AAA 600,000
New York City, General Obligation, Tax
Exempt Commercial Paper:
Series H4, 3.15%, 8/13/96 (c) ...................... 1,000,000 A1+ 1,000,000
Series 1994H-3, 3.2%, 8/14/96 (c) .................. 2,000,000 A1+ 2,000,000
New York City, Revenue Anticipation Notes,
4.5%, 4/11/96 ........................................ 1,000,000 MIG1 1,000,153
New York State Dormitory Authority Revenue:
Cornell University, Daily Demand Bonds, Series B,
3.6%, 7/1/25* ...................................... 500,000 A1+ 500,000
</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 Value ($)
Amount ($) Rating (b) (Note A)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Memorial Sloan-Kettering Cancer Center Revenue,
Series C, 3.35%, 8/23/96 ............................. 750,000 A1 750,000
New York State Energy Research & Development
Authority:
Pollution Control Revenue, Orange & Rockland
Rochester Project, Weekly Demand Notes,
Series A, 3.15%, 10/1/14 (c)* .................... 1,000,000 MIG1 1,000,000
Orange & Rockland Utilities Inc., Project,
Weekly Demand Notes, 3.15%, 8/1/15 (c)* .......... 1,000,000 MIG1 1,000,000
Pollution Control Revenue, Rochester Gas &
Electric Co., Monthly Reset Bonds,
Series 1984, 3.2%, 10/1/14* ...................... 1,000,000 P1 1,000,000
New York State Electric & Gas, 3.45%, 10/1/29* ......... 1,300,000 A1+ 1,300,000
New York State Environmental Facilities Corp.,
Solid Waste Revenue, General Electric Corp.,
Series 1987A, Commercial Paper:
3%, 5/8/96 ......................................... 500,000 A1+ 500,000
3%, 8/6/96 ......................................... 1,000,000 A1+ 1,000,000
3%, 8/9/96 ......................................... 1,000,000 A1+ 1,000,000
New York State, Tax Exempt Commercial Paper,
Series Q, 3.2%, 5/8/96 ............................... 1,000,000 A1 1,000,000
New York State Housing Finance Agency, Housing
Revenue Bonds:
Liberty View Apartments Project,
Weekly Demand Bonds, 3.45%, 11/1/05* ............. 1,200,000 MIG1 1,200,000
Hospital for Special Surgery, Variable Rate
Demand Bonds, 3.45%, 11/1/10* .................... 2,300,000 MIG1 2,300,000
Memorial Sloan-Kettering Cancer Center,
Series 1985 A, 3.2%, 11/1/15* .................... 2,600,000 A1+ 2,600,000
Normandie Court 1 Housing Revenue, Variable Rate
Demand Bonds, 3.1%, 5/15/15* ....................... 1,900,000 MIG1 1,900,000
New York State Job Development Authority:
Monthly Reset Bonds, Series 1985 C,
3.85%, 3/1/00* ..................................... 1,000,000 MIG1 1,000,000
Monthly Reset Bonds, Series F, 3.5%, 3/1/99* ......... 710,000 MIG1 710,000
New York State Local Government Assistance
Corporation:
Series 1993 A, Weekly Demand Note,
3.15%, 4/1/22* ................................... 1,000,000 MIG1 1,000,000
Series 1994 B, Weekly Demand Note,
3.1%, 4/1/23* .................................... 500,000 MIG1 500,000
New York State Medical Care Facilities Financing
Agency, Children's Hospital of Buffalo, Weekly
Demand Bonds, 3.25%, 11/1/05* ........................ 1,800,000 MIG1 1,800,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Value ($)
Amount ($) Rating (b) (Note A)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Power Authority Revenue & General
Purpose, Optional Put Bonds, 3.25%, 3/1/16* .......... 1,800,000 MIG1 1,800,000
Niagara County, NY, General Obligation,
Series B, 5.125%, 1/15/97 (c) ........................ 750,000 AAA 758,785
North Hempstead, NY, Solid Waste Management
Revenue Refunding, Series 1993 A, Weekly
Demand Note, 3.1%, 2/1/12* ........................... 200,000 MIG1 200,000
North Hempstead, Nassau County, NY, Bond
Anticipation Notes, Series 1995 C, 5%, 5/30/96 ....... 1,500,000 SS&C 1,502,094
Rochester, NY, Bond Anticipation Notes, Series I,
4.5%, 10/31/96 ....................................... 1,000,000 SS&C 1,006,092
Rockland County, NY, Revenue Anticipation Notes,
5%, 5/17/96 .......................................... 795,000 SS&C 795,934
Schenectady County, NY, Industrial Development
Revenue, Scotia Industrial Park Project,
Weekly Demand Bonds, 3.25%, 6/1/09* .................. 2,270,000 P1 2,270,000
Seneca County, NY, Industrial Development Agency,
1991 Civic Facility, New York Chiropractic College,
Weekly Demand Bond, 3.2%, 10/1/21* ................... 500,000 A1+ 500,000
Triborough Bridge and Tunnel Authority, NY, Special
Obligation, Weekly Demand Note, 3.1%, 1/1/24 (c)* .... 3,600,000 MIG1 3,600,000
Trust for the Cultural Resources of the City of
New York, Museum of Natural History:
Weekly Demand Note, 3.15%, 4/1/21 (c)* ............. 1,600,000 MIG1 1,600,000
Weekly Demand Note, Series 1993 A,
3.15%, 4/1/21 (c)* ............................... 500,000 MIG1 500,000
----------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $57,730,216) (a) ............................... 57,730,216
==========
==========================================================================================================
<FN>
(a) The cost for federal income tax purposes was $57,730,216.
(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, FSA 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.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<CAPTION>
MARCH 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at value (identified cost $57,730,216)
(Note A) ............................................ $57,730,216
Receivables:
Investments sold .................................... 500,000
Interest ............................................ 496,975
Fund shares sold .................................... 194,993
-----------
Total assets ...................................... 58,922,184
LIABILITIES
Payables:
Due to custodian bank ............................... $304,075
Fund shares redeemed ................................ 131,727
Dividends ........................................... 15,906
Accrued management fee (Note C) ..................... 13,670
Other accrued expenses (Note C) ..................... 42,927
--------
Total liabilities ................................. 508,305
-----------
Net assets, at value .................................. $58,413,879
===========
NET ASSETS
Net assets consist of:
Accumulated net realized loss ....................... $ (15,964)
Shares of beneficial interest ....................... 584,176
Additional paid-in capital .......................... 57,845,667
-----------
Net assets, at value .................................. $58,413,879
===========
NET ASSET VALUE, offering and redemption price per
share ($58,413,879/58,417,547 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.
14
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED MARCH 31, 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest ............................................... $2,067,646
Expenses:
Management fee (Note C) ................................ $ 277,273
Services to shareholders (Note C) ...................... 79,614
Custodian and accounting fees (Note C) ................. 51,179
Trustees' fees (Note C) ................................ 14,241
Auditing ............................................... 26,476
State registration ..................................... 8,410
Reports to shareholders ................................ 9,097
Legal .................................................. 2,953
Other .................................................. 6,328
---------
Total expenses before reductions ....................... 475,571
Expense reductions (Note C) ............................ (142,485)
---------
Expenses, net .......................................... 333,086
----------
Net investment income .................................. 1,734,560
NET REALIZED LOSS ON INVESTMENTS
Net realized loss from investment transactions ......... (3,311)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ... $1,731,249
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
---------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .......................... $ 1,734,560 $ 1,327,739
Net realized loss from investment
transactions ................................. (3,311) (6,662)
------------ ------------
Net increase in net assets resulting from
operations ................................... 1,731,249 1,321,077
------------ ------------
Distributions to shareholders from net
investment income ($.031 and $.025
per share, respectively) ..................... (1,734,560) (1,327,739)
------------ ------------
Fund share transactions at net asset value of
$1.00 per share:
Shares sold .................................... 57,520,540 66,783,648
Net asset value of shares issued to
shareholders in reinvestment of
distributions ................................ 1,503,912 1,176,765
Shares redeemed ................................ (55,556,958) (60,149,789)
------------ ------------
Net increase in net assets from Fund
share transactions ........................... 3,467,494 7,810,624
------------ ------------
INCREASE IN NET ASSETS ......................... 3,464,183 7,803,962
Net assets at beginning of period .............. 54,949,696 47,145,734
------------ ------------
NET ASSETS AT END OF PERIOD .................... $ 58,413,879 $ 54,949,696
============ ============
</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,
1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income (a) ........ .031 .025 .017 .022 .035 .046 .052 .047 .033
Distributions from net
investment income .............. (.031) (.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 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (b) ............. 3.18 2.57 1.75 2.22 3.55 4.69 5.33 4.78 3.33**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions) ................... 58 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 .60 .53 .50*
Ratio of net investment income
to average daily net
assets (%) ..................... 3.13 2.56 1.73 2.19 3.46 4.57 5.21 4.76 4.08*
(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 $ .003 $ .004 $ .004 $ .004 $ .004 $ .004 $ .004 $ .004
Operating expense ratio
including expenses
reimbursed, management
fee and other expenses
not imposed (%) ................ .86 .89 .97 .97 1.01 1.08 1.08 .98 1.19*
<FN>
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
17
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
---------------------------------------------------------------------------------------------------
5.6% SHORT-TERM MUNICIPAL INVESTMENTS
---------------------------------------------------------------------------------------------------
NEW YORK New York City, NY, General Obligation, Unlimited Tax,
Daily Demand Note, Series A4, 3.75%, 8/1/21* ........ 100,000 MIG1 100,000
New York State Dormitory Authority Revenue,
Cornell University, Daily Demand Bonds, Series B,
3.6%, 7/1/25* ....................................... 1,700,000 A1+ 1,700,000
New York State Energy Research & Development
Authority, Pollution Control Revenue, Niagara
Mohawk Co., Daily Demand Note, 3.7%, 7/1/15* ........ 4,500,000 A1+ 4,500,000
New York State Job Development Authority, Special
Purpose, Series B1-21, Daily Demand Note,
Subject to AMT, 3.9%, 3/1/05* ....................... 280,000 MIG1 280,000
Syracuse, NY, Industrial Development Agency, Civic
Facilities Revenue, Syracuse University Project,
Daily Demand Bonds, 3.6%, 3/1/23* ................... 2,400,000 MIG1 2,400,000
Trust for the Cultural Resources of The City of
New York, The Solomon R. Guggenheim
Foundation, Daily Demand Note, 3.6%, 12/1/15* ....... 1,600,000 A1+ 1,600,000
----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $10,580,000) .................................. 10,580,000
----------
---------------------------------------------------------------------------------------------------
94.4% LONG-TERM MUNICIPAL INVESTMENTS
---------------------------------------------------------------------------------------------------
NEW YORK 34th Street Partnership Inc., NY, Capital Improvement,
5.5%, 1/1/14......................................... 1,900,000 A 1,781,132
Albany, NY, General Obligation, 7%, 1/15/08 (c) ....... 485,000 AAA 527,020
Battery Park City Authority, NY, Revenue Refunding,
Series A, 5%, 11/1/13 ............................... 1,850,000 AA 1,648,720
Battery Park City Project, NY, Housing Corporation,
Senior Revenue Refunding:
5.2%, 11/1/06 ..................................... 4,505,000 AA 4,411,521
5%, 11/1/13 ....................................... 2,500,000 AA 2,210,650
City University of New York, Certificates of
Participation, John Jay College, 5%, 8/15/09 (c) .... 2,000,000 AAA 1,917,000
Chautauqua County, NY:
7.3%, 4/1/08 (c) .................................... 575,000 AAA 684,676
7.3%, 4/1/09 (c) .................................... 575,000 AAA 686,533
Development Authority of The North Country, NY,
Solid Waste Management Authority, Series 1992A:
5.75%, 7/1/96 ..................................... 690,000 BAA 693,422
6%, 7/1/97 ........................................ 390,000 BAA 399,319
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6.15%, 7/1/98 ....................................... 980,000 BAA 1,014,459
Erie County, NY, General Obligation, Series A,
5.5%, 6/15/25 (c) ..................................... 500,000 AAA 477,605
Inverse Variable Rate Certificate Trust, Metropolitan
Transit Authority, Series 1993 B,
6.67%, 6/30/02 (c)** .................................. 8,000,000 NR 8,220,000
Monroe County, NY, Airport Authority, Greater
Rochester International Airport, Subject to AMT,
5.375%, 1/1/19 (c) .................................... 6,550,000 AAA 6,056,261
Nassau County Industrial Development Agency, NY,
Adelphi University, 5.5%, 6/1/03 ...................... 1,000,000 A 997,570
Nassau County, NY, General Obligation, Refunding
Combined Sewer Districts, Series 1993 G,
5.4%, 1/15/10 (c) ..................................... 3,405,000 AAA 3,398,803
New York City, Municipal Water Finance Authority,
Water and Sewer System Revenue,
Inverse Floater, 6.92%, 6/15/13 (c)** ................. 9,000,000 AAA 8,010,000
New York City, NY, General Obligation:
Series 1991, 7.5%, 2/1/06 ............................. 1,000,000 A 1,103,750
Series B, 7.5%, 2/1/05 ................................ 2,500,000 A 2,765,950
Series B, 8.25%, 6/1/06 ............................... 2,750,000 A 3,290,045
Series B, 6.2%, 8/15/06 ............................... 500,000 A 511,090
Series B, 7.25%, 8/15/07 .............................. 2,250,000 A 2,512,418
Series B, 7.3%, 8/15/10 ............................... 1,000,000 A 1,094,770
Series E, 8%, 8/1/05 (c) .............................. 330,000 AAA 401,742
Series E, 6.5%, 2/15/06 ............................... 4,000,000 A 4,174,360
Series F, 8.25%, 11/15/16 ............................. 200,000 A 227,774
Series 1996G, 5.9%, 2/1/05 ............................ 500,000 BBB 503,925
New York City, NY, Industrial Development Agency:
Civil Facilities, USTA National Tennis Center,
FSA Insured:
6.1%, 11/15/04 .................................... 1,215,000 AAA 1,314,727
6.25%, 11/15/06 ................................... 3,000,000 AAA 3,277,020
Special Facility, Terminal One Group,
Subject to AMT:
6%, 1/1/15 ........................................ 190,000 A 183,960
6%, 1/1/19 ........................................ 2,480,000 A 2,384,619
Visy Paper Inc. Project, Series 1995, 7.95%,
1/1/28 .............................................. 2,250,000 NR 2,287,350
New York State Dormitory Authority Revenue:
Capital Appreciation Insured, Canisius College:
5.4%, 7/1/10 ........................................ 1,000,000 AAA 979,680
</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 Market
Amount ($) Rating (b) Value ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5.45%, 7/1/11 ...................................... 1,000,000 AAA 976,340
City University:
Series A, 9.25%, 7/1/00 ............................ 2,000,000 BBB 2,322,360
Series B, 8.125%, 7/1/08 ........................... 1,200,000 BBB 1,310,904
Series D, 8.2%, 7/1/12 ............................. 2,000,000 BBB 2,188,020
Consolidated Revenue, Series A2,
5.75%, 7/1/09 (c) ................................ 3,750,000 AAA 3,879,938
Columbia University, 5%, 7/1/15 ...................... 2,500,000 AAA 2,277,725
Crouse Irving Memorial Hospital, 10.5%, 7/1/17 ....... 2,600,000 A 2,704,000
Department of Health, Roswell Cancer Center,
Series 1996, 5.75%, 7/1/17 ......................... 5,000,000 BBB 4,702,000
Mental Health Services Facilities Improvement,
Series 1996B:
6.5%, 2/15/10 .................................... 1,500,000 A 1,606,440
6.5%, 2/15/11 .................................... 1,000,000 A 1,064,930
6%, 2/15/12 ...................................... 2,500,000 A 2,527,925
Mt. Sinai School of Medicine, Series B,
5.7%, 7/1/11 (c) ................................... 1,825,000 AAA 1,863,690
Pooled Capital Program, 7.8%, 12/1/05 (c) ............ 3,970,000 AAA 4,306,418
State University Educational Facility, Series A:
6.5%, 5/15/06 ...................................... 2,000,000 BBB 2,148,740
7.125%, 5/15/09 .................................... 25,000 BBB 26,902
5.875%, 5/15/11 .................................... 2,250,000 BBB 2,252,048
Upstate Community College, Series A, 5.8%, 7/1/06 .... 1,075,000 BBB 1,085,309
7.125%, 5/15/09, prerefunded 5/15/99*** .............. 475,000 AAA 523,046
New York State Energy Research & Development
Authority Revenue Bonds, Western NY Nuclear
Service Center, Series B:
Series 1995, 5.5%, 4/1/05 .......................... 500,000 BBB 491,650
Series 1995, 5.5%, 4/1/06 .......................... 300,000 BBB 292,353
New York State Energy Research & Development
Authority, Consolidated Edison Company, Series B,
5.25%, 8/15/20 (c) ................................... 4,250,000 AAA 3,889,813
New York State Environmental Facilities Corporation,
Pollution Control Revenue, Water Revolving Fund,
Series D, 6.9%, 5/15/15 .............................. 2,445,000 AAA 2,769,549
New York State Housing Finance Agency Revenue
Health Facilities, Series 1996A, 6.375%, 11/1/04 ..... 2,000,000 BBB 2,074,740
New York State Housing Finance Agency, Service
Contract, Series F, 5.625%, 3/15/09 .................. 5,750,000 BBB 5,507,580
New York State Local Government Assistance
Corporation, Series 1994A, 5.25%, 4/1/19 ............. 1,000,000 A 909,390
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Medical Care Facilities Finance
Agency:
Mental Health Center:
Series A, 8.25%, 2/15/99 ........................... 3,415,000 BBB 3,633,150
Series A, 8.875%, 8/15/07 .......................... 395,000 BBB 425,178
North Shore University, Glen Cove, Series A,
5.125%, 11/1/12 (c) ................................ 1,450,000 AAA 1,356,649
New York State Mortgage Agency Revenue,
Homeowner Mortgage, Series FF, 7.95%, 10/1/14 .......... 250,000 AA 263,863
New York State Power Authority:
Revenue & General Purpose, Series 1993CC,
5.125%, 1/1/11 ....................................... 1,500,000 AA 1,447,785
General Purpose Revenue, Series CC,
5.125%, 1/1/11 (c) ................................... 6,500,000 AAA 6,273,735
New York State Thruway Authority:
General Revenue, Series B, 5%, 1/1/20 (c) .............. 3,740,000 AAA 3,360,876
Service Contract Revenue, Local Highway and
Bridge Building:
5.125%, 4/1/07 ..................................... 3,000,000 BBB 2,881,710
5.75%, 4/1/08 ...................................... 1,000,000 BBB 1,003,010
New York State Urban Development Corporation
Revenue:
Correctional Capital Facilities:
Series A, 5.45%, 1/1/07 ............................ 2,000,000 BBB 1,949,040
Series A, 5.5%, 1/1/09 ............................. 2,500,000 BBB 2,415,325
Series 1994A, FSA Insured, 5.5%, 1/1/14 ............ 3,000,000 AAA 2,952,990
Series 1995, 5.375%, 1/1/15 ........................ 2,000,000 BBB 1,820,400
Series 1995, 5.375%, 1/1/25 ........................ 4,000,000 BBB 3,554,400
Series 6, 6%, 1/1/04 ............................... 2,370,000 BBB 2,443,754
Onondaga County Convention Center, 6%, 1/1/06 ........ 1,630,000 BBB 1,667,262
Niagara County, NY, General Obligation,
7.1%, 2/15/11 (c) ...................................... 500,000 AAA 586,570
Niagara, NY, Frontier Transportation Authority Airport
Revenue Greater Buffalo International Airport,
Series 1994A, 6.125%, 4/1/14 (c) ....................... 2,700,000 AAA 2,743,362
Niagara Falls, NY, Water Treatment Plant,
Subject to AMT:
7%, 11/1/03 (c) ...................................... 2,260,000 AAA 2,546,975
8.5%, 11/1/05 (c) .................................... 2,140,000 AAA 2,673,309
8.5%, 11/1/06 (c) .................................... 1,240,000 AAA 1,561,768
Shenendehowa Central School District, NY,
Clifton Park:
6.85%, 6/15/08 (c) ................................... 350,000 AAA 404,093
6.85%, 6/15/09 (c) ................................... 350,000 AAA 404,656
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
SCUDDER NEW YORK TAX FREE FUND
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Syracuse, NY, Industrial Development Agency, Pilot
Revenue Bonds, Series 1995, 5.125%, 10/15/02 ............ 1,000,000 AA 992,030
Valley Central School District, Montgomery, NY,
7.15%, 6/15/08 (c) ...................................... 625,000 AAA 738,450
PUERTO RICO Puerto Rico Commonwealth Infrastructure Finance
Authority, Series A:
7.9%, 7/1/07 .......................................... 1,000,000 BBB 1,089,690
7.75%, 7/1/08 ......................................... 920,000 BBB 999,580
VIRGIN ISLANDS Virgin Islands Public Finance Authority,
General Obligation, Mortgage Fund Loan Notes,
Series A, 7%, 10/1/02 ................................... 500,000 BBB 529,635
Virgin Islands, Special Tax Bonds, Hugo Bonds,
7.75%, 10/1/06 .......................................... 1,500,000 NR 1,613,925
-----------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $173,628,182) ..................................... 178,182,851
-----------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $184,208,182) (a) ................................. 188,762,851
===========
<FN>
(a) The cost for federal income tax purposes was $184,535,167. At March 31,
1996, net unrealized appreciation for all securities based on tax cost was
$4,227,684. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $6,128,160 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,900,476.
(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.
** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of March 31, 1996.
*** 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.
22
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------
<CAPTION>
MARCH 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $184,208,182)
(Note A) ................................................. $188,762,851
Cash ......................................................... 3,312
Receivables:
Interest ................................................. 3,261,737
Fund shares sold ......................................... 66,643
Other assets ................................................. 1,956
------------
Total assets .......................................... 192,096,499
LIABILITIES
Payables:
Dividends ................................................ $266,838
Fund shares redeemed ..................................... 13,584
Accrued management fee (Note C) .......................... 99,992
Other accrued expenses (Note C) .......................... 62,798
--------
Total liabilities ..................................... 443,212
------------
Net assets, at market value .................................. $191,653,287
============
NET ASSETS
Net assets consist of:
Unrealized appreciation on investments ................... $ 4,554,669
Accumulated net realized loss ............................ (7,905,244)
Shares of beneficial interest ............................ 179,646
Additional paid-in capital ............................... 194,824,216
------------
Net assets, at market value .................................. $191,653,287
============
NET ASSET VALUE, offering and redemption price per share
($191,653,287 / 17,964,551 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized) .................................... $10.67
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
SCUDDER NEW YORK TAX FREE FUND
<TABLE>
- -------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED MARCH 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest ....................................................... $11,132,644
Expenses:
Management fee (Note C) ........................................ $1,215,011
Services to shareholders (Note C) .............................. 165,749
Custodian and accounting fees (Note C) ......................... 105,622
Trustees' fees (Note C) ........................................ 14,241
Auditing ....................................................... 37,089
Reports to shareholders ........................................ 25,932
Legal .......................................................... 6,188
Federal and state registration ................................. 12,047
Other .......................................................... 12,450 1,594,329
-----------------------
Net investment income .......................................... 9,538,315
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments ............................................ 61,889
Futures ................................................ (509,134)
Options ................................................ (67,500) (514,745)
------------------------
Net unrealized appreciation during the
period on investments .................................. 5,871,555
-----------
Net gain on investments ........................................ 5,356,810
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... $14,895,125
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ........................... $ 9,538,315 $ 10,299,978
Net realized loss from investment
transactions .................................. (514,745) (5,532,589)
Net unrealized appreciation on
investment transactions ....................... 5,871,555 6,398,650
------------ ------------
Net increase in net assets resulting from
operations .................................... 14,895,125 11,166,039
------------ ------------
Distributions to shareholders:
From net investment income ($.53 and
$.52 per share, respectively) ............... (9,538,315) (10,299,978)
------------ ------------
In excess of net realized
gains ($.05 per share) ...................... -- (1,028,717)
------------ ------------
Fund share transactions:
Proceeds from shares sold ....................... 26,487,697 34,151,916
Net asset value of shares issued to
shareholders in reinvestment
of distributions .............................. 6,276,457 7,668,354
Cost of shares redeemed ......................... (40,000,573) (55,402,814)
------------ ------------
Net decrease in net assets from
Fund share transactions ....................... (7,236,419) (13,582,544)
------------ ------------
DECREASE IN NET ASSETS .......................... (1,879,609) (13,745,200)
Net assets at beginning of period ............... 193,532,896 207,278,096
------------ ------------
NET ASSETS AT END OF PERIOD ..................... $191,653,287 $193,532,896
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period ....... 18,645,871 20,085,899
------------ ------------
Shares sold ..................................... 2,462,070 3,366,073
Shares issued to shareholders in
reinvestment of distributions ................. 585,375 754,635
Shares redeemed ................................. (3,728,765) (5,560,736)
------------ ------------
Net decrease in Fund shares ..................... (681,320) (1,440,028)
------------ ------------
Shares outstanding at end of period ............. 17,964,551 18,645,871
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
<TABLE>
SCUDDER NEW YORK 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>
YEARS ENDED MARCH 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........ $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39 $11.43 $11.19
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income .................... .53 .52 .54 .61 .65 .67 .69 .72 .73 .75
Net realized and unrealized
gain (loss) on investment
transactions .............. .29 .11 (.35) 1.03 .50 .13 .16 .14 (.84) .39
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................. .82 .63 .19 1.64 1.15 .80 .85 .86 (.11) 1.14
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income .................... (.53) (.52) (.54) (.61) (.65) (.67) (.69) (.72) (.73) (.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 .......... (.53) (.57) (1.27) (1.22) (.90) (.67) (.78) (.72) (.93) (.90)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period ............. $10.67 $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39 $11.43
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ............. 7.95 6.39 1.31 15.60 11.11 7.79 8.18 8.55 (.61) 10.71
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ........ 192 194 207 201 159 142 132 123 116 154
Ratio of operating
expenses, net to
average daily net
assets (%) ................. .82 .82 .82 .82 .87 .91 .89 .89 .95 .88
Ratio of net investment
income to average
daily net assets (%) ....... 4.91 5.13 4.80 5.36 5.96 6.29 6.39 6.89 7.05 6.70
Portfolio turnover
rate (%) ................... 80.5 83.8 158.0 201.4 168.2 224.9 114.3 132.1 44.2 71.9
</TABLE>
26
<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 Funds' financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Funds in the
preparation of their financial statements.
SECURITY VALUATION. Tax Free Money Fund values all portfolio securities
utilizing the amortized cost method permitted in accordance with Rule 2a-7 under
the 1940 Act and pursuant to which Tax Free Money Fund must adhere to certain
conditions. Under this method, which does not take into account unrealized gains
and losses on securities, an instrument is initially valued at its cost and
thereafter assumes a constant accretion/amortization to maturity of any
discount/premium.
Tax Free Fund's portfolio debt securities with remaining maturities greater than
sixty days are valued by pricing agents approved by the Officers of the Fund,
which quotations reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. 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.
FUTURES CONTRACTS. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the year ended
March 31,1996, the Tax Free Fund purchased interest rate futures to manage the
duration of the portfolio. Additionally, during the year
27
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
SCUDDER NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------
ended March 31, 1996, the Tax Free Fund sold interest rate futures to hedge
against declines in the value of portfolio securities.
Upon entering into a futures contract, the Tax Free Fund is required to deposit
with a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Tax Free Fund each
day, dependent on the daily fluctuations in the value of the underlying
security, and are recorded for financial reporting purposes as unrealized gains
or losses by the Tax Free Fund. When entering into a closing transaction, the
Tax Free Fund will realize a gain or loss equal to the difference between the
value of the futures contract to sell and the futures contract to buy. Futures
contracts are valued at the most recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Tax Free Fund's ability to
close out a futures contract prior to the settlement date and that a change in
the value of a futures contract may not correlate exactly with changes in the
value of the securities or currencies hedged. When utilizing futures contracts
to hedge, the Tax Free Fund gives up the opportunity to profit from favorable
price movements in the hedged positions during the term of the contract.
OPTIONS. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the year
ended March 31, 1996, the Tax Free Fund purchased put options on securities as a
hedge against potential adverse price movements in the value of portfolio
assets.
If the Fund writes an option and 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 Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of the premium paid. If the Fund elects to close out the option it would
recognize a gain or loss equal to the difference between the cost of acquiring
the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
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,
29
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
SCUDDER NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------
the Funds paid no federal income taxes and no provisions for federal income
taxes were required.
At March 31, 1996, the Tax Free Money Fund had a net tax basis capital loss
carryforward of approximately $53,000 which may be applied against any realized
net taxable capital gains of each succeeding year until fully utilized or until
March 31, 2000 ($1,000), March 31, 2001 ($2,000), March 31, 2002 ($4,000), March
31, 2003 ($43,000), and March 31, 2004 ($3,000), the respective expiration
dates, whichever occurs first.
At March 31, 1996, the Tax Free Fund had a net tax basis capital loss
carryforward of approximately $6,317,000 which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until March 31, 2003 ($3,937,000) and March 31, 2004 ($2,380,000), the
respective expiration dates, whichever occurs first.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Funds
is declared as dividends to shareholders of record as of the close of business
each day and is paid to shareholders monthly.
During any particular year, net realized gains from investment transactions, in
excess of available capital loss carryforwards, would be taxable to the Funds if
not distributed and, therefore, will be distributed to shareholders. An
additional distribution may be made to the extent necessary to avoid the payment
of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
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.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Funds use the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
OTHER. Investment transactions are accounted for on a trade date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of the call
or maturity date.
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
During the year ended March 31, 1996, purchases and sales of long-term municipal
securities aggregated $147,730,722 and $153,890,088, respectively, for Tax Free
Fund.
The aggregate face value of futures contracts both opened and closed during the
year ended March 31, 1996 amounted to $241,241,605, 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 purchased, sold or entered into by each Fund. In addition to
portfolio management services, the Adviser provides certain administrative
services in accordance with the Agreements.
The Agreements also provide that if the Funds' expenses, exclusive of taxes,
interest and certain other expenses exceed specified limits, such excess, up to
the amount of the management fee, will be paid by the Adviser. For the year
ended March 31, 1996, the fee for Tax Free Fund pursuant to the Agreement
amounted to
31
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
SCUDDER NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------
$1,215,011, which was equivalent to an annual effective rate of .625% of the
Fund's average daily net assets.
With respect to Tax Free Money Fund, the Adviser has agreed not to impose all or
a portion of its management fee until July 31, 1996 and during such period to
maintain the annualized expenses of Tax Free Money Fund at not more than 0.60%
of average daily net assets. For the year ended March 31, 1996, the Adviser did
not impose a portion of its fee amounting to $142,485, and the portion imposed
amounted to $134,788.
Scudder Fund Accounting Corporation ("SFAC") a subsidiary of the Adviser, is
responsible 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, 1996 SFAC
imposed fees amounting to $30,000 for the New York Tax Free Money Fund. For the
year ended March 31, 1996, SFAC imposed fees amounting to $53,141 for the New
York Tax Free Fund.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Funds. For the
year ended March 31, 1996, $60,783 and $124,088 were charged by SSC to Tax Free
Money Fund and Tax Free Fund, of which $5,060 and $10,151 were unpaid at March
31, 1996, 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, 1996,
Trustees' fees aggregated $14,241 each for both the Tax Free Money Fund and Tax
Free Fund.
32
<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, 1996 and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund as of
March 31, 1996, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and their financial highlights for each of the periods indicated therein in
conformity with generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 20, 1996
33
<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, 1996, 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.
34
<PAGE>
(This page intentionally left blank.)
35
<PAGE>
(This page intentionally left blank.)
36
<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; General Partner, TL Ventures
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
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.
37
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
The Scudder Family of Funds
-----------------------------------------------------------------------------------------------------------------
<C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Discovery Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
-----------------------------------------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
-----------------------------------------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
-----------------------------------------------------------------------------------------------------------------
Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
-----------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,(TM) an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.
</TABLE>
38
<PAGE>
HOW TO CONTACT SCUDDER
<TABLE>
<CAPTION>
Account Service and Information
-------------------------------------------------------------------------------------------------------------
<C> <C>
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For personalized information about your Scudder accounts;
exchanges and redemptions; or information on any Scudder fund
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
-------------------------------------------------------------------------------------------------------------
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
-------------------------------------------------------------------------------------------------------------
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
-------------------------------------------------------------------------------------------------------------
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
-------------------------------------------------------------------------------------------------------------
For information on Scudder For information on Scudder
Treasurers Trust,(TM)an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
-------------------------------------------------------------------------------------------------------------
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
</TABLE>
39
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F.
Haven Clark, Scudder, Stevens & Clark was the first independent
investment counsel firm in the United States. Since its birth,
Scudder's pioneering spirit and commitment to professional long-term
investment management have helped shape the investment industry. In
1928, we introduced the nation's first no-load mutual fund. Today we
offer 38 pure no load(TM) funds, including the first international
mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and
dedication to research and fundamental investment disciplines have
helped us become one of the largest and most respected investment
managers in the world. Though times have changed since our beginnings,
we remain committed to our long-standing principles: managing money
with integrity and distinction; keeping the interests of our clients
first; providing access to investments and markets that may not be
easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
<PAGE>
Scudder
Ohio
Tax Free Fund
Annual Report
March 31, 1996
o For investors seeking double-tax-free income exempt from both Ohio and regular
federal income taxes.
o A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
<PAGE>
CONTENTS
2 In Brief
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
IN BRIEF
o Scudder Ohio Tax Free Fund rewarded investors with a total return of 7.85%
for the fiscal year ended March 31, 1996. The Fund's share price rose $0.18
to $12.95 at the end of the period, while investors received tax-free
income distributions totaling $0.69 and a taxable capital gain distribution
of $0.12 per share.
o During the period, the Fund performed markedly better than the average Ohio
tax free fund tracked by Lipper Analytical Services, Inc., which returned
6.76%.
o The Fund's 30-day net annualized SEC yield was 5.04% on March 31, 1996. For
Ohio residents in the combined state and federal income tax bracket of
44.13%, this tax-free yield translated to a 9.02% yield for a taxable
investment.
BAR CHART OMITTED HERE WITH THE CAPTION BELOW:
Fund Yield vs. Taxable Equivalent Yield
3/31/96 9/30/96
------- -------
The Fund's 30-Day SEC Yield: 5.04% 5.08%
Taxable Equivalent Yield: 9.02% 9.09%
2
<PAGE>
Dear Shareholders,
Widespread declines in U.S. interest rates helped create hospitable
conditions for bonds during the past 12 months. Scudder Ohio Tax Free Fund
completed the fiscal year ended March 31, 1996, with a total return of 7.85%,
reflecting appreciation in the Fund's share price and an attractive level of
double-tax-free income to investors. From a competitive standpoint, these
results were especially rewarding, placing the Fund well ahead of the average
Ohio Tax Free Fund monitored by Lipper Analytical Services, Inc.
As bond markets regained strength during 1995, taxable bonds led the march
back, while tax-free municipal bonds recovered more slowly. By fall, municipal
bonds had become attractively valued compared to Treasuries, which helped renew
investor interest and resulted in municipals slightly outperforming taxable
bonds for the past six months.
Recent economic indicators raised concerns that the economy may be stronger
than originally believed, which unsettled the market. Still, ample evidence
suggests the absence of mounting inflationary pressures. This scenario would be
beneficial for bonds. Given the current economic uncertainties, the Fund's
challenge is to stand ready to participate in potential price rallies but
provide a measure of price stability should the market weaken instead, while
also continuing to supply competitive levels of double-tax-free income.
In closing, we wish to take this opportunity to announce that a new member
joins the Scudder Family of Funds as of May 8 -- Scudder Emerging Markets Growth
Fund. The new Fund focuses on stocks of developing nations around the globe. For
more information about Scudder Emerging Markets Growth Fund and other Scudder
products and services, please see page 26. For questions about Scudder Ohio Tax
Free Fund, please call a Scudder Investor Relations representative at
1-800-225-2470.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Ohio Tax Free Fund
3
<PAGE>
SCUDDER OHIO TAX FREE FUND
PERFORMANCE UPDATE as of March 31, 1996
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER OHIO TAX FREE FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,785 7.85% 7.85%
5 Year $14,590 45.90% 7.85%
Life of
Fund* $19,392 93.92% 7.77%
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,838 8.38% 8.38%
5 Year $14,745 47.45% 8.07%
Life of
Fund* $20,703 107.03% 8.58%
*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 $10,000
'88 $10,230
'89 $11,337
'90 $12,221
'91 $13,291
'92 $14,530
'93 $16,425
'94 $16,832
'95 $17,980
'96 $19,392
Lehman Brothers Municipal Bond Index
Year Amount
- ----------------------
5/31/87 $10,000
'88 $10,847
'89 $11,628
'90 $12,855
'91 $14,041
'92 $15,444
'93 $17,378
'94 $17,781
'95 $19,102
'96 $20,703
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>
1988* 1989 1990 1991 1992 1993 1994 1995 1996
-----------------------------------------------------------------------
NET ASSET VALUE... $11.65 $11.94 $11.97 $12.14 $12.47 $13.13 $12.68 $12.77 $12.95
INCOME DIVIDENDS.. $ .61 $ .84 $ .82 $ .78 $ .75 $ .72 $ .70 $ .70 $ .69
CAPITAL GAINS
DISTRIBUTIONS..... $ -- $ .02 $ .07 $ .06 $ .03 $ .19 $ .10 $ .04 $ .12
FUND TOTAL
RETURN (%)........ 2.30 10.83 7.80 8.75 9.33 13.04 2.48 6.82 7.85
INDEX TOTAL
RETURN (%)........ 8.48 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38
</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 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>
PORTFOLIO SUMMARY as of March 31, 1996
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
General Obligations 23%
Hospital/Health 18% During the year, the Fund
Sales and Special Tax 12% remained well diversified
Water/Sewer Revenue 12% across a broad range of
Higher Education 11% revenue bonds, while
Core Cities/Lease 6% modestly increasing
State Agency/Lease 5% investments in Ohio's general
Electric Utility Revenue 5% obligation bonds.
School District/Lease 3%
Miscellaneous Municipal 5%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 53%
AA 13%
A 19% Attention to credit quality
BBB 8% continued to be central part
Not Rated 7% of Fund strategy.
----
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 4% As interest rates declined,
1 - 5 years 10% the Fund slightly increased
5 - 10 years 34% its investments in bonds with
10 - 20 years 45% longer-term effective
Greater than 20 years 7% maturities, though the bulk
---- of the portfolio remained
100% focused on intermediate-term
==== bonds.
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>
Dear Shareholders,
Scudder Ohio Tax Free Fund continued to reward investors with strong
results during the fiscal year ended March 31, 1996. In addition to providing
investors a healthy stream of income free from Ohio state and federal income
taxes, the Fund posted an $0.18 gain in share price. Combined, the increase in
share price to $12.95 on March 31, 1996, from $12.77 a year ago and the
reinvestment of tax-free dividend distributions totaling $0.69 and taxable
capital gains of $0.12 per share, helped the Fund generate a 7.85% total return
for the year. This performance placed the Fund well ahead of the average Ohio
tax free fund tracked by Lipper Analytical Services, Inc., which returned 6.76%.
For bonds, the downward path of interest rates boosted prices
significantly, more than making up for the corresponding drop in yields. The
Fund ended the period with a 5.04% 30-day net annualized SEC yield, down
slightly from its 5.22% yield at the beginning of the period. Yet, the Fund's
yield remains attractive versus comparable taxable investments. Ohio residents
in the highest combined federal and state tax bracket of 44.13% would have to
earn a 9.02% yield from a comparable taxable investment to match your Fund's
double-tax-free yield.
Slower Economic Growth Fosters
Recovery in Bond Markets
The confluence of slower, more sustainable economic growth, tame levels of
inflation, and weak consumer spending put a decisive end to 1994's faltering
bond prices. As bond markets began to recover, Treasury securities led the way.
During periods of falling interest rates, Treasuries have an edge over municipal
bonds: Treasuries are not callable (which means they cannot be retired in
advance of their stated maturity dates) whereas most municipal bonds can be
called by their issuers. Lower rates increase the likelihood of calls as
municipal issuers take advantage of opportunities to refinance as a way to lower
debt costs.
Proposed flat tax legislation -- which threatened to eliminate the tax
advantages of owning municipal bonds -- also hampered the performance of
municipal bonds for much of 1995. Meanwhile, other factors detracted from
municipal demand including the impressive performance of stocks, investors'
reluctance to reenter bond markets, and lingering effects of Orange County's
financial problems that made headlines as 1994 drew to a close. Towards the end
of the period, the presidential primaries once again put the spotlight on the
flat tax, negatively affecting municipals. Since then, however, discussions
6
<PAGE>
about the flat tax have disappeared along with the presidential aspirations of
Steve Forbes, and municipal demand has begun to improve.
Balancing Opportunities for Price Appreciation and Income Preservation
The Fund's basic goal of blending a healthy level of double-tax-free income
with strong price performance remained in place during the fiscal year. This
total return approach meant that when interest rates were rising in 1994, a
higher level of income earnings helped to stabilize overall Fund performance by
offsetting weak prices. In 1995, this approach translated into pursuing
opportunities to capture price gains while maintaining a reasonable level of
income in the face of falling rates.
Noncallable bonds remained a focal point during the year. In an environment
of falling interest rates, noncallable bonds can add more value than their
callable counterparts, offering both price appreciation potential and a more
reliable income stream, since they are not at risk of being repaid prematurely.
Because noncallable bonds are a scarce commodity in the realm of municipal
bonds, portfolios owning a sizable amount of these bonds have an advantage.
During the year, bonds with maturities of five to 20 years continued to
compose the vast majority of the portfolio. In our estimation, this segment of
the maturity spectrum offered the most compelling tradeoff between risk and
reward. With rates generally declining, we pushed maturities slightly further
out along the intermediate-maturity spectrum, where the Fund was able to capture
most of the yield and much of the price gain of longer-term bonds. In
particular, we increased the weighting of bonds maturing between 15 and 20
years. These bonds contributed heavily to the Fund's performance over the
period. Generally, we avoided securities with more than 20 years to maturity,
believing that they did not offer enough extra yield to justify their additional
price sensitivity to changes in the direction of interest rates.
Credit quality, as usual, remained an important focus, with 66% of the
portfolio invested in bonds rated AA or better. In addition, we maintained
substantial investments in insured bonds, which afford a degree of liquidity and
safety, since they are protected against default by various bond insurance
companies.
7
<PAGE>
Ohio Review
The state of Ohio's fiscal health remained sound. The state's broad revenue
base helped to cushion it against shifts in the economic cycle. Increased tax
revenues and decreased expenditures on public health and assistance during
fiscal year 1995 contributed to Ohio's operating surplus. Revenues are expected
to grow at a 4% rate during fiscal year 1996, with the state's debt levels
remaining moderate compared to the rest of the country. The combination of a
gradual decline in Ohio's manufacturing sector and growth in the trade and
service sectors has enabled the state's economy to become more diversified.
Meanwhile, Ohio's unemployment rate, at 5%, remains below the national average
of 5.5%.
Given the state's improving financial performance and moderate debt levels,
Ohio's general obligation bonds (which are funded by the state's tax revenues)
have been attractive investments. These bonds carry a favorable Aa rating from
Moody's and an AA rating from Standard & Poor's. The market, however, treats
these bonds as even higher-quality instruments, given their strong credit
characteristics and the relative infrequency of new issues.
Outlook
We believe the key catalysts for attractive bond market conditions -- slow
economic growth, low inflation, and therefore the potential for stable to lower
interest rates -- remain in place, despite short-term uncertainty. Municipal
bonds also stand to benefit from relatively low new issuance and a more
favorable demand environment now that the flat tax proposal is more or less
tabled.
Positives aside, conflicting reports about the economy's future direction
have added a degree of uncertainty to the bond markets. In addition, bonds may
find it difficult to stage a real recovery without robust foreign demand, which
was so instrumental last year in pushing yields down and prices up. We will
continue to study economic data to help us shape investment strategy through the
year. Until it becomes clear which direction the economy will take, we have
become a bit more cautious, allowing cash reserves to build up more than usual.
This affords us the flexibility to move quickly when attractive investment
opportunities come our way while helping to stabilize the Fund's value during
times of market declines.
8
<PAGE>
In the months ahead, the Fund's share price and income will vary in
response to changes in interest rates and other economic factors. In our view,
Scudder Ohio Tax Free Fund is well positioned to continue to provide investors
with a healthy stream of income exempt from state and federal income taxes while
seeking to limit share price volatility.
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 16 years of experience in
municipal investing and portfolio management.
9
<PAGE>
SCUDDER OHIO TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1996
<TABLE>
<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,
3.85%, 1/1/16* ........................................ 1,100,000 MIG1 1,100,000
Franklin County, OH, Health Systems, St. Anthony's
Medical Center, Daily Demand Note,
3.85%, 7/1/15* ........................................ 500,000 MIG1 500,000
Hamilton Health Systems, Franciscan Sisters of the
Poor Health Systems, Series A, Daily Demand Note,
3.85%, 3/1/17* ........................................ 1,400,000 MIG1 1,400,000
Ohio Water Development Authority, Environmental
Mead Corporation, Series 1986 B, Daily Demand
Note, 3.7%, 11/1/15* .................................. 200,000 A1+ 200,000
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS ---------
(Cost $3,200,000) ..................................... 3,200,000
---------
96.1% LONG-TERM MUNICIPAL INVESTMENTS
OHIO Cleveland, OH:
General Obligation:
Series A, 6.3%, 7/1/06 (c) .......................... 1,000,000 AAA 1,080,320
5.3%, 9/1/08 (c) .................................... 2,000,000 AAA 2,010,400
Series 1993, 5.375%, 9/1/09 (c) ..................... 1,700,000 AAA 1,705,576
Public Power System Improvement Revenue:
Series 1994 A, Zero Coupon, 11/15/09 (c) ............ 2,250,000 AAA 1,061,393
Series B, 7%, 11/15/17 .............................. 750,000 BBB 794,355
Urban Renewal Tax Increment Rock & Roll Hall of
Fame and Museum Project, 6.75%, 3/15/18 ............. 1,000,000 NR 1,011,330
Waterworks Improvement, First Mortgage Revenue,
Series 1992 F, 6.25%, 1/1/07 (c) .................... 1,000,000 AAA 1,072,130
Columbus, OH, General Obligation:
Limited Tax, Various Purpose, Series 1993,
5.25%, 9/15/11 ...................................... 1,000,000 AAA 979,260
Unlimited Tax, Sewer Improvement, 6%, 5/1/13 .......... 1,000,000 AAA 1,028,130
Cuyahoga County, OH:
General Obligation, Jail Facilities:
Series 1991, ETM, Zero Coupon, 10/1/02*** ........... 1,500,000 AA 1,093,365
Series 1993 B, 5%, 10/1/08 (c) ...................... 4,180,000 AAA 4,111,364
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hospital Facilities Revenue, Health Cleveland Inc.,
Series 1993, 6.25%, 8/15/10 ......................... 1,000,000 A 1,011,450
Fairfield, OH, City School District, 7.2%, 12/1/09 (c) 1,000,000 AAA 1,154,530
Franklin County, OH, Riverside United Methodist
Hospital, Series A, 5.75%, 5/15/12 .................. 1,950,000 AA 1,884,285
Gateway Economic Development Corporation of
Cleveland, OH, Stadium Revenue, 6.5%, 9/15/14 ......... 4,000,000 NR 3,875,960
Gateway Economic Development Corporation of
Cuyahoga County, OH, Excise Tax, Series 1990,
7.5%, 9/1/05 .......................................... 1,000,000 A 1,103,550
Gateway Economic Development Corporation of
Greater Cleveland, OH, Excise Tax, Series 1990,
7.2%, 9/1/01 .......................................... 2,550,000 A 2,689,689
Hamilton County, OH:
General Obligation, 5.1%, 12/1/11 ..................... 1,000,000 AA 954,230
Health System Revenue, Franciscan Sisters of the
Poor Health System, Providence Hospital,
Series 1992, 6.8%, 7/1/08 ........................... 2,000,000 BBB 2,032,500
Hospital Facilities Revenue, Christ Hospital,
Series 1991 B, 6.625%, 1/1/06 (c) ................... 1,000,000 AAA 1,070,980
Sewer System Revenue, Improvement and Refunding:
Series 1991 A, 6.4%, 12/1/05 ........................ 530,000 AA 569,453
Series 1991 A, 6.4%, 12/1/05, prerefunded
6/1/01** .......................................... 220,000 AAA 241,718
5.45%, 12/1/09 (c) .................................. 1,000,000 AAA 1,011,850
Hilliard, OH, School District, Series 1996A,
Zero Coupon, 12/1/12 (c) .............................. 1,655,000 AAA 653,593
Huber Heights, OH, Water System Revenue,
Zero Coupon 12/1/12 ................................... 1,005,000 AAA 396,895
Lorain County, OH:
Hospital Refunding Revenue:
EMH Regional Medical Center, 5%, 11/1/07 (c) ........ 1,000,000 AAA 981,850
Humility of Mary Health Care System,
Series A, 5.9%, 12/15/08 ............................ 1,000,000 A 984,200
Lorain, OH, Hospital Authority Refunding Revenue,
Lakeland Community Hospital Inc., 6.5%, 11/15/12 ...... 1,000,000 A 1,021,060
Lucas County, OH, Hospital Revenue:
Flower Hospital, Series 1993, 6.125%, 12/1/13 ......... 1,375,000 BBB 1,323,231
St. Vincent Medical Center, 5.25%, 8/15/20 (c) ........ 1,900,000 AAA 1,745,853
Mahoning County, OH, General Obligation,
Limited Tax, 6.6%, 12/1/06 (c) ........................ 1,100,000 AAA 1,206,535
North Olmsted, OH, General Obligation,
6.25%, 12/15/12 (c) ................................... 1,500,000 AAA 1,564,230
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
SCUDDER OHIO TAX FREE FUND
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Northeast Ohio Regional Sewer District, Wastewater
Improvement Revenue Refunding:
5.5%, 11/15/12 (c) .................................. 1,550,000 AAA 1,529,959
5.6%, 11/15/13 (c) .................................. 1,000,000 AAA 988,680
Ohio Air Quality Development Authority, Pollution
Control Revenue, Cleveland Electric Company,
8%, 12/1/13 (c) ....................................... 1,250,000 AAA 1,465,050
Ohio General Obligation, 6%, 8/1/10 .................... 1,000,000 AA 1,064,420
Ohio Higher Education Facilities Revenue:
Case Western Reserve University, Series B,
6.5%, 10/1/20 ....................................... 2,250,000 AA 2,470,320
John Carroll University, Series B, 5.3%, 11/15/14 ..... 1,000,000 A 938,030
Oberlin College Project, 7.1%, 10/1/12,
prerefunded 10/1/99** ............................... 495,000 AAA 534,249
University of Dayton Project:
7.25%, 12/1/12 (c) .................................. 1,000,000 AAA 1,108,940
1994 Project, 5.8%, 12/1/14 (c) ..................... 500,000 AAA 500,740
Ohio Housing Finance Agency, Single-Family
Mortgage Revenue, Series 1990 F, 7.6%, 9/1/16 ......... 1,590,000 AAA 1,685,177
Ohio Liquor Profits Refunding Bonds, Economic
Development Revenue, Series 1989,
6.85%, 3/1/00 (c) ..................................... 1,000,000 AAA 1,084,040
Ohio Mortgage Revenue, International Order of
Odd Fellows Home, 8.15%, 8/1/17 (c) ................... 150,000 AAA 159,675
Ohio Public Facilities Commission, Higher Educational
Capital Facilities Revenue, Series 2B,
5.4%,11/1/07 (c) ...................................... 2,000,000 AAA 2,028,580
Ohio State Building Authority:
Correctional Facilities Revenue, Series 1991 A,
6.5%, 10/1/04 ......................................... 1,000,000 A 1,089,680
Juvenile Correction Facilities, 6%, 10/1/06 ........... 1,555,000 A 1,663,819
Toledo Government Office Building, Series A,
8%, 10/1/07, prerefunded 4/1/03** ................... 500,000 AAA 595,550
Worker's Compensation Facilities, William Green
Building, Series 1993 A, 4.75%, 4/1/14 .............. 1,000,000 A 884,650
Ohio Water Development Authority, Pollution Control
Revenue, Ohio Edison Company Project,
Series 1989 A, 7.625%, 7/1/23 ......................... 1,140,000 BBB 1,211,831
Olmsted Falls, OH, City School District, General
Obligation, Series 1991, 7.05%, 12/15/11 (c) .......... 1,000,000 AAA 1,109,410
Parma, OH, General Obligation, 5.4%, 12/1/11 ........... 1,000,000 AAA 981,480
Solon, OH, School District, 5.3%, 12/1/13 .............. 1,000,000 AA 970,900
Summit County, OH, General Obligation,
6.4%, 12/1/14 (c) ..................................... 1,000,000 AAA 1,054,480
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warren County, OH, Water Improvement, General
Obligation, The P&G Project, Series 1995,
5.25%, 12/1/16 ........................................ 1,720,000 AA 1,610,694
PUERTO RICO Puerto Rico Aqueduct and Sewer Authority,
6%, 7/1/09 ............................................ 1,000,000 A 1,037,930
Puerto Rico Electric Power Authority,
Power Revenue, Series S, 6.125%, 7/1/09 ............... 2,000,000 A 2,112,480
Puerto Rico, General Obligation:
Public Improvement, 6.6%, 7/1/13, prerefunded
7/1/02 (c)** ........................................ 1,000,000 AAA 1,119,430
Public Improvement Refunding, 5.4%, 7/1/07 ............ 1,500,000 A 1,493,610
University of Puerto Rico, University Systems,
Series N, 6.25%, 6/1/08 (c) ........................... 1,000,000 AAA 1,103,250
VIRGIN ISLANDS Virgin Islands Public Finance Authority:
General Obligation, Matching Fund Loan Notes,
Series A, 7.25%, 10/1/18 ............................ 1,000,000 NR 1,061,140
Highway Revenue, Series 1989, 7.7%, 10/1/04 ........... 1,000,000 BBB 1,087,820
TOTAL LONG-TERM MUNICIPAL INVESTMENTS ----------
(Cost $76,240,011) .................................... 79,171,279
----------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $79,440,011) (a) ................................ 82,371,279
==========
</TABLE>
(a) The cost for federal income tax purposes was $79,440,011. At March 31,
1996, net unrealized appreciation for all securities based on tax cost was
$2,931,268. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $3,173,414 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$242,146.
(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, FHA 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 a
trustee and used to pay principal and interest on bonds so designated.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
SCUDDER OHIO TAX FREE FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
- --------------------------------------------------------------------------------
Assets
Investments, at market (identified cost $79,440,011)
(Note A) .............................................. $82,371,279
Cash ...................................................... 40,739
Receivables:
Interest .............................................. 1,449,050
Fund shares sold ...................................... 2,553
-----------
Total assets ....................................... 83,863,621
Liabilities
Payables:
Dividends ............................................. $132,334
Fund shares redeemed .................................. 8,000
Accrued management fee (Note C) ....................... 19,568
Other accrued expenses (Note C) ....................... 54,008
--------
Total liabilities .................................. 213,910
-----------
Net assets, at market value ............................... $83,649,711
===========
Net Assets Net assets consist of:
Unrealized appreciation on investments ................ $ 2,931,268
Accumulated net realized loss ......................... (185,761)
Shares of beneficial interest ......................... 64,577
Additional paid-in capital ............................ 80,839,627
-----------
Net assets, at market value ............................... $83,649,711
-----------
Net asset value, offering and redemption price per
share ($ 83,649,711 DIVIDED BY 6,457,717 outstanding
shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) ................ $ 12.95
===========
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year Ended March 31, 1996
- --------------------------------------------------------------------------------
Investment income
Interest .................................................. $ 4,698,285
Expenses:
Management fee (Note C) .................................. $ 486,363
Services to shareholders (Note C) ......................... 78,523
Custodian and accounting fees (Note C) .................... 63,168
Trustees' fees and expenses (Note C) ...................... 14,214
Auditing .................................................. 31,871
Reports to shareholders ................................... 21,504
Legal ..................................................... 5,540
State registration ........................................ 6,724
Other ..................................................... 12,143
--------
Total expenses before reductions .......................... 720,050
Expense reductions (Note C) ............................... (314,079)
--------
Expenses, net ............................................. 405,971
-----------
Net investment income ..................................... 4,292,314
-----------
Net realized and unrealized gain
on investment transactions
Net realized gain from investment transactions ............ 778,640
Net unrealized appreciation on investments
during the period ..................................... 984,684
-----------
Net gain on investments ................................... 1,763,324
-----------
Net increase in net assets resulting from operations ...... $ 6,055,638
===========
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
SCUDDER OHIO TAX FREE FUND
STATEMENTS OF CHANGES IN NET ASSETS
Years Ended March 31,
---------------------
Increase (Decrease) in Net Assets 1996 1995
- --------------------------------------------------------------------------------
Operations:
Net investment income ........................ $4,292,314 $4,344,717
Net realized gain from investment
transactions ............................. 778,640 8,918
Net unrealized appreciation on
investments during the period ............ 984,684 526,733
---------- ----------
Net increase in net assets resulting from
operations ............................... 6,055,638 4,880,368
---------- ----------
Distributions to shareholders:
From net investment income ($.69 and $.70
per share, respectively) ................ (4,292,314) (4,344,717)
---------- ----------
From net realized gains from investment
transactions ($.12 per share) ........... (708,420) --
---------- ----------
In excess of net realized gains ($.04 per share) -- (252,478)
---------- ----------
Fund share transactions:
Proceeds from shares sold .................... 9,467,393 10,714,541
Net asset value of shares issued to
shareholders in reinvestment of
distributions ............................ 3,377,267 3,306,000
Cost of shares redeemed ...................... (8,635,781) (16,250,379)
---------- ----------
Net increase (decrease) in net assets from
Fund share transactions ................. 4,208,879 (2,229,838)
---------- ----------
Increase (decrease) in net assets ............ 5,263,783 (1,946,665)
Net assets at beginning of period ............ 78,385,928 80,332,593
---------- ----------
Net assets at end of period .................. $83,649,711 $78,385,928
========== ==========
Other Information
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .... 6,140,345 6,334,774
---------- ----------
Shares sold .................................. 720,794 855,533
Shares issued to shareholders in
reinvestment of distributions ............ 258,369 264,552
Shares redeemed .............................. (661,791) (1,314,514)
---------- ----------
Net increase (decrease) in Fund shares ....... 317,372 (194,429)
---------- ----------
Shares outstanding at end of period .......... 6,457,717 6,140,345
========== ==========
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the
Period
May 28, 1987
(commencement
Years Ended March 31, of operations)
----------------------------------------------------------------------------- to March 31
1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ................. $ 12.77 $ 12.68 $ 13.13 $ 12.47 $ 12.14 $ 11.97 $ 11.94 $ 11.65 $ 12.00
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income (a) ........... .69 .70 .70 .72 .75 .78 .82 .79 .66
Net realized and unrealized
gain (loss) on investment
transactions ...................... .30 .13 (.35) .85 .36 .23 .10 .36 (.40)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations .......................... .99 .83 .35 1.57 1.11 1.01 .92 1.15 .26
------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income ............... (.69) (.70) (.70) (.72) (.75) (.78) (.82) (.84) (.61)
Net realized gains on
investment transactions ........... (.12) -- (.08) (.19) (.03) (.06) (.07) (.02) --
In excess of net
realized gains .................... -- (.04) (.02) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ................... (.81) (.74) (.80) (.91) (.78) (.84) (.89) (.86) (.61)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period ........ $ 12.95 $ 12.77 $ 12.68 $ 13.13 $ 12.47 $ 12.14 $ 11.97 $ 11.94 $ 11.65
======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (%) (b) .................. 7.85 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) ........................ 84 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 .50*
Ratio of net investment income to
average daily net assets (%) ........ 5.30 5.59 5.23 5.61 6.05 6.50 6.74 7.13 7.17*
Portfolio turnover rate (%) ........... 19.6 19.9 12.2 34.7 13.2 22.6 15.9 35.7 105.5*
<FN>
(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 $ .05 $ .06 $ .07 $ .07 $ .07 $ .07 $ .05
Operating expense ratio
before expense
reductions (%) .................. .89 .91 .90 .95 1.03 1.21 1.62 2.14 4.51*
(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 Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
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. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
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.
18
<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. 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 the earlier of the call
or maturity date.
B. Purchases and Sales of Securities
- --------------------------------------------------------------------------------
During the year ended March 31, 1996, purchases and sales of municipal
securities (excluding short-term investments) aggregated $18,399,064 and
$15,296,685, 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 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 Adviser has agreed not to impose all or a portion of its
management fee until July 31, 1996 and during such period to maintain the
annualized expenses of the Fund at not more than 0.50% of average daily net
assets. For the year ended March 31, 1996, the Adviser imposed fees amounting to
$172,284 and the portion not imposed amounted to $314,079 at March 31, 1996.
19
<PAGE>
SCUDDER OHIO TAX FREE FUND
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Fund. For the
year ended March 31, 1996, the amount charged to the Fund by SSC aggregated
$58,847 of which $4,831 is unpaid at March 31, 1996.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
March 31, 1996, the amount charged to the Fund by SFAC aggregated $36,000, of
which $3,000 was unpaid at March 31, 1996.
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, 1996,
Trustees' fees and expenses charged to the Fund aggregated $14,214.
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, 1996,
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 eight 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, 1996, 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, 1996, 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 eight
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 20, 1996
21
<PAGE>
SCUDDER OHIO TAX FREE FUND
TAX INFORMATION
The Fund paid distributions of $.115 per share from net long-term capital gains
during its year ended March 31, 1996. Pursuant to Section 852 of the Internal
Revenue Code, the Fund designates $721,002 as capital gain dividends for its
year ended March 31, 1996.
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 1996, 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
<PAGE>
(This page intentionally left blank.)
23
<PAGE>
(This page intentionally left blank.)
24
<PAGE>
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Consultant 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; General Partner,
TL Ventures
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
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>
<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 Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Discovery Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
- ------------------------------------------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
- ------------------------------------------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
- ------------------------------------------------------------------------------------------------------------------
Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
- ------------------------------------------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,(TM) an institutional cash management
service that utilizes certain portfolios of Scudder Fund, Inc. ($100,000
minimum), call 1-800-541-7703.
26
<PAGE>
Account Service and Information
- --------------------------------------------------------------------------------------------------------------
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For personalized information about your
Scudder accounts; exchanges and
redemptions; or information on any
Scudder fund SCUDDER AUTOMATED
INFORMATION LINE (SAIL) 1-800-343-2890
Investment Information
- --------------------------------------------------------------------------------------------------------------
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
- --------------------------------------------------------------------------------------------------------------
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
- --------------------------------------------------------------------------------------------------------------
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
- --------------------------------------------------------------------------------------------------------------
For information on Scudder Treasurer's 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.
- --------------------------------------------------------------------------------------------------------------
</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.
27
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 38 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
<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, 1996
o For investors seeking double-tax-free income exempt from both Pennsylvania
and regular federal income taxes
o A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
<PAGE>
SCUDDER PENNSYLVANIA 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
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
IN BRIEF
o Scudder Pennsylvania Tax Free Fund rewarded investors with a total return
of 7.45% for the fiscal year ended March 31, 1996. The Fund's share price
rose $0.18 to $13.31 at the end of the period, while investors received
tax-free income distributions totaling $0.71 and a taxable capital gain
distribution of $0.07 per share.
o During the period, the Fund's performance was on par with the 7.46% average
return of the 62 Pennsylvania tax free funds tracked by Lipper Analytical
Services, Inc.
o The Fund's 30-day net annualized SEC yield was 4.96% on March 31, 1996. For
Pennsylvania residents in the combined state and federal income tax bracket
of 41.29%, this tax-free yield translated to an 8.45% yield for a taxable
investment.
BAR CHART TITLE: Fund Yield vs. Taxable Equivalent Yield
The Fund's 30-Day Taxable Equivalent
SEC Yield Yield
--------- -----
CHART DATA:
3/31/96 4.96% 8.45%
9/30/95 4.84% 8.24%
2
<PAGE>
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Widespread declines in U.S. interest rates helped create hospitable
conditions for bonds during the past 12 months. Scudder Pennsylvania Tax Free
Fund finished the fiscal year ended March 31, 1996, with a total return of
7.45%, reflecting appreciation in the Fund's share price and an attractive level
of double-tax-free income to investors. These results were in line with the
7.46% average return of the 62 Pennsylvania tax-free funds monitored by Lipper
Analytical Services, Inc.
As bond markets regained strength during 1995, taxable bonds led the
march back, while tax-free municipal bonds recovered more slowly. By the fall,
municipal bonds had become attractively valued compared to Treasuries, which
helped renew investor interest and resulted in modest outperformance versus
taxable bonds.
Recent economic indicators raised concerns that the economy may be
stronger than originally believed, which unsettled the market. Still, ample
evidence suggests the absence of mounting inflationary pressures. This scenario
would be beneficial for bonds. Given the current economic uncertainties, the
Fund's challenge is to stand ready to participate in potential price rallies but
provide a measure of price stability should the market weaken instead, while
also continuing to supply competitive levels of double-tax-free income.
In closing, we wish to take this opportunity to announce that a new
member joins the Scudder Family of Funds as of May 8 -- Scudder Emerging Markets
Growth Fund. The new Fund focuses on stocks in developing nations around the
globe. For more information about Scudder Emerging Markets Growth Fund and other
Scudder products and services, please see page 26. For questions about Scudder
Pennsylvania Tax Free Fund, please call a Scudder Investor Relations
representative at 1-800-225-2470.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Pennsylvania Tax Free Fund
3
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
PERFORMANCE UPDATE as of March 31, 1996
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER PENNSYLVANIA TAX FREE FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,745 7.45% 7.45%
5 Year $14,808 48.08% 8.17%
Life of
Fund* $19,896 98.96% 8.09%
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,838 8.38% 8.38%
5 Year $14,745 47.45% 8.07%
Life of
Fund* $20,703 107.03% 8.58%
*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 Pennsylvania Tax Free Fund
Year Amount
- ----------------------
5/31/87 $10,000
'88 $10,399
'89 $11,484
'90 $12,489
'91 $13,436
'92 $14,874
'93 $16,835
'94 $17,289
'95 $18,516
'96 $19,896
Lehman Brothers Municipal Bond Index
Year Amount
- ----------------------
5/31/87 $10,000
'88 $10,847
'89 $11,628
'90 $12,855
'91 $14,041
'92 $15,444
'93 $17,378
'94 $17,781
'95 $19,102
'96 $20,703
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>
1988* 1989 1990 1991 1992 1993 1994 1995 1996
-----------------------------------------------------------------------
NET ASSET VALUE... $11.80 $12.08 $12.27 $12.35 $12.80 $13.46 $13.01 $13.13 $13.31
INCOME DIVIDENDS.. $ .59 $ .85 $ .84 $ .82 $ .77 $ .76 $ .75 $ .73 $ .71
CAPITAL GAINS
DISTRIBUTIONS..... $ -- $ .06 $ .01 $ -- $ .07 $ .21 $ .09 $ .03 $ .07
FUND TOTAL
RETURN (%)........ 3.39 11.00 8.75 7.58 10.70 13.19 2.70 7.09 7.45
INDEX TOTAL
RETURN (%)........ 8.48 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38
</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>
PORTFOLIO SUMMARY as of March 31, 1996
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
General Obligation 28%
Hospital/Health 21%
Water/Sewer Revenue 17%
Electric Utility Revenue 6% The Fund remained well
Pollution Control/ diversified across carefully
Industrial Development 5% selected revenue and general
Housing Finance Authority 5% obligation bonds.
School District/Lease 4%
Core Cities/Lease 4%
State Agency/Lease 4%
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 74%
AA 7% Attention to credit quality
A 5% continued to be a central part
BBB 11% of Fund strategy.
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 4% As interest rates declined,
1 - 5 years 11% the Fund slightly increased
5 - 10 years 30% its investments in bonds with
10 - 20 years 46% longer-term effective
Greater than 20 years 9% maturities, though the bulk
---- of the portfolio remained
100% focused on intermediate-term
==== bonds.
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 PENNSYLVANIA TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Scudder Pennsylvania Tax Free Fund performed well during the fiscal
year ended March 31, 1996. In addition to providing investors a healthy stream
of income free from Pennsylvania state and federal income taxes, the Fund posted
an $0.18 gain in share price. Combined, the increase in share price to $13.31 on
March 31, 1996, from $13.13 a year ago and the reinvestment of tax-free dividend
distributions totaling $0.71 and taxable capital gains of $0.07 per share,
helped the Fund generate a 7.45% total return for the year. This performance was
in line with the 7.46% average return for the 62 Pennsylvania tax free funds
tracked by Lipper Analytical Services, Inc.
For bonds, the downward path of interest rates boosted prices, more
than making up for the corresponding drop in yields. The Fund ended the period
with a 4.96% 30-day net annualized SEC yield, down slightly from its 5.29% yield
at the beginning of the period. Yet, the Fund's yield remains attractive versus
comparable taxable investments. Pennsylvania residents in the highest combined
federal and state tax bracket of 41.29% would have to earn an 8.45% yield from a
comparable taxable investment to match your Fund's double-tax-free yield.
Slower Economic Growth Fosters Recovery in Bond Markets
The confluence of slower, more sustainable economic growth, tame levels
of inflation, and weak consumer spending put a decisive end to 1994's faltering
bond prices. As bond markets began to recover, Treasury securities led the way.
During periods of falling interest rates, Treasuries often have an edge over
municipal bonds: Treasuries are not callable (which means they cannot be retired
in advance of their stated maturity dates) whereas most municipal bonds can be
called by their issuers. Lower rates increase the likelihood of calls as
municipal issuers take advantage of opportunities to refinance as a way to lower
debt costs.
Proposed flat tax legislation -- which threatened to eliminate the tax
advantages of owning municipal bonds -- also hampered the performance of
municipal bonds for much of 1995. Other factors detracted from municipal demand
as well, including the impressive performance of stocks, investors' reluctance
to reenter bond markets, and the lingering effects of Orange County,
California's financial problems, which made headlines as 1994 was drawing to a
close. Towards the end of the period, the presidential primaries once again put
the spotlight on the flat tax, negatively affecting municipals. Since then,
6
<PAGE>
however, discussions about the flat tax have disappeared along with the
presidential aspirations of Steve Forbes. Municipal demand, meanwhile, has begun
to improve in recent months, as more money flows into tax-exempt mutual funds.
Balancing Opportunities for Price Appreciation
and Income Preservation
The Fund's basic goal of blending a healthy level of double-tax-free
income with strong price performance remained in place during the fiscal year.
This total return approach meant that when interest rates were rising in 1994,
the Fund maintained a shorter than average maturity to help protect share price
while its current yield rose. In 1995, the Fund benefited from its position in
non-callable and discount bonds which improved in price as yields declined.
In an environment of falling interest rates, noncallable bonds can add
more value than their callable counterparts, offering both price appreciation
potential and a more reliable income stream, since they are not at risk of being
repaid prematurely. Because noncallable bonds are a scarce commodity in the
municipal realm, portfolios owning a sizable amount of these bonds have an
advantage.
During the period, nearly 80% of the portfolio was invested in bonds
maturing between five and 20 years. In our estimation, this segment of the
maturity spectrum offered the most compelling tradeoff between risk and reward.
With rates generally declining, we pushed maturities slightly further out along
the intermediate-maturity spectrum, where the Fund was able to capture most of
the yield and much of the price gain of longer-term bonds. In particular, we
increased the weighting of bonds maturing between 15 and 20 years. These bonds
contributed heavily to the Fund's performance over the period. Generally, we
avoided securities with more than 20 years to maturity, believing that they did
not offer enough extra yield to justify their additional price sensitivity to
changes in the direction of interest rates.
Credit quality, as usual, remained an important focus, with around 82%
of the portfolio invested in bonds rated AA or better at the period's close. In
addition, we maintained approximately 65% in insured bonds, which afford a
degree of safety as well as liquidity, since they are protected against default
by various bond insurance companies.
7
<PAGE>
Pennsylvania Review
The state of Pennsylvania's improved fiscal environment reflects its
successful efforts to control expenditures. Since 1992, the commonwealth has
managed to balance its budget, with small operating surpluses each year. The
commonwealth's favorable financial performance has lessened the need for
short-term borrowing, and Pennsylvania remains committed to reducing its current
debt burden, which happens to be moderate relative to the rest of the country.
The lion's share of Pennsylvania's broad revenue base consists of sales taxes,
personal income taxes, and corporate taxes.
The combination of a broad revenue base and a more diverse economy has
diminished Pennsylvania's vulnerability to shifting economic cycles. During the
past year, economic activity in Pennsylvania has been moderate. Job growth in
the services sector has offset declines in manufacturing, placing the
unemployment level on a par with the national average of 5.5%.
Within the municipal marketplace, Pennsylvania's bonds have performed
well, reflecting the relatively strong market demand for its tax-exempt debt.
Outlook
We believe the key catalysts for attractive bond market conditions --
slow economic growth, low inflation, and therefore the potential for
stable-to-lower interest rates -- remain in place, despite short-term
uncertainty. Municipal bonds also stand to benefit from relatively light new
issuance and a more favorable demand environment now that the flat tax proposal
is more or less tabled.
Positives aside, conflicting reports about the economy's future
direction have added a degree of uncertainty to the bond markets. In addition,
bonds may find it difficult to stage a real recovery without robust foreign
demand, which was so instrumental last year in pushing yields down and prices
up. We will continue to scrutinize this economic data to help us shape
investment strategy through the year. Until more definitive signs of the
economy's direction emerge, we have become a bit more cautious, allowing cash
reserves to build up more than usual. This affords us the flexibility to move
quickly when attractive investment opportunities come our way while helping to
reduce fluctuations in the Fund's value during periods of market declines.
8
<PAGE>
In the months ahead, the Fund's share price and income will vary in
response to changes in interest rates and other economic factors. In our view,
Scudder Pennsylvania Tax Free Fund remains well positioned to continue to
provide investors with a healthy stream of income exempt from state and federal
income taxes while seeking to reduce share price volatility. Thank you for your
continued interest in Scudder Pennsylvania Tax Free Fund.
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 16 years of experience in
municipal investing and portfolio management.
9
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1996
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3.0% SHORT-TERM MUNICIPAL INVESTMENTS
Pennsylvania Bucks County, PA, Oxford Falls Plaza, Series 1984,
Weekly Demand Note, 3.675%, 10/1/14* .................... 100,000 MIG1 100,000
Delaware County, PA:
Airport Facilities Revenue, United Parcel Service,
Daily Demand Note, 3.7%, 12/1/15* ..................... 900,000 AAA 900,000
Industrial Development Authority, British Petroleum
Project, Daily Demand Note, 3.85%, 10/1/19* ........... 500,000 A1+ 500,000
Langhorne, PA, Franciscan Health System Pooled
Financing, Saint Mary Hospital:
Series A, Daily Demand Note, 3.7%, 12/1/24* ........... 200,000 A1+ 200,000
Series C, Daily Demand Note, 3.7%, 12/1/24* ........... 500,000 A1+ 500,000
Total Short-term Municipal Investments ---------
(Cost $2,200,000) ....................................... 2,200,000
---------
97.0% LONG-TERM MUNICIPAL INVESTMENTS
Pennsylvania Allegheny County, PA:
Hospital Development Authority, Hospital Revenue,
Magee Women's Hospital, 5.3%, 10/1/07 (c) ............. 1,260,000 AAA 1,261,499
Sanitary Authority, Sewer Revenues, Series 1986 B,
7.5%, 12/1/16, prerefunded 6/1/99 (c)*** .............. 500,000 AAA 546,930
Armstrong County, PA, Hospital Authority, St. Frances
Medical Center, Series A, 6.25%, 6/1/13 (c) ............. 1,000,000 AAA 1,036,760
Berks County, PA, Municipal Authority Hospital
Revenue, Reading Hospital and Medical
Center Project:
5.5%, 10/1/08 (c) ..................................... 2,000,000 AAA 2,036,220
5.7%, 10/1/14 (c) ..................................... 1,000,000 AAA 996,600
Bethlehem, PA, Water Authority, Refunding,
4.875%, 11/15/14 (c) .................................... 1,000,000 AAA 893,330
Bethlehem, PA, Water Revenue, Series 1992,
6.25%, 11/15/11, prerefunded 11/15/01 (c)*** ............ 1,000,000 AAA 1,082,990
Blair County, PA, Hospital Authority, Altoona Hospital
Project, 5.5%, 7/1/07 (c) ............................... 1,000,000 AAA 1,015,850
Bristol Township, PA, School District, Series A,
5.25%, 2/15/12 (c) ...................................... 1,920,000 AAA 1,847,846
Bucks County, PA, Water and Sewer Authority
Revenue, ETM, 6.375%, 12/1/08** ......................... 425,000 NR 440,912
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Clearfield, PA, Hospital Authority Revenue,
Clearfield Hospital, 6.875%, 6/1/16 ..................... 1,455,000 BBB 1,423,033
Commonwealth of Pennsylvania, Certificate of
Participation, Lease Revenue, Series A:
5.25%, 7/1/10 (c) ..................................... 1,890,000 AAA 1,827,252
5%, 7/1/15 (c) ........................................ 1,000,000 AAA 901,410
Delaware County, PA:
Health Facilities Revenue, Mercy Health
Corporation of Southeastern Pennsylvania,
Series B, 6%, 11/15/07 ................................ 1,500,000 BBB 1,448,805
Hospital Revenue, Memorial Hospital,
5.5%, 8/15/13 ......................................... 1,750,000 AAA 1,692,863
Delaware County Authority, Commonwealth of
Pennsylvania, University Revenue, Villanova
University, 7.75%, 8/1/18, prerefunded 8/1/98*** ........ 200,000 AAA 219,320
Erie, PA, Higher Education Building Authority,
College Revenue, Mercyhurst College Project,
5.75%, 3/15/20 .......................................... 1,000,000 BBB 867,150
Erie County, PA:
General Obligation, 5.25%, 9/1/12 (c) ................... 1,000,000 AAA 947,270
Prison Authority, Commonwealth Lease Revenue,
6.25%, 11/1/11, prerefunded 11/1/01 (c)*** ............ 1,000,000 AAA 1,082,500
Harrisburg, PA, Water Authority Revenue, Series
1993 B, Inverse Floater, 7.97%, 6/18/15 (c)**** ......... 1,000,000 AAA 972,500
Indiana County, PA, Industrial Development Authority,
Pennsylvania Electric Company, Pollution Control
Revenue, 5.35%, 11/1/10 (c) ............................. 1,000,000 AAA 986,810
Lebanon County, PA, Good Samaritan Hospital
Authority Revenue, Series 1989 B, 8.25%,11/1/18,
prerefunded 11/1/99*** .................................. 600,000 AAA 683,562
Lehigh County, PA, Hospital Revenue, Healtheast,
Series B, 9%, 7/1/15, prerefunded 7/1/97*** ............. 200,000 AAA 216,662
Montgomery County, PA:
Holy Redeemer Hospital, 6.75%, 2/1/09 (c) ............... 500,000 AAA 526,225
Redevelopment Authority, Multi-Family Housing
Revenue Refunding, KBF Associates,
6.375%, 7/1/12 ........................................ 1,500,000 BBB 1,473,795
Pennsylvania Convention Center Authority,
Funding Revenue, 6%, 9/1/19 (c) ......................... 2,200,000 AAA 2,313,916
Pennsylvania General Obligation:
10%, 4/15/02 (c) ........................................ 2,500,000 AAA 3,178,000
6.25%, 7/1/10 ........................................... 1,000,000 AA 1,088,870
5.375%, 5/1/13 .......................................... 1,500,000 AA 1,443,960
Zero Coupon, 12/15/02, prerefunded 12/15/98*** .......... 2,040,000 AAA 1,329,223
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania Housing Finance Agency,
Single Family Mortgage Revenue:
Series 1991-32, 7.15%, 4/1/15 ......................... 1,000,000 AA 1,065,260
Series 1992-33, 6.85%, 10/1/09 ........................ 840,000 AA 891,979
Pennsylvania Industrial Development Authority,
Economic Development Revenue, 5.8%, 1/1/08 (c) .......... 1,000,000 AAA 1,048,420
Pennsylvania Intergovernmental Cooperation
Authority, Special Tax Revenue, City of
Philadelphia, 6.8%, 6/15/12,
prerefunded 6/15/02*** .................................. 1,000,000 AAA 1,114,170
Philadelphia, PA, Airport Revenue, Philadelphia
Airport System, 9%, 6/15/15 ............................. 100,000 BBB 103,336
Philadelphia, PA, Gas Works Revenue,
Series A, 7.3%, 7/1/99, prerefunded 7/1/97*** ........... 1,000,000 AAA 1,062,660
Philadelphia, PA, General Obligation:
11.5%, 8/1/98 (c) ..................................... 500,000 AAA 579,350
Refunding Revenue, Series A, 11.5%, 8/1/99 (c) ........ 710,000 AAA 861,905
School District, Series A, 6.25%, 9/1/09 (c) .......... 1,000,000 AAA 1,090,370
Philadelphia, PA, Hospital and Higher Education
Facilities Authority, Hospital Revenue:
Albert Einstein Medical Center, 7.5%, 4/1/99 .......... 775,000 A 805,140
Children's Seashore House, Series A,
7%, 8/15/12 (c) ..................................... 1,000,000 A 1,054,240
Graduate Health System Obligation Group,
6.625%, 7/1/21 ...................................... 500,000 BBB 495,395
Temple University Hospital, Series 1993 A,
6.625%, 11/15/23 .................................... 1,100,000 BBB 1,133,407
Philadelphia, PA, Municipal Authority, Lease
Revenue Refunding:
Series A, 5.625%, 11/15/14 (c) ........................ 1,000,000 AAA 976,820
Series C, 5%, 4/1/07 (c) .............................. 2,000,000 AAA 1,975,020
Philadelphia, PA, Port Authority Lease Revenue,
Series 1993, 6.2%, 9/1/13 (c) ........................... 2,000,000 AAA 2,054,240
Philadelphia, PA, Water & Wastewater Refunding
Revenue, 5.625%, 6/15/09 (c) ............................ 2,000,000 AAA 2,046,680
Philadelphia, PA, Water Revenue, 6.25%, 8/1/10 (c) ....... 1,000,000 AAA 1,089,230
Pittsburgh, PA, General Obligation, Series 1993 A,
5.5%, 9/1/14 (c) ........................................ 1,500,000 AAA 1,474,365
Pittsburgh, PA, Water and Sewer System Revenue:
Series A, 6.5%, 9/1/14, prerefunded 9/1/01 (c)*** ....... 1,250,000 AAA 1,384,863
ETM, 7.25%, 9/1/14 (c)** ................................ 150,000 AAA 169,458
Series A, 4.75%, 9/1/16 (c) ............................. 2,000,000 AAA 1,733,240
Pottsville, PA, Hospital Authority, Warne Clinic,
7.25%, 7/1/24 ........................................... 1,000,000 BBB 1,025,130
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Somerset County, PA, General Authority,
Commonwealth Lease Revenue,
6.25%, 10/15/11, prerefunded 10/15/01 (c)*** ............ 1,000,000 AAA 1,081,950
Union County, PA, Higher Education Facilities
Authority, University Revenue, Bucknell University,
6.2%, 4/1/07 (c) ........................................ 1,000,000 AAA 1,058,360
University Area, PA, Sewer Revenue,
5.25%, 11/1/14 (c) ...................................... 1,750,000 AAA 1,658,423
Upper Merion County, PA:
General Authority, Lease Revenue,
7.2%, 8/15/16, crossover refunded 8/15/96***** ........ 350,000 AA 361,074
Municipal Utility Authority, Sewer Revenue,
7.2%, 8/15/16, crossover refunded 8/15/96***** ........ 150,000 AA 154,746
Washington County, PA, Lease Revenue,
Shadyside Hospital Project, 7.375%, 12/15/09,
prerefunded 6/15/00 (c)*** .............................. 1,000,000 AAA 1,136,030
York County, PA, Resource Recovery Solid Waste
Authority, General Obligation, Series C,
8.2%, 12/1/14 ........................................... 315,000 A 336,924
Puerto Rico Puerto Rico Public Building Authority, Government
Facilities Revenue, 6.25%, 7/1/13 (c) ................... 1,000,000 AAA 1,089,820
Puerto Rico Electric Power Authority, Power Revenue
Refunding, Series N, Zero Coupon, 7/1/03 (c) ............ 1,500,000 AAA 1,063,230
Puerto Rico, General Obligation, Public Improvement
Refunding, 5.4%, 7/1/07 ................................. 1,500,000 A 1,493,610
Virgin Islands Virgin Islands Public Finance Authority,
General Obligation, Matching Fund Loan Notes,
Series A, 7.25%, 10/1/18 ................................ 1,500,000 NR 1,591,710
Total Long-term Municipal Investments ----------
(Cost $69,387,194) ...................................... 72,042,618
----------
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio - 100.0%
(Cost $71,587,194) (a) .................................. 74,242,618
==========
</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 $71,587,194. At March 31,
1996, net unrealized appreciation for all securities based on tax cost
was $2,655,424. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $3,088,032 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$432,608.
(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, 1996.
***** 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>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
- --------------------------------------------------------------------------------
Assets
Investments, at market (identified cost $71,587,194)
(Note A) .............................................. $ 74,242,618
Cash ...................................................... 66,536
Receivables:
Investments sold ...................................... 225,000
Interest .............................................. 1,351,345
Fund shares sold ...................................... 650
------------
Total assets ....................................... 75,886,149
Liabilities
Payables:
Dividends ............................................. $ 126,932
Fund shares redeemed .................................. 176,227
Accrued management fee (Note C) ....................... 11,794
Other accrued expenses (Note C) ....................... 52,962
---------
Total liabilities .................................. 367,915
------------
Net assets, at market value ............................... $ 75,518,234
============
Net Assets
Net assets consist of:
Unrealized appreciation on investments ................ $ 2,655,424
Accumulated net realized gain ......................... 29,734
Shares of beneficial interest ......................... 56,741
Additional paid-in capital ............................ 72,776,335
------------
Net assets, at market value ............................... $ 75,518,234
============
Net asset value, offering and redemption price per share
($75,518,234 DIVIDED BY 5,674,116 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized) ................................. $13.31
============
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
STATEMENT OF OPERATIONS
Year Ended March 31, 1996
- --------------------------------------------------------------------------------
Investment income
Interest .................................................. $ 4,385,932
Expenses:
Management fee (Note C) ................................... $ 453,712
Services to shareholders (Note C) ......................... 83,745
Custodian and accounting fees (Note C) .................... 66,024
Trustees' fees (Note C) ................................... 14,176
Auditing .................................................. 32,137
Reports to shareholders ................................... 20,321
State registration ........................................ 6,218
Legal ..................................................... 2,437
Other ..................................................... 8,078
---------
Total expenses before reductions .......................... 686,848
Expense reductions (Note C) ............................... (308,030)
---------
Expenses, net ............................................. 378,818
-----------
Net investment income ..................................... 4,007,114
-----------
Net realized and unrealized gain
on investment transactions
Net realized gain from investment transactions ............ 268,513
Net unrealized appreciation on investments
during the period ..................................... 1,138,390
-----------
Net gain on investments ................................... 1,406,903
-----------
Net increase in net assets resulting from operations ...... $ 5,414,017
===========
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
Years Ended March 31,
---------------------
Increase (Decrease) in Net Assets 1996 1995
- --------------------------------------------------------------------------------
Operations:
Net investment income ........................ $ 4,007,114 $ 4,086,809
Net realized gain from investment
transactions ............................. 268,513 181,781
Net unrealized appreciation on
investments during the period ............ 1,138,390 452,741
------------ ------------
Net increase in net assets resulting from
operations ............................... 5,414,017 4,721,331
------------ ------------
Distributions to shareholders:
From net investment income ($.71 and $.73 per
share, respectively) ..................... (4,007,114) (4,086,809)
------------ ------------
From net realized gains from investment
transactions ($.07 and $.03 per share,
respectively) ............................ (406,975) (157,473)
------------ ------------
Fund share transactions:
Proceeds from shares sold .................... 13,628,858 15,679,635
Net asset value of shares issued to
shareholders in reinvestment
of distributions ......................... 2,848,989 2,980,880
Cost of shares redeemed ...................... (14,251,658) (20,409,846)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions .................. 2,226,189 (1,749,331)
------------ ------------
Increase (decrease) in net assets ............ 3,226,117 (1,272,282)
Net assets at beginning of period ............ 72,292,117 73,564,399
------------ ------------
Net assets at end of period .................. $ 75,518,234 $ 72,292,117
============ ============
Other Information
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .... 5,507,084 5,653,359
------------ ------------
Shares sold .................................. 1,013,230 1,242,877
Shares issued to shareholders in
reinvestment of distributions ............ 212,399 232,520
Shares redeemed .............................. (1,058,597) (1,621,672)
------------ ------------
Net increase (decrease) in Fund shares ....... 167,032 (146,275)
------------ ------------
Shares outstanding at end of period .......... 5,674,116 5,507,084
============ ============
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
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.
<TABLE>
<CAPTION>
For the
Period
May 20, 1987
(commencement
Years Ended March 31, of operations)
----------------------------------------------------------------------------- to March 31
1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............... $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80 $ 12.00
------ ------ ------ ------ ------ ------ ------ ------ -------
Income from investment operations:
Net investment income (a) ......... .71 .73 .75 .76 .77 .82 .84 .79 .65
Net realized and unrealized gain
(loss) on investment
transactions .................... .25 .15 (.36) .87 .52 .08 .20 .40 (.26)
------ ------ ------ ------ ------ ------ ------ ------ -------
Total from investment operations .... .96 .88 .39 1.63 1.29 .90 1.04 1.19 .39
------ ------ ------ ------ ------ ------ ------ ------ -------
Less distributions:
From net investment income ........ (.71) (.73) (.75) (.76) (.77) (.82) (.84) (.85) (.59)
From net realized gains on
investment transactions ......... (.07) (.03) (.09) (.21) (.07) -- (.01) (.06) --
------ ------ ------ ------ ------ ------ ------ ------ -------
Total distributions ................. (.78) (.76) (.84) (.97) (.84) (.82) (.85) (.91) (.59)
------ ------ ------ ------ ------ ------ ------ ------ -------
Net asset value, end of period ...... $13.31 $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $ 11.80
====== ====== ====== ====== ====== ====== ====== ====== =======
Total Return (%) (b) ................ 7.45 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) ...................... 76 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 .50*
Ratio of net investment income to
average daily net assets (%) ...... 5.30 5.74 5.42 5.79 6.05 6.67 6.78 7.09 7.16*
Portfolio turnover rate (%) ......... 11.1 26.2 17.4 29.2 11.2 7.8 2.0 13.5 97.6*
<FN>
(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 ........... $ .05 $ .06 $ .06 $ .07 $ .08 $ .07 $ .07 $ .07 $ .05
Operating expense ratio
before expense
reductions (%) ................ .91 .94 .95 1.02 1.13 1.43 1.84 2.43 5.75*
(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 Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
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. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
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.
19
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
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 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 the earlier of the call
or maturity date.
B. Purchases and Sales of Securities
- --------------------------------------------------------------------------------
During the year ended March 31, 1996, purchases and sales of municipal
securities (excluding short-term investments) aggregated $10,568,499 and
$7,860,991, 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 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 Adviser has agreed not to impose all or a portion of its
management fee until July 31, 1996, and during such period to maintain the
annualized expenses of the Fund at not more than 0.50% of average daily net
assets. For the year ended March 31, 1996, the Adviser imposed fees amounting to
$145,682 and the portion not imposed amounted to $308,030.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Fund. For the
year ended March 31, 1996, the amount charged to the Fund by SCC aggregated
$62,311, of which $5,167 is unpaid at March 31, 1996.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
March 31, 1996, the amount charged to the Fund by SFAC aggregated $36,000, of
which $3,000 is unpaid at March 31, 1996.
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, 1996,
Trustees' fees charged to the Fund aggregated $14,176.
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,
1996, 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 eight 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, 1996, 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, 1996, 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 eight 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 10, 1996
22
<PAGE>
TAX INFORMATION
The Fund paid distributions of $.072 per share from net long-term capital gains
during its year ended March 31, 1996. Pursuant to Section 852 of the Internal
Revenue Code, the Fund designates $255,698 as capital gain dividends for its
year ended March 31, 1996.
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 1996, 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 intentionally left 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; Consultant 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; General Partner, TL Ventures
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
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 Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Discovery Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
- --------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
- --------------------------------------------------------------------------------
Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
- --------------------------------------------------------------------------------
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,^(TM) an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.
</TABLE>
26
<PAGE>
HOW TO CONTACT SCUDDER
<TABLE>
<CAPTION>
<S> <C>
Account Service and Information
-------------------------------------------------------------------------------------------------------------
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For personalized information about your Scudder accounts;
exchanges and redemptions; or information on any Scudder fund
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
-------------------------------------------------------------------------------------------------------------
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
-------------------------------------------------------------------------------------------------------------
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
-------------------------------------------------------------------------------------------------------------
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
-------------------------------------------------------------------------------------------------------------
For information on Scudder For information on Scudder
Treasurers Trust,(TM)an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
-------------------------------------------------------------------------------------------------------------
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
</TABLE>
27
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 38 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication
to research and fundamental investment disciplines have helped us become one of
the largest and most respected investment managers in the world. Though times
have changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
