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 March 1, 1997, 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 and is available along with other related
materials on the SEC's Internet Web site (http://www.sec.gov).
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
March 1, 1997
Two pure no-load(TM) (no sales charges) mutual funds which seek to provide
double tax-free income, exempt from both Massachusetts state personal income and
regular federal income tax.
<PAGE>
Expense information
Scudder Massachusetts Limited Term Tax Free Fund
How to compare a Scudder pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Massachusetts Limited Term Tax Free Fund (the
"Fund"). By reviewing this table and those in other mutual funds' prospectuses,
you can compare the Fund's fees and expenses with those of other funds. With
Scudder's pure no-load(TM) funds, you pay no commissions to purchase or redeem
shares, or to exchange from one fund to another. As a result, all of your
investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended October 31, 1996.
Investment management fee 0.45%**
12b-1 fees NONE
Other expenses 0.30%
-----
Total Fund operating expenses 0.75%**
=====
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its
net investment income to shareholders. (As noted above, the Fund has no
redemption fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$8 $24 $42 $93
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than
those shown.
* You may redeem by writing or calling the Fund 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 October 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 waive a portion of its fee so that the total annualized
expenses of the Fund did not exceed 0.50% from August 1, 1995 to February
29, 1996 and 0.75% from March 1, 1996 to October 31, 1996, Fund expenses
would have been: investment management fee 0.60%, other expenses 0.30% and
total operating expenses 0.90% for the fiscal year ended October 31, 1996.
2
<PAGE>
Expense information
Scudder Massachusetts Tax Free Fund
How to compare a Scudder pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Massachusetts Tax Free Fund (the "Fund"). By
reviewing this table and those in other mutual funds' prospectuses, you can
compare the Fund's fees and expenses with those of other funds. With Scudder's
pure no-load(TM) funds, you pay no commissions to purchase or redeem shares, or
to exchange from one fund to another. As a result, all of your investment goes
to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended March 31, 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.
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, 1996 and may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
For the Period
February 15, 1994
(commencement of
operations) to
Years Ended October 31, October 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
----------------------------------------------
Net asset value, beginning of period ............ $12.02 $11.64 $12.00
----------------------------------------------
Income from investment operations:
Net investment income ........................... .50 .54 .36
Net realized and unrealized gain (loss) on
investment transactions ...................... (.03) .38 (.36)
----------------------------------------------
Total from investment operations ................ .47 .92 .00
----------------------------------------------
Less distributions from net investment income ... (.50) (.54) (.36)
----------------------------------------------
Net asset value, end of period .................. $11.99 $12.02 $11.64
---------------------------------------------------------------------------------------------------
Total Return (%) (a) ............................ 3.98 8.08 0.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......... 66 55 36
Ratio of operating expenses, net to average
daily net assets (%) ......................... .67 .24 --
Ratio of operating expenses before expense ...... .90 .92 1.44*
reductions, to average daily net assets (%)
Ratio of net investment income to average
daily net assets (%) ......................... 4.16 4.56 4.45*
Portfolio turnover rate (%) ..................... 12.4 27.4 26.3*
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
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
(commence-
Six Months ment of
Ended operations)
September 30 to
1996 Years Ended March 31, March 31,
(unaudited) 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
---------------------------------------------------------------------------------------------
period ......................... $13.70 $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 ............. .35 .72 .74 .81 .84 .81 .83 .82 .81 .69
Net realized and unrealized
gain (loss) on investment
transactions ................... .05 .37 .18 (.33) .96 .46 .19 .13 .22 .21
---------------------------------------------------------------------------------------------
Total from investment operations .. .40 1.09 .92 .48 1.80 1.27 1.02 .95 1.03 .90
---------------------------------------------------------------------------------------------
Less distributions:
From net investment income ........ (.35) (.72) (.74) (.81) (.84) (.81) (.83) (.82) (.88) (.62)
From net realized gains on
investment transactions ........ -- -- -- (.08) (.16) (.09) -- (.11)(a) (.20) --
In excess of net realized gains ... -- -- (.01) (.04) -- -- -- -- -- --
---------------------------------------------------------------------------------------------
Total distributions ............... (.35) (.72) (.75) (.93) (1.00) (.90) (.83) (.93) (1.08) (.62)
---------------------------------------------------------------------------------------------
Net asset value, end of ---------------------------------------------------------------------------------------------
period ......................... $13.75 $13.70 $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28
---------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) .............. 2.98** 8.28 7.37 3.37 14.59 10.46 8.60 7.89 9.50 7.73**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 322 314 296 332 267 120 67 46 31 16
Ratio of operating expenses,
net to average daily net
assets (%) ..................... .77* .75 .47 .07 -- .48 .60 .60 .51 .50*
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) ..................... .77* .76 .77 .77 .83 .93 1.05 1.16 1.20 2.25*
Ratio of net investment income
to average daily net
assets (%) ..................... 5.13* 5.23 5.73 5.80 6.36 6.38 6.72 6.60 7.23 7.55*
Portfolio turnover rate (%) ....... 12.89* 20.9 10.2 17.0 29.6 23.2 27.1 45.5 110.5 95.9*
</TABLE>
(a) Includes $.01 per share distributions in excess of realized gains pursuant
to Internal Revenue Code Section 4982.
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
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 $115 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
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 16
Exchanges and redemptions 17
Distribution and performance information 18
Fund organization 20
Transaction information 21
Shareholder benefits 24
Trustees and Officers 28
Investment products and services 29
How to contact Scudder 30
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. 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, 1996 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 money market instruments and, in the
case of Scudder Massachusetts Tax Free Fund, repurchase agreements.
8
<PAGE>
<TABLE>
<CAPTION>
Summary of important features
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment objectives Investments Maturity Quality Dividends
and characteristics
Scudder o prices expected to o focus on o primarily o 75% of o declared
Massachusetts fluctuate moderately investment- shorter-term investments rated daily and
Limited Term with changes in grade bonds, average within top four paid monthly
Tax Free Fund interest rates Massachusetts maturity quality ratings, o option to
o income exempt from municipal between one including 50% receive in
both Massachusetts securities and five years within top three, cash or
state personal income or judged to be reinvest in
tax and regular of comparable additional
federal income tax quality shares
Scudder o prices will fluctuate o focus on o primarily o 75% of o declared
Massachusetts with changes in investment- long-term investments rated daily and
Tax Free Fund interest rates grade bonds, within top four paid monthly
o income exempt from Massachusetts generally with quality ratings o option to
both Massachusetts municipal maturities of or judged to be receive in
state personal income securities more than ten of comparable cash or
tax and regular years quality reinvest in
federal income tax additional
shares
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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.
TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7%
AND 9%, A TAXABLE INVESTMENT WOULD HAVE TO EARN*:
COMBINED
1997 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
INDIVIDUAL
-------------------------------------------
<S> <C> <C> <C> <C>
$ 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)
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 7.14% to
receive after-tax income equal to the 4.02% tax-free yield provided by Scudder
Massachusetts Limited Term Tax Free Fund for the 30-day period ended October 31,
1996. In other words, it would be necessary to earn $1,775 from a taxable
investment to equal $1,000 of tax-free income you receive from either Fund. The
yield levels of tax-free and taxable investments continually change. Before
10
<PAGE>
investing in a Fund, you should compare its yield to the after-tax yield you
would receive from a comparable investment paying taxable income. For up-to-date
yield information on the Funds, shareholders can call SAIL, Scudder Automated
Information Line, for toll-free information at any time.
Investment characteristics
Scudder Massachusetts Limited Term Tax Free Fund is managed for current income,
liquidity and a relatively high degree of price stability. For the investor who
can tolerate more price volatility, Scudder Massachusetts Limited Term Tax Free
Fund can be used as an alternative to a tax-free money market fund. While a
tax-free money fund is managed for total price stability, it generally offers
lower and less stable yields than a short-term municipal bond fund. Further,
Scudder Massachusetts Limited Term Tax Free Fund may appeal to investors
concerned about market volatility or the possibility of rising interest rates,
and so are willing to accept somewhat lower yields than normally provided by a
longer-term bond fund in exchange for greater price stability. Some investors
may view Scudder Massachusetts Limited Term Tax Free Fund as a tax-free
alternative to a bank certificate of deposit ("CD"). While an investment in
Scudder Massachusetts Limited Term Tax Free Fund is not federally insured and
there is no guarantee of price stability, an investment in the Fund--unlike a
CD--is not locked away for any period, may be redeemed at any time without
incurring early withdrawal penalties and may provide a higher after-tax yield.
Investors may choose Scudder Massachusetts Tax Free Fund as an alternative or
complement to tax-free money market or tax-free shorter-term investments.
Although shareholders will be assuming the possibility of greater price
fluctuation, they will typically be receiving a higher yield than normally
provided by tax-free income funds with relatively short maturities. Investors in
either Fund will also benefit from the convenience, cost-savings and
professional management of a mutual fund free of sales commissions. Scudder,
Stevens & Clark, Inc. has been researching and managing fixed-income investments
since 1929 and currently oversees more than $60 billion in bonds, including $14
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 January 31, 1997.
In addition, each Fund offers all the benefits of the Scudder Family of Funds.
Scudder, Stevens & Clark, Inc. manages a diverse family of pure no-load(TM)
funds and provides a wide range of services to help investors meet their
investment needs. Please refer to "Investment products and services" for
additional information.
Additional information about policies and investments
Investment restrictions
Each Fund has adopted certain fundamental policies which may not be changed
without a vote of shareholders and which are designed to reduce the Funds'
investment risk.
Each Fund may not borrow money except as a temporary measure for extraordinary
or emergency purposes or, in the case of Scudder Massachusetts Tax Free Fund, in
connection with reverse repurchase agreements.
Scudder Massachusetts Limited Term Tax Free Fund may not make loans except
through the lending of portfolio securities, the purchase of debt securities or
through repurchase agreements. Scudder Massachusetts Tax Free Fund may not make
loans except through the purchase of debt obligations or through repurchase
agreements.
Each Fund may invest more than 25% of its assets in industrial development or
other private activity bonds. For purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, all such bonds
ultimately payable by companies within the same industry will be considered as
11
<PAGE>
Additional information about policies and investments (cont'd)
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.
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. In
1995, total non-agricultural employment in Massachusetts grew at a rate of 2.4%
with the most rapid growth coming in the construction sector and the services
sector, which grew at rates of 4.7% and 4.9%, respectively. The unemployment
rate for the Commonwealth for 1996 was 4.1% compared to the national rate of
5.2%. Real income levels in Massachusetts declined between 1989 and 1991. Since
1994, however, real per capita income levels in Massachusetts have increased
faster than the national average, showing growth rates of 3.6% and 3.0% in 1994
and 1995, respectively. Massachusetts had the third highest level of personal
income in the United States in 1995. For additional information about the
Massachusetts economy, see the Funds' Statement of Additional Information dated
March 1, 1997.
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
12
<PAGE>
specified intervals to tender (or "put") its bonds to the institution and
receive the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps.
Variable rate demand instruments
Each Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally.
These instruments also permit the Funds to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent.
Municipal lease obligations
Each Fund may invest in municipal lease obligations and participation interests
in such obligations. These obligations, which may take the form of a lease, an
installment purchase contract or a conditional sales contract, are issued by
state and local governments and authorities to acquire land and a wide variety
of equipment and facilities. Generally, the Funds will not hold such obligations
directly, but will purchase a certificate of participation or other
participation interest in a municipal obligation from a bank or other financial
intermediary. A participation interest gives the Funds a proportionate interest
in the underlying obligation.
Indexed securities
Each Fund may invest in indexed securities, the value of which is linked to
currencies, interest rates, commodities, indices or other financial indicators
("reference instruments"). The interest rate or (unlike most fixed-income
securities) the principal amount payable at maturity of an indexed security may
be increased or decreased, depending on changes in the value of the reference
instrument.
Strategic Transactions and derivatives
Each Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements), to manage the effective maturity
or duration of each Fund's portfolio, or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Funds may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit (except to the extent that 80% of each Fund's net assets
are required to be invested in tax-exempt Massachusetts municipal securities,
and as limited by each Fund's other investment restrictions) to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for each Fund's portfolio resulting from securities markets
fluctuations, to protect each Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of each Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for 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
13
<PAGE>
Additional information about policies and investments (cont'd)
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 could. 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. Preliminary reports indicate that the Commonwealth
ended fiscal 1996 with a surplus of revenues and other sources over expenditures
and other uses of $426.4 million resulting in aggregate ending fund balances in
the Commonwealth's budgeted operating funds of approximately $1.153 billion. 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
14
<PAGE>
limitations on their taxing power that could affect their ability or the ability
of the Commonwealth to meet their respective financial obligations. See
"Investing in Massachusetts" in the Funds' Statement of Additional Information
for further details about the risks of investing in Massachusetts municipal
securities.
Lower-grade debt securities. While each Fund invests 75% of its assets in
investment-grade securities, each may invest a portion of its assets in
lower-grade securities rated below Baa by Moody's or below BBB by S&P or Fitch.
Securities rated below investment-grade are commonly referred to as "junk bonds"
and involve greater price volatility and higher degrees of speculation with
respect to the payment of principal and interest than higher quality
fixed-income securities. The market prices of such lower-rated debt securities
may decline significantly in periods of general economic difficulty. In
addition, the trading market for these securities is generally less liquid than
for higher rated securities and a Fund may have difficulty disposing of these
securities at the time it wishes to. The lack of a liquid secondary market for
certain securities may also make it more difficult for a Fund to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its net
asset value.
Third party puts. In connection with a third party put, the financial
institution granting the option does not provide credit enhancement, and
typically if there is a default on or significant downgrading of the bond or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Funds will be that of holding a long-term bond.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Funds. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property.
Illiquid or restricted investments. The absence of a trading market can make it
difficult to ascertain a market value for illiquid or restricted investments.
Disposing of illiquid or restricted 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
(Continued on page 18)
15
<PAGE>
<TABLE>
<CAPTION>
Purchases
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Opening Minimum initial investment: $2,500; IRAs $1,000
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
Scudder Funds." Fund name, to 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
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>
16
<PAGE>
<TABLE>
<CAPTION>
Exchanges and redemptions
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exchanging Minimum investments: $2,500 to establish a new account;
shares $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 $100,000 sent to your address of record.
o By "Write- You may redeem shares by writing checks against your account
A-Check" 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 $100,000.
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>
17
<PAGE>
Additional information about policies and investments (cont'd)
(Continued from page 15)
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to a Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation a 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
18
<PAGE>
the extent such dividends are exempt from regular federal income tax and are
identified by the Funds as derived from interest payments on Massachusetts
municipal securities and certain other qualifying securities (including Puerto
Rico, the U.S. Virgin Islands and Guam). Long-term capital gains distributions
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.
19
<PAGE>
Fund organization
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax
Free Fund are series of Scudder State Tax Free Trust (the "Trust"), an open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"). The Trust was organized as a Massachusetts business trust
in May 1983.
The Funds' activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
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.
For the period August 1, 1995 to February 29, 1996, the Adviser agreed to
maintain the annualized expenses for Scudder Massachusetts Limited Term Tax Free
Fund 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, 1997. Accordingly, for the fiscal year ended October 31, 1996,
the Adviser received an investment management fee of 0.37% 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
20
<PAGE>
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,
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:
o the name of the fund in which the money is to be invested,
o the account number of the fund, and
o 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
21
<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 most retirement plan accounts. However, "AutoBuy" transactions are
available for Scudder IRA 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
22
<PAGE>
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 $100,000 we require an original
signature and an original signature guarantee for each person in whose name the
account is registered. (Each Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $100,000 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
23
<PAGE>
Transaction information (cont'd)
fluctuations in a Fund's share price appears evident.
Tax information
A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires a Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a certified Social Security or tax identification number and certain
other certified information or upon notification from the IRS or a broker that
withholding is required. Each Fund reserves the right to reject new account
applications without a certified Social Security or tax identification number.
Each Fund also reserves the right, following 30 days' notice, to redeem all
shares in accounts without a certified Social Security or tax identification
number. A shareholder may avoid involuntary redemption by providing the Fund
with a tax identification number during the 30-day notice period.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500, which amount
may be changed by the Board of Trustees. Scudder retirement plans and certain
other accounts have similar or lower minimum share balance requirements. A
shareholder may open an account with at least $1,000, if an automatic investment
plan of $100/month is established.
Shareholders who maintain a non-fiduciary account balance of less than $2,500 in
the Fund, without establishing an automatic investment plan, will be assessed an
annual $10.00 per fund charge with the fee to be paid to the Fund. The $10.00
charge will not apply to shareholders with a combined household account balance
in any of the Scudder Funds of $25,000 or more. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250, including accounts of new investors, where a reduction in
value has occurred due to a redemption or exchange out of the account. The Fund
will mail the proceeds of the redeemed account to the shareholder. Reductions in
value that result solely from market activity will not trigger an involuntary
redemption. Retirement accounts and certain other accounts will not be assessed
the $10.00 charge or be subject to automatic liquidation. Please refer to
"Exchanges and Redemptions--Other Information" in the Fund's Statement of
Additional Information for more information.
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
24
<PAGE>
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
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.
Personal Counsel(SM) -- A Managed Fund Portfolio Program
If you would like to receive direct guidance and management of your overall
mutual fund portfolio to help you pursue your investment goals, you may be
interested in Personal Counsel from Scudder. Personal Counsel, a program of
Scudder Investor Services, Inc., a registered investment adviser, and a
subsidiary of Scudder, Stevens & Clark, Inc., combines the benefits of a
customized portfolio of pure no-load Scudder Funds with ongoing portfolio
monitoring and individualized service, for an annual fee of generally 1% or less
of assets (with a $1,000 minimum). In addition, it draws upon Scudder, Stevens &
Clark's more than 75-year heritage of providing investment counsel to large
corporate and private clients. If you have $100,000 or more to invest initially
and would like more information about Personal Counsel, please call
1-800-700-0183.
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.
25
<PAGE>
Shareholder benefits (cont'd)
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,
New York and San Francisco.
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.
26
<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.
27
<PAGE>
Trustees and Officers
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager,
WGBH Educational Foundation
E. Michael Brown*
Trustee
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
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
*Scudder, Stevens & Clark, Inc.
28
<PAGE>
Investment products and services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Limited
Term Tax Free Fund
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund
Retirement Programs
- -------------------
IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan *+++ +++
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder World Income Opportunities
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. +++Funds within categories are listed in order from
expected least risk to most risk. +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.
29
<PAGE>
How to contact Scudder
Account Service and Information:
For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163
For 24 hour account information, fund information, exchanges, and an
overview of all the services available to you
Scudder Electronic Account Services -- http://funds.scudder.com
For personalized information about your Scudder accounts, exchanges and
redemptions
Scudder Automated Information Line (SAIL) -- 1-800-343-2890
Investment Information:
For information about the Scudder funds, including additional
applications and prospectuses, or for answers to investment questions
Scudder Investor Relations -- 1-800-225-2470
[email protected]
Scudder's World Wide Web Site -- http://funds.scudder.com
For establishing 401(k) and 403(b) plans
Scudder Defined Contribution Services -- 1-800-323-6105
Scudder Brokerage Services:
To receive information about this discount brokerage service and to obtain
an application
Scudder Brokerage Services* -- 1-800-700-0820
Personal Counsel(SM) -- A Managed Fund Portfolio Program:
To receive information about this mutual fund portfolio guidance and
management program
Personal Counsel from Scudder -- 1-800-700-0183
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 Chicago San Francisco
Boston New York
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061--
Member NASD/SIPC.
<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
March 1, 1997
- --------------------------------------------------------------------------------
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 March 1, 1997, 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>
TABLE OF CONTENTS
Page
<S> <C>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objective and Policies of Scudder Massachusetts Limited Term Tax
Free Fund...............................................................................................1
General Investment Objective and Policies of Scudder Massachusetts Tax Free Fund.............................2
Municipal Obligations........................................................................................2
Management Strategies........................................................................................5
Special Considerations.......................................................................................6
Trustees' Power to Change Objective and Policies............................................................20
Investment Restrictions.....................................................................................20
PURCHASES............................................................................................................24
Additional Information About Opening an Account.............................................................24
Checks......................................................................................................24
Wire Transfer of Federal Funds..............................................................................24
Additional Information About Making Subsequent Investments by AutoBuy.......................................25
Share Price.................................................................................................25
Share Certificates..........................................................................................25
Other Information...........................................................................................26
EXCHANGES AND REDEMPTIONS............................................................................................26
Exchanges...................................................................................................26
Redemption by Telephone.....................................................................................27
Redemption By AutoSell......................................................................................27
Redemption by Mail or Fax...................................................................................28
Redemption by Write-a-Check.................................................................................28
Other Information...........................................................................................28
FEATURES AND SERVICES OFFERED BY THE FUND............................................................................29
The Pure No-Load(TM) Concept................................................................................29
Internet access.............................................................................................30
Dividend and Capital Gain Distribution Options..............................................................30
Scudder Funds Centers.......................................................................................31
Reports to Shareholders.....................................................................................31
Transaction Summaries.......................................................................................31
THE SCUDDER FAMILY OF FUNDS..........................................................................................31
SPECIAL PLAN ACCOUNTS................................................................................................35
Automatic Withdrawal Plan...................................................................................35
Cash Management System -- Group Sub-Accounting Plan for Trust Accounts, Nominees and Corporations...........36
Automatic Investment Plan...................................................................................36
Uniform Transfers/Gifts to Minors Act.......................................................................36
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................37
PERFORMANCE INFORMATION..............................................................................................37
Average Annual Total Return.................................................................................37
Cumulative Total Return.....................................................................................38
Total Return................................................................................................38
Yield.......................................................................................................39
Tax-Equivalent Yield........................................................................................39
Comparison of Fund Performance..............................................................................39
ORGANIZATION OF THE FUNDS............................................................................................43
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER...................................................................................................43
Personal Investments by Employees of the Adviser............................................................46
TRUSTEES AND OFFICERS................................................................................................47
REMUNERATION.........................................................................................................48
Responsibilities of the Board--Board and Committee Meetings.................................................48
Compensation of Officers and Trustees.......................................................................49
DISTRIBUTOR..........................................................................................................50
TAXES................................................................................................................50
Federal Taxation............................................................................................51
State Taxation..............................................................................................54
PORTFOLIO TRANSACTIONS...............................................................................................54
Brokerage Commissions.......................................................................................54
Portfolio Turnover..........................................................................................55
NET ASSET VALUE......................................................................................................55
ADDITIONAL INFORMATION...............................................................................................56
Experts.....................................................................................................56
Shareholder Indemnification.................................................................................56
Ratings of Municipal Obligations............................................................................56
Commercial Paper Ratings....................................................................................57
Glossary....................................................................................................58
Other Information...........................................................................................59
FINANCIAL STATEMENTS.................................................................................................60
Massachusetts Limited Term Tax Free Fund....................................................................60
Massachusetts Tax Free Fund.................................................................................60
</TABLE>
ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See "Investment objective and policies" and "Additional information about
policies and investments" in the Funds' prospectus.)
Scudder Massachusetts Limited Term Tax Free Fund and Scudder
Massachusetts Tax Free Fund (each a "Fund," collectively the "Funds") are series
of Scudder State Tax Free Trust (the "Trust"). The Trust is a pure no-load(TM)
open-end management investment company presently consisting of six series.
General Investment Objective and Policies of Scudder Massachusetts Limited Term
Tax Free Fund
Scudder Massachusetts Limited Term Tax Free Fund ("Massachusetts
Limited Term Tax Free Fund") seeks to provide Massachusetts taxpayers with as
high a level of income exempt from Massachusetts personal income tax and regular
federal income tax, as is consistent with a high degree of price stability
through a professionally managed portfolio consisting primarily of investment
grade municipal securities. In pursuit of its objective, the Fund expects to
invest at least 75% of its assets in Massachusetts municipal securities that are
rated Baa or better by Moody's Investors Service, Inc. ("Moody's"), BBB or
better by Standard and Poor's ("S&P"), or Fitch Investors Service, Inc.
("Fitch"), or in securities considered to be of equivalent quality. There can be
no assurance that the objective of the Fund will be achieved or that all income
to shareholders which is exempt from regular federal income taxes will be exempt
from state income or local taxes or that income exempt from regular federal
income tax will be exempt from the federal alternative minimum tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the Commonwealth of Massachusetts and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Massachusetts residents, would be exempt, in the
opinion of bond counsel rendered on the date of issuance, from Massachusetts
personal income as well as regular federal income taxes. Because the Fund is
intended for investors subject to Massachusetts personal income tax and federal
income tax it may not be appropriate for all investors and is not available in
all states. As described below in "Massachusetts Limited Term Tax Free Fund's
Investments," the Fund may also invest in taxable obligations.
Massachusetts Limited Term Tax Free Fund's Investments As a matter of
fundamental policy, which cannot be changed without the approval of a majority
of the Fund's outstanding voting securities (as defined below under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be normally
invested in municipal obligations the income from which is, in the opinion of
bond counsel rendered on the date of issuance, exempt from regular federal and
Massachusetts personal income taxes ("Massachusetts municipal securities")
except that the Fund may temporarily invest more than 20% of its net assets in
securities the income from which may be subject to regular federal and
Massachusetts personal income taxes during periods which, in the opinion of the
Funds' investment adviser, Scudder, Stevens & Clark, Inc. (the "Adviser"),
require a temporary defensive position for the protection of shareholders. The
Fund may also invest in when-issued or forward delivery securities and strategic
transactions (as defined below). Investors should be aware that shares of the
Fund do not represent a complete investment program.
Normally, at least 80% of the Fund's net assets will be invested in
securities whose interest income is not treated as a tax preference item under
the individual alternative minimum tax. Furthermore, all of the Fund's portfolio
obligations, including short-term obligations, will be (a) rated at the time of
purchase within the six highest quality ratings categories assigned by Moody's,
S&P or Fitch, (b) if not rated, judged at the time of purchase by the Adviser,
to be of a quality comparable to the six highest quality ratings categories of
Moody's, S&P or Fitch and to be readily marketable, or (c) issued or guaranteed
by the U.S. Government. Should the rating of a portfolio security be downgraded,
the Adviser will determine whether it is in the best interest of the Fund to
retain or dispose of the security.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Massachusetts municipal securities make it advisable to do so, up to
20% of the Fund's net assets may be held in cash or invested in short-term
taxable investments such as (1) U.S. Treasury notes, bills and bonds; (2)
obligations of agencies and instrumentalities of the U.S. Government; and (3)
money market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances.
<PAGE>
General Investment Objective and Policies of Scudder Massachusetts Tax Free Fund
Scudder Massachusetts Tax Free Fund ("Massachusetts Tax Free Fund")
seeks to provide Massachusetts taxpayers with income exempt from Massachusetts
personal income tax and regular federal income tax through a professionally
managed portfolio consisting primarily of investment grade municipal securities.
In pursuit of its objective, the Fund expects to invest principally in
Massachusetts municipal securities that are rated A or better by Moody's, S&P or
Fitch. There can be no assurance that the objective of the Fund will be achieved
or that all income to shareholders which is exempt from regular federal income
taxes will be exempt from state income or local taxes or that income exempt from
regular federal income tax will be exempt from the federal alternative minimum
tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the Commonwealth of Massachusetts and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Massachusetts residents, would be exempt, in the
opinion of bond counsel rendered on the date of issuance, from Massachusetts
state personal income as well as regular federal income taxes. Because the Fund
is intended for investors subject to Massachusetts personal income tax and
federal income tax it may not be appropriate for all investors and is not
available in all states. As described below in "Massachusetts Tax Free Fund's
Investments," the Fund may also invest in taxable obligations.
Massachusetts Tax Free Fund's Investments As a matter of fundamental policy,
which cannot be changed without the approval of a majority of the Fund's
outstanding voting securities (as defined below under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be invested in
municipal obligations the income from which, in the opinion of bond counsel
rendered on the date of issuance, is exempt from regular federal and
Massachusetts state personal income taxes ("Massachusetts municipal securities")
except that the Fund may temporarily invest more than 20% of its net assets in
securities the income from which may be subject to regular federal and
Massachusetts state income taxes during periods which, in the opinion of the
Adviser, require a temporary defensive position for the protection of
shareholders. The Fund may also invest in when-issued or forward delivery
securities, enter into repurchase agreements, reverse repurchase agreements, and
strategic transactions (as defined below). Investors should be aware that shares
of the Fund do not represent a complete investment program.
Normally, at least 80% of the Fund's net assets will be invested in
securities whose interest income is not treated as a tax preference item under
the individual alternative minimum tax. Furthermore, all of the Fund's portfolio
obligations, including short-term obligations, will be (a) rated at the time of
purchase within the six highest grades assigned by Moody's, S&P or Fitch, (b) if
not rated, judged at the time of purchase by the Adviser, to be of a quality
comparable to the six highest ratings of Moody's, S&P or Fitch and to be readily
marketable, or (c) issued or guaranteed by the U.S. Government. Should the
rating of a portfolio security be downgraded, the Adviser will determine whether
it is in the best interest of the Fund to retain or dispose of the security.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Massachusetts municipal securities make it advisable to do so, up to
20% of the Fund's net assets may be held in cash or invested in short-term
taxable investments such as (1) U.S. Treasury notes, bills and bonds; (2)
obligations of agencies and instrumentalities of the U.S. Government; and (3)
money market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances.
Municipal Obligations
Municipal obligations are issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions, agencies
and instrumentalities to obtain funds for various public purposes. The interest
on most of these obligations is generally exempt from regular federal income tax
in the hands of most individual investors, although it may be subject to the
individual and corporate alternative minimum tax. Interest on municipal
obligations issued by Massachusetts issuers is generally exempt from
Massachusetts personal income tax. The two principal classifications of
municipal obligations are "notes" and "bonds."
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 municipal securities the interest income from which is subject to
the alternative minimum tax ("AMT bonds"). For the purposes of each Fund's
investment limitation regarding concentration of investments in any one
industry, industrial development or other private activity bonds ultimately
payable by companies within the same industry will be considered as if they were
issued by issuers in the same industry.
3. Other Municipal Obligations. There is, in addition, a variety of
hybrid and special types of municipal obligations as well as numerous
differences in the security of municipal obligations both within and between the
two principal classifications above.
Each Fund may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued
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interest upon a specified number of days' notice to the issuer or its agent. The
demand feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument. Each Fund intends to exercise the demand only (1)
upon a default under the terms of the municipal obligation, (2) as needed to
provide liquidity to a Fund, or (3) to maintain an investment grade investment
portfolio. A bank that issues a repurchase commitment may receive a fee from a
Fund for this arrangement. The issuer of a variable rate demand instrument may
have a corresponding right to prepay in its discretion the outstanding principal
of the instrument plus accrued interest upon notice comparable to that required
for the holder to demand payment.
The variable rate demand instruments that a Fund may purchase are
payable on demand on not more than thirty calendar days' notice. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily up to six months, and the adjustments are based upon the prime rate
of a bank or other appropriate interest rate adjustment index as provided in the
respective instruments. A Fund will determine the variable rate demand
instruments that it will purchase in accordance with procedures approved by the
Trustees to minimize credit risks. The Adviser may determine that an unrated
variable rate demand instrument meets a Fund's quality criteria by reason of
being backed by a letter of credit or guarantee issued by a bank that meets the
quality criteria for a Fund. Thus, either the credit of the issuer of the
municipal obligation or the guarantor bank or both will meet the quality
standards of a Fund. The Adviser will reevaluate each unrated variable rate
demand instrument held by a Fund on a quarterly basis to determine whether it
continues to meet a Fund's quality criteria.
The value of the underlying variable rate demand instruments may change
with changes in interest rates generally, but the variable rate nature of these
instruments should minimize changes in value due to interest rate fluctuations.
Accordingly, as interest rates decrease or increase, the potential for capital
gain and the risk of capital loss on the disposition of portfolio securities are
less than would be the case with the comparable portfolio of fixed income
securities. A Fund may purchase variable rate demand instruments on which stated
minimum or maximum rates, or maximum rates set by state law, limit the degree to
which interest on such variable rate demand instruments may fluctuate; to the
extent it does, increases or decreases in value of such variable rate demand
notes may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed interest
rate securities. Accordingly, interest rates on the variable rate demand
instruments may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar final maturities.
The maturity of the variable rate demand instrument held by a Fund will
ordinarily be deemed to be the longer of (1) the notice period required before a
Fund is entitled to receive payment of the principal amount of the instrument or
(2) the period remaining until the instrument's next interest rate adjustment.
4. General Considerations. An entire issue of municipal obligations may
be purchased by one or a small number of institutional investors such as either
Fund. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933 (the "1933 Act") prior
to offer and sale unless an exemption from such registration is available,
municipal obligations which are not publicly offered may nevertheless be readily
marketable. A secondary market exists for municipal obligations which were not
publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in a Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. In addition,
Stand-by Commitments and demand obligations also enhance marketability.
For the purpose of a Fund's investment restrictions, the identification
of the "issuer" of municipal obligations which are not general obligation bonds
is made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal
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obligations of one or more of the following types: public housing authorities;
general obligations of states and localities; lease rental obligations of states
and local authorities; state and local housing finance authorities; municipal
utilities systems; bonds that are secured or backed by the Treasury or other
U.S. Government guaranteed securities; or industrial development and pollution
control bonds. There could be economic, business or political developments,
which might affect all municipal obligations of a similar type. However, each
Fund believes that the most important consideration affecting risk is the
quality of particular issues of municipal obligations, rather than factors
affecting all, or broad classes of, municipal obligations.
Each Fund may invest up to 25% of its total assets in fixed-income
securities rated below investment grade, that is, below Baa by Moody's, or below
BBB by S&P or Fitch, or in unrated securities considered to be of equivalent
quality. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. Each Fund may not invest in
fixed-income securities rated below B by Moody's, S&P or Fitch, or their
equivalent. Securities rated below BBB are commonly referred to as "junk bonds"
and involve greater price volatility and higher degrees of speculation with
respect to the payment of principal and interest than higher-quality
fixed-income securities. In addition, the trading market for these securities is
generally less liquid than for higher-rated securities and the Funds may have
difficulty disposing of these securities at the time they wish to do so. The
lack of a liquid secondary market for certain securities may also make it more
difficult for the Funds to obtain accurate market quotations for purposes of
valuing their portfolios and calculating their net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
a Fund will be purchased upon issuance, which may involve special risks because
the securities so acquired are new issues. In such instances a Fund may be a
substantial purchaser of the issue and therefore have the opportunity to
participate in structuring the terms of the offering. Although this may enable a
Fund to seek to protect itself against certain of such risks, the considerations
discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely a Fund's net asset
value. In addition, a Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
During the fiscal year ended March 31, 1996 for Scudder Massachusetts
Tax Free Fund and October 31, 1996 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. While
economic growth in Massachusetts slowed considerably during the recession of
1990-1991, indicators such as retail sales, housing permits, construction, and
employment levels suggest a strong and continued economic recovery. The
unemployment rate for the Commonwealth as of July 1996 was 4.5% compared to a
national average of 5.4%. Although real income levels in Massachusetts declined
between 1989 and 1991, per capita personal income has increased faster than the
national average since 1994, and still remains among the highest in the nation.
Major infrastructure projects are anticipated in the Commonwealth over
the next decade. It is currently anticipated that the federal government will
assume responsibility for approximately 90% of the estimated $7.7 billion cost
of projects which consist of the depression of the central artery which
traverses the City of Boston and the construction of a third harbor tunnel
linking downtown Boston to Logan Airport. The Massachusetts Water Resource
Authority is undertaking capital projects for the construction and
rehabilitation of sewage collection and treatment facilities in order to bring
wastewater discharges into Boston Harbor into compliance with federal and state
pollution control requirements. The harbor cleanup project is estimated to cost
$3.584 billion in current dollars. Work on the project began in 1988 and is
expected to be completed in 1999, with the most significant expenditures
occurring between 1990 and 1999. The majority of the project's expenditures will
be paid for by local communities, in the form of user fees, with federal and
state sources making up the difference; the assumptions regarding the amounts to
be supplied through federal aid are subject to change.
The fiscal viability of the Commonwealth's authorities and
municipalities is inextricably linked to that of the Commonwealth. The
Commonwealth guarantees the debt of several authorities, most notably the
Massachusetts Bay Transportation Authority and the University of Massachusetts
Building Authority. Their ratings are based on this guarantee and can be
expected to move in tandem. Several other authorities are funded in part or in
whole by the Commonwealth and their debt ratings may be adversely affected by a
negative change in those of the Commonwealth.
Commonwealth spending exceeded revenues in each of the five fiscal
years commencing fiscal 1987. In particular, from 1987 to 1990, spending in five
major expenditure categories--Medicaid, debt service, public assistance, group
health insurance and transit subsidies--grew at rates in excess of the rate of
inflation for the comparable period. In addition, the Commonwealth's tax
revenues during this period repeatedly failed to meet official forecasts. For
the budgeted funds, operating losses in fiscal 1987 and 1988, of $349 million
and $370 million, respectively, were covered by surpluses carried forward from
prior years. The operating losses in fiscal 1989 and 1990, which totaled $672
million and $1.251 billion, respectively, were covered primarily through deficit
borrowings. During that period, operating fund balances declined from a budget
surplus of $1.072 billion in fiscal 1987 to a deficit of $1.104 billion for the
fiscal year ending 1990.
For the fiscal year ending June 30, 1991, total operating revenues of
the Commonwealth increased by 13.5% over the prior year, to $13.878 billion.
This increase was due chiefly to state tax increases enacted in July, 1990 and
to a substantial federal reimbursement for uncompensated patient care under the
Medicaid program. 1991 expenditures also increased over the prior year to
$13.899 billion resulting in an operating loss in the amount of $21.2 million.
However, after applying the opening fund balances created from proceeds of the
borrowing that financed the fiscal 1990 deficit, no deficit borrowing was
required to close-out fiscal 1991.
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.
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In July 1992, tax revenues had been estimated to be approximately $9.685 billion
for fiscal 1993. This amount was subsequently revised during fiscal 1993 to
$9.940 billion.
Commonwealth budgeted expenditures and other uses in fiscal 1993
totaled approximately $14.696 billion, which is $1.280 billion or approximately
9.6% higher than fiscal 1992 expenditures and other uses. Fiscal 1993 budgeted
expenditures were $23 million lower than the initial July 1992 estimates of
fiscal 1993 budgeted expenditures.
As of June 30, 1993, after payment of all Local Aid and retirement of
short-term debt, the Commonwealth showed a year-end cash position of
approximately $622.2 million, as compared to a projected position of $485.1
million.
The budgeted operating funds of the Commonwealth ended fiscal 1994 with
a surplus of revenues and other sources over expenditures and other uses of
$26.8 million and aggregate ending fund balances in the budgeted operating funds
of the Commonwealth of approximately $589.3 million. Budgeted revenues and other
sources for fiscal 1994 totaled approximately $15.550 billion, including tax
revenues of $10.607 billion, $87 million below the Department of Revenue's
fiscal 1994 tax revenue estimate of $10.694 billion. Total revenues and other
sources increased by approximately 5.7% from fiscal 1993 to fiscal 1994 while
tax revenues increased by 6.8% for the same period.
Commonwealth budgeted expenditures and other uses in fiscal 1994
totaled $15.523 billion, which is $826.5 million or approximately 5.6% higher
than fiscal 1993 budgeted expenditures and other uses.
As of June 30, 1994, the Commonwealth showed a year-end cash position
of approximately $757 million, as compared to a projected position of $599
million.
Since 1989, S&P and Moody's had 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.
The 1996 Comptroller's Preliminary Financial Report indicates that the
budgeted operating funds of the Commonwealth ended fiscal 1996 with a surplus of
revenues and other sources over expenditures and other uses of $426.4 million
resulting in aggregate ending fund balances in the budgeted operating funds of
the Commonwealth of approximately $1.153 billion. Budgeted revenues and other
sources for fiscal 1996 totaled approximately $17.323 billion, including tax
revenues of approximately $12.049 billion, approximately $365 million higher
than the most recent official estimate in May, 1996. Budgeted revenues and other
sources increased by approximately 5.7% from fiscal 1995 to fiscal 1996, while
tax revenues increased by approximately 7.9% for the same period. Income tax
withholding payments increased by approximately 8.0% from fiscal 1995, and total
income tax collections by approximately 12.3%. (The Department of Revenue
believes that the strong tax revenue growth in fiscal 1996 was due partly to
one-time factors that may not recur in fiscal 1997. These include the rise in
the stock and bond markets in calendar 1995, which may have created unusually
large capital gains and thus increases in personal income tax payments in fiscal
1996. These factors have been incorporated into the Department's forecast for
fiscal 1997 tax revenues.) Budgeted expenditures and other uses in fiscal 1996
totaled approximately $16.896 billion, an increase of approximately $645.7
million, or 4.0%, over fiscal 1995.
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The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $179.4 million, bringing the Stabilization Fund balance to
approximately $627.1 million, which exceeded the amount that can remain in the
Stabilization Fund by law, $543.3 million. Under state finance law, year-end
surplus amounts (as defined in the law) in excess of the amount that can remain
in the Stabilization Fund are transferred to the Tax Reduction Fund, to be
applied, subject to legislative appropriation, to the reduction of personal
income taxes. The balance in the Tax Reduction Fund, as reflected in the 1996
Comptroller's Preliminary Financial Report, is approximately $233.8 million.
Legislation approved by the Governor on July 30, 1996 appropriated $150 million
from the Tax Reduction Fund for personal income tax reductions in fiscal 1997,
to be implemented by a temporary increase in the amount of the personal
exemption allowable for the 1996 taxable year. The Governor has filed
legislation to appropriate the remaining balance of approximately $83.8 million
in the Tax Reduction Fund for an additional temporary personal exemption
increase.
State Budget. On June 30, 1996, the Governor signed the budget for the
1997 fiscal year. When signed, the budget marked the seventh consecutive year in
which the Commonwealth's budget has been balanced without new taxes or deficit
borrowing. Budgeted revenues and other sources to be collected in fiscal 1997
are estimated by the Executive Office for Administration and Finance to be
approximately $17.242 billion. This amount includes estimated fiscal 1996 tax
revenues of $12.123 billion, which is approximately $73.8 million, or 0.6%,
higher than fiscal 1996 tax revenues. The tax revenue projection is based upon
the consensus revenue estimate of approximately $12.177 billion, adjusted for
actual fiscal 1996 tax collections and various changes in law enacted after May,
1996, including a $233.8 million reduction in fiscal 1997 tax revenues funded by
a fiscal 1996 transfer from the General Fund to the Tax Reduction Fund, a change
in the way state tax liability is calculated for certain mutual fund service
corporations, an increase in the cigarette tax passed by the Legislature over
the Governor's veto and a provision in the fiscal 1997 budget increasing the
number of auditors in the Department of Revenue. Through October, 1996, tax
revenue collections have totaled approximately $2.874 billion, approximately
$71.9 million, or 2.6%, greater than tax revenue collections for the same period
in fiscal 1996. Collections through October, 1996, are approximately $20 million
below the midpoint of the benchmark range ($2.807 billion to $2.982 billion)
contemplated by the Department of Revenue's estimates.
Fiscal 1997 non-tax revenues are projected to total approximately
$5.119 billion, approximately $28 million, or 0.7%, less than fiscal 1996
non-tax revenues after adjusting for the shifts to and from certain non-budgeted
items. 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.
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
Chairpersons of the House and Senate Ways and Means Committees and the Secretary
for Administration and Finance for fiscal 1994 was $10.540 billion, an increase
of 6.1% over 1993. Actual fiscal 1994 tax revenues were $10.607 billion, a 6.8%
increase over fiscal 1993.
In May, 1994, the Chairpersons of the House and Senate Ways and Means
Committees and the Secretary for Administration and Finance jointly endorsed an
estimate of tax revenues for fiscal 1994 of $11.328 billion, an increase 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.
Preliminary fiscal 1996 tax revenue collections are estimated to be $12.049
billion. Fiscal 1997 tax revenue collections are projected to be approximately
$12.123 billion.
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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 6.86
cents of the Commonwealth's 21-cent gasoline tax. Certain independent
authorities and agencies within the Commonwealth are statutorily authorized to
issue debt for which the Commonwealth is either directly, in whole or in part,
or indirectly liable. The Commonwealth's liabilities with respect to these bonds
and notes are classified as either (a) Commonwealth-supported debt; (b)
Commonwealth-guaranteed debt; or (c) indirect obligations. Indirect obligations
consist of (i) obligations of the Commonwealth to fund capital reserve funds
pledged to certain Massachusetts Housing Finance Agency bonds, (ii) the
obligation of the Commonwealth, acting through the Higher Education Coordinating
Council ("HECC"), to fund debt service, solely from moneys otherwise
appropriated to HECC, on certain community college program bonds issued by the
Massachusetts Health and Educational Facilities Authority, (iii) the obligation
of the Commonwealth, acting through the Executive Office of Public Safety
("EOPS"), to fund debt service from amounts appropriated by the Legislature to
EOPS, on certificates of participation issued to finance the new Plymouth County
Correctional Facility, and (iv) the obligation of the Commonwealth to make lease
payments from amounts appropriated by the Legislature with respect to the
Massachusetts Information Technology Center in the city of Chelsea,
Massachusetts. In addition, the Commonwealth has liabilities under certain
tax-exempt capital leases. Commonwealth-guaranteed debt consists of certain
liabilities arising out of the Commonwealth's guarantees of the bonds of the two
higher education building authorities and certain bond anticipation notes of the
Massachusetts Turnpike Authority. Commonwealth-supported debt arises from
statutory requirements from payments by the Commonwealth with respect to debt
service of the Massachusetts Bay Transportation Authority (including the Boston
Metropolitan District), the Massachusetts Convention Center Authority, the
Massachusetts Government Land Bank, the Steamship Authority and certain regional
transit authorities. Hence, the Commonwealth's fiscal condition could adversely
affect the market values and marketability of, or result in default in payment
on, obligations of certain authorities and agencies.
Local Governments. Proposition 2 1/2, an initiative petition adopted by
the voters of the Commonwealth of Massachusetts on November 4, 1980, constraints
levels of property taxation and limits the charges and fees imposed on cities
and towns by certain governmental entities, including county governments. At the
time Proposition 2 1/2 was enacted, many cities and towns had property tax
levels in excess of the limit and were therefore required to roll back property
taxes with a concurrent loss of revenues. While many communities have responded
to the limits of Proposition 2 1/2 through statutorily permitted overrides and
exclusions (such as exclusion of debt service on specific bonds and notes),
Proposition 2 1/2 has and will continue to restrain significantly the ability of
cities and towns to pay for local services, including certain debt service. To
mitigate the impact of Proposition 2 1/2 on local programs and services since
1980, the Commonwealth has increased payments to its cities, towns and regional
school districts.
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A statute adopted by voter initiative petition in November, 1990
regulates the distribution of Local Aid to cities and towns. Direct Local Aid
decreased from $2.937 billion in fiscal 1990 to $2.360 billion in fiscal 1992;
increased to $2.547 billion in fiscal 1993 and increased to $2.727 billion in
fiscal 1994. Fiscal 1995 expenditures for direct Local Aid were $2.976 billion.
Fiscal 1996 expenditures for direct Local Aid were $3.246 billion. It is
estimated that fiscal 1997 expenditures for direct Local Aid will be $3.534
billion, which is an increase of approximately 8.9% above fiscal 1996 level.
Under the November, 1990 law, new Local Aid distribution formulas would have
called for a substantial increase in direct Local Aid in fiscal 1992, and would
call for such an increase in fiscal 1993 and in subsequent years. Local Aid
payments explicitly remain subject to annual appropriation, and fiscal 1992,
1993, 1994, 1995 and 1996 appropriations for Local Aid did not meet, and fiscal
1997 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.
Medicaid. The Medicaid program provides health care to low-income
children and families, the disabled and the elderly. The program, which is
administered by the Division of Medical Assistance (an agency within the
Executive Office of Health and Human Services), is 50% funded by federal
reimbursements.
During fiscal years 1992, 1993, 1994, 1995 and 1996 Medicaid
expenditures were $2.818 billion, $3.151 billion, $3.313 billion, $3.398 billion
and $3.416 billion, respectively. The average annual growth rate from fiscal
1992 to fiscal 1996 was 3.9%, compared to an average annual growth of
approximately 17% between fiscal 1987 and fiscal 1991. There was virtually no
growth from fiscal 1995 to fiscal 1996. The Executive Office for Administration
and Finance estimates that fiscal 1997 Medicaid expenditures will be
approximately $3.394 billion. Factoring out one-time payments in fiscal 1996 to
settle bills from hospitals and nursing homes dating back to the 1980's, and
adjusting for a change in the account structure of the Medicaid program,
Medicaid expenditures are projected to remain flat from fiscal 1996 to fiscal
1997. The decrease in the rate of growth after 1991 is due to a number of
savings and cost control initiatives that the Division of Medical Assistance
continues to implement and refine, including managed care, utilization review
and the identification of third party liabilities.
Fiscal 1997 is projected by the Executive Office for Administration and
Finance to be the fourth year with no need for supplemental Medicaid
appropriations for current year expenses. Decreased reliance on supplemental
appropriations reflects an effective management of Medicaid expenditures by the
Commonwealth. Prior to fiscal 1994, substantial Medicaid expenditures were
provided through supplemental appropriations because program requirements
consistently exceeded initial appropriations. In addition, substantial amounts
have been required to cover retroactive settlement of provider payments.
Medicaid expenditures for fiscal 1992 of $2.818 billion included $50.0 million
for prior year provider settlements. Fiscal 1994 and fiscal 1995 Medicaid
expenditures included a total of approximately $123.0 million in retroactive
rate settlements funded through the final fiscal 1994 supplemental budget to pay
pre-1992 liabilities to hospitals and nursing homes. Fiscal 1996 expenditures
included $9.4 million for final settlement of these hospital and nursing home
liabilities. The Executive Office for Administration and Finance estimates that
all current Medicaid costs as well as all remaining prior year bills will be
covered within the current appropriation for fiscal 1997. Current spending
estimates project a $61 million Medicaid surplus, as well.
Pensions. The Commonwealth is responsible for the payment of pension
benefits for state employees and school teachers throughout the state and for
the cost-of-living increases payable to local government retirees. In 1988, the
Commonwealth adopted a funding schedule under which it is required to fund
future pension liabilities currently and to amortize the accumulated unfunded
liabilities over 40 years. Since the adoption of this schedule, the amount of
the unfunded liability has been reduced significantly. Total pension
expenditures have increased at an average annual rate of 8% per year, rising
from $751.5 million in fiscal 1992 to $1.005 billion in fiscal 1996. Total
pension expenses include the costs associated with an early retirement program
for elementary and secondary school teachers mandated by the 1993 education
reform legislation. In fiscal 1997, the anticipated pension expenditure is
$1.074 billion, an increase of 6.9% over fiscal 1996 costs. In fiscal 1996, a
number of reform measures affecting pensions were enacted into law. Among the
most notable were a measure consolidating the assets of the state employees' and
teachers' retirement systems into a single investment fund and another that will
reform the disability pension system. As of August 31, 1996, the Commonwealth's
state pension reserves were approximately $7.7 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
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the period between purchase and settlement, no payment is made by the purchaser
to the issuer and no interest accrues to the purchaser. To the extent that
assets of a Fund are not invested prior to the settlement of a purchase of
securities, a Fund will earn no income; however, it is intended that a Fund will
be fully invested to the extent practicable and subject to the policies stated
herein. When-issued or forward delivery purchases are negotiated directly with
the other party, and are not traded on an exchange. While when-issued or forward
delivery securities may be sold prior to the settlement date, it is intended
that a Fund will purchase such securities with the purpose of actually acquiring
them unless a sale appears desirable for investment reasons. At the time a Fund
makes the commitment to purchase a security on a when-issued or forward delivery
basis, it will record the transaction and reflect the value of the security in
determining its net asset value. Each Fund does not believe that a Fund's net
asset value or income will be adversely affected by its purchase of securities
on a when-issued or forward delivery basis. Each Fund will not enter into such
transactions for leverage purposes.
Stand-by Commitments. Massachusetts Tax Free Fund, subject to the receipt of any
required regulatory authorization, may acquire "stand-by commitments," which
will enable the Fund to improve its portfolio liquidity by making available same
day settlements on portfolio sales (and thus facilitate the payment of same day
payments of redemption proceeds in federal funds). The Fund may enter into such
transactions subject to the limitations in the rules under the Investment
Company Act of 1940 (the "1940 Act"). A stand-by commitment is a right acquired
by the Fund, when it purchases a municipal obligation from a broker, dealer or
other financial institution ("seller"), to sell up to the same principal amount
of such securities back to the seller, at the Fund's option, at a specified
price. Stand-by commitments are also known as "puts." The Fund's investment
policies permit the acquisition of stand-by commitments solely to facilitate
portfolio liquidity. The exercise by the Fund of a stand-by commitment is
subject to the ability of the other party to fulfill its contractual commitment.
Stand-by commitments acquired by the Fund will have the following
features: (1) they will be in writing and will be physically held by the Fund's
custodian, State Street Bank and Trust Company; (2) the Fund's rights to
exercise them will be unconditional and unqualified; (3) they will be entered
into only with sellers which in the Adviser's opinion present a minimal risk of
default; (4) although stand-by commitments will not be transferable, municipal
obligations purchased subject to such commitments may be sold to a third party
at any time, even though the commitment is outstanding; and (5) their exercise
price will be (i) the Fund's acquisition cost (excluding the cost, if any, of
the stand-by commitment) of the municipal obligations which are subject to the
commitment (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date. The Fund expects to refrain from exercising a stand-by commitment in the
event that the amount receivable upon exercise of the stand-by commitment is
significantly greater than the then current market value of the underlying
municipal obligations, determined as described below under "Net Asset Value," in
order to avoid imposing a loss on a seller and thus jeopardizing the Fund's
business relationship with that seller.
The Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for stand-by commitments, either
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
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company with respect to such obligations will be tax-exempt in the hands of the
company and may be distributed to its shareholders as exempt-interest dividends.
The IRS has subsequently announced that it will not ordinarily issue advance
ruling letters as to the identity of the true owner of property in cases
involving the sale of securities or participation interests therein if the
purchaser has the right to cause the security, or the participation interest
therein, to be purchased by either the seller or a third party. The Fund intends
to take the position that it is the owner of any municipal obligations acquired
subject to a stand-by commitment and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the IRS will agree with such position in any particular case.
There is no assurance that stand-by commitments will be available to the Fund
nor has the Fund assumed that such commitments would continue to be available
under all market conditions.
Third Party Puts. Each Fund may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals to tender (or "put") the bonds to the
institution and receive the face value thereof (plus accrued interest). These
third party puts are available in several different forms, may be represented by
custodial receipts or trust certificates and may be combined with other features
such as interest rate swaps. A Fund receives a short-term rate of interest
(which is periodically reset), and the interest rate differential between that
rate and the fixed rate on the bond is retained by the financial institution.
The financial institution granting the option does not provide credit
enhancement, and in the event that there is a default in the payment of
principal or interest or downgrading of a bond to below investment grade or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to a Fund will be that of holding a long-term bond. A Fund may be
assessed "tender fees" for each tender period at a rate equal to the difference
between the bond's fixed coupon rate and the rate, as determined by a
remarketing or similar agent, that would cause the bond coupled with the option
to trade at par on the date of such determination.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. Each Fund intends to take
the position that it is the owner of any municipal obligation acquired subject
to a third-party put, and that tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt in its hands. There is no assurance
that the IRS will agree with such position in any particular case. Additionally,
the federal income tax treatment of certain other aspects of these investments,
including the treatment of tender fees and swap payments, in relation to various
regulated investment company tax provisions is unclear. However, the Adviser
intends to manage a Fund's portfolio in a manner designed to minimize any
adverse impact from these investments.
Municipal Lease Obligations and Participation Interests. A municipal lease
obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
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
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consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Adviser will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
Each Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. Each Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax and
Massachusetts state income tax.
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities" or "not readily
marketable," i.e., securities which cannot be sold to the public without
registration under the 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
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seller of the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
Obligation, in which case the Fund may incur a loss if the proceeds to the Fund
of the sale to a third party are less than the repurchase price. However, if the
market value of the Obligation subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. Massachusetts Tax Free Fund may enter into
"reverse repurchase agreements," which are repurchase agreements in which the
Fund, as the seller of the securities, agrees to repurchase them at an agreed
time and price. The Fund will maintain a segregated account, as described under
"Use of Segregated and Other Special Accounts" in connection with outstanding
reverse repurchase agreements. Reverse repurchase agreements are deemed to be
borrowings subject to the Fund's investment restrictions applicable to that
activity. The Fund will enter into a reverse repurchase agreement only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction. There is no current intention to invest more than 5% of the Fund's
net assets in reverse repurchase agreements.
Indexed Securities. Each Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which
a Fund may invest in several respects. First, the interest rate or, unlike other
debt securities, the principal amount payable at maturity of an indexed security
may vary based on changes in one or more specified reference instruments, such
as an interest rate compared with a fixed interest rate or the currency exchange
rates between two currencies (neither of which need be the currency in which the
instrument is denominated). The reference instrument need not be related to the
terms of the indexed security. For example, the principal amount of a U.S.
dollar denominated indexed security may vary based on the exchange rate of two
foreign currencies. An indexed security may be positively or negatively indexed;
that is, its value may increase or decrease if the value of the reference
instrument increases. Further, the change in the principal amount payable or the
interest rate of an indexed security may be a multiple of the percentage change
(positive or negative) in the value of the underlying reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates and broad or specific market movements), to
manage the effective maturity or duration of a Fund's portfolio, or to enhance
potential gain. These strategies may be executed through the use of derivative
contracts. Such strategies are generally accepted as a part of modern portfolio
management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit (except to the extent that 80% of each Fund's net assets
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,
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to manage the effective maturity or duration of a Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of a Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of a
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. Each Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of options and futures transactions entails certain other risks. In particular,
the variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of a Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of that Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, a Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
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.
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Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
Each Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the Counterparty to sell the option back to a Fund at a formula
price within seven days. A Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing 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.
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Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. Each Fund will not sell put options if, as a result, more than 50%
of such Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. Each Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by a Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right in return for the premium paid to assume a position in a
futures contract and obligates the seller to deliver such position.
Each Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.
Each Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of a Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
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
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transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream a Fund
may be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. An index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
Each Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and each Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. Each Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, a Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. Each Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. Each Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
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
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restrictions, an amount of cash or liquid high grade securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by a Fund will require that Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high-grade
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a Fund on an index will require that Fund to
own portfolio securities which correlate with the index or to segregate liquid
high grade assets equal to the excess of the index value over the exercise price
on a current basis. A put option written by a Fund requires that Fund to
segregate liquid, high grade assets equal to the exercise price.
OTC options entered into by a Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when a Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, and that Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by that Fund. Moreover, instead of segregating assets if a Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Each Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "TAXES.")
Trustees' Power to Change Objective and Policies
Except as specifically stated to the contrary, the objective and
policies stated above may be changed by the Trustees without a vote of the
shareholders.
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
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outstanding shares of a Fund are present in person or by proxy, or (2) more than
50% of the outstanding shares of the Fund. Any investment restrictions herein
which involve a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, Massachusetts Limited Term Tax Free
Fund and 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 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;
3. 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);
4. purchase or sell physical commodities or contracts relating to
physical commodities;
5. act as an 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;
6. 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;
7. 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;
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;
9. purchase securities if such 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, provided that there
is no limitation in respect to investments in obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; and
In addition, as a matter of fundamental policy, Massachusetts Tax Free
Fund may not:
10. 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 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;
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(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;
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;
(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;
and
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(xiii) borrow money in excess of 5% of its total assets (taken at
market value) except for temporary or emergency purposes,
borrow other than from banks or in connection with reverse
repurchase agreements.
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;
(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;
(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
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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; and
(xii) borrow money in excess of 5% of its total assets (taken at
market value) except for temporary or emergency purposes,
borrow other than from banks or in connection with reverse
repurchase agreements.
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 ($2,500 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
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.
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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.
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.
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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 $2,500. When an exchange
represents an additional investment into an existing account, the account
receiving the exchange proceeds must have identical registration, address, and
account options/features as the account of origin. Exchanges into an existing
account must be for $100 or more. If the account receiving the exchange proceeds
is to be different in any respect, the exchange request must be in writing and
must contain an original signature guarantee as described under "Transaction
Information--Redeeming shares--Signature guarantees" in the Funds' prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder Fund to an
existing account in another Scudder Fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
No commission is charged to the shareholder for any exchange described
above. An exchange into another Scudder fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder, and
the proceeds of such an exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. Each Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that a Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. Each Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. Each Fund
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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
$100,000 to their address of record automatically, without having to elect it.
Shareholders may also request by telephone to have the proceeds mailed or wired
to their predesignated bank account. In order to request redemptions by
telephone, shareholders must have completed and returned to the Transfer Agent
the application, including the designation of a bank account to which the
redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a predesignated bank account or who want to
change the bank account previously designated to receive
redemption payments should either return a Telephone
Redemption Option Form (available upon request) or send a
letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly
as the shareholder's name(s) appears on the account. An
original signature and an original signature guarantee are
required for each person in whose name the account is
registered.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. Each Fund will not be liable
for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between a Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption By 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
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<PAGE>
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
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").
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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 $2,500 in value, that Fund may notify the shareholder that, unless
the account balance is brought up to at least $2,500, 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 $2,500 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
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.
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- --------------------------------------------------------------------------------
Scudder No-Load Fund
YEARS Pure No-Load(TM) 8.50% Load Fund Load Fund with with 0.25% 12b-1
Fund 0.75% 12b-1 Fee Fee
- --------------------------------------------------------------------------------
10 $25,937 $23,733 $24,222 $25,354
15 41,772 38,222 37,698 40,371
20 67,275 61,557 58,672 64,282
- --------------------------------------------------------------------------------
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.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties
on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call MeTM feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call MeTM feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
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.
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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
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 $2,500 or $1,000 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.
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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.
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.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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TAX FREE
Scudder High Yield Tax Free Fund seeks to provide high income which is
exempt from regular federal income tax by investing in 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 grade.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation by investing in high-grade municipal securities of
intermediate maturities.
Scudder California Tax Free Fund* seeks to provide income exempt from
both California and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
California state, municipal and local government obligations.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide as
high a level of income exempt from Massachusetts personal and regular
federal income tax as is consistent with a high degree of principal
stability.
Scudder Massachusetts Tax Free Fund* seeks to provide income exempt
from both Massachusetts and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
Massachusetts state, municipal and local government obligations.
Scudder New York Tax Free Fund* seeks to provide income exempt from New
York state, New York City and regular federal income taxes through the
professional and efficient management of a portfolio consisting of
investments in New York state, municipal and local government
obligations.
Scudder Ohio Tax Free Fund* seeks to provide income exempt from both
Ohio and regular federal income taxes through the professional and
efficient management of a portfolio consisting of Ohio state, municipal
and local government obligations.
Scudder Pennsylvania Tax Free Fund* seeks to provide income exempt from
both Pennsylvania and regular federal income taxes through a portfolio
consisting of Pennsylvania state, municipal and local government
obligations.
GROWTH AND INCOME
Scudder Balanced Fund seeks to provide a balance of growth and income,
as well as long-term preservation of capital, from a diversified
portfolio of equity and fixed income securities.
Scudder Growth and Income Fund seeks to provide long-term growth of
capital, current income, and growth of income through a portfolio
invested primarily in common stocks and convertible securities by
companies which offer the prospect of growth of earnings while paying
current dividends.
GROWTH
Scudder Classic Growth Fund seeks long-term growth of capital with
reduced share price volatility compared to other growth mutual funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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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 Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in equity securities of large U.S.
growth companies.
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a broad and flexible investment program
emphasizing common stocks.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-cap stocks.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in securities of emerging growth companies poised
to be leaders in the 21st century.
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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ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio will, under normal market conditions, invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks a balance of growth
and income by investing in a select mix of Scudder money market, bond
and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return. Total return consists of any capital appreciation plus dividend
income and interest. To achieve this objective, the Portfolio invests
in a select mix of international and global Scudder Funds.
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.
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 a Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Payments are mailed at the
end of each month. The check amounts may be based on the redemption of a fixed
dollar amount, fixed share amount, percent of account value or declining
balance. The Plan provides for income dividends and capital gains distributions,
if any, to be
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reinvested in additional shares. Shares are then liquidated as necessary to
provide for withdrawal payments. Since the withdrawals are in amounts selected
by the investor and have no relationship to yield or income, payments received
cannot be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment. Requests
for increases in withdrawal amounts or to change payee must be submitted in
writing, signed exactly as the account is registered and contain signature
guarantee(s) as described under "Transaction information--Redeeming
shares--Signature guarantees" in the Funds' prospectus. Any such requests must
be received by the Funds' transfer agent by the 15th of the month in which such
change is to take effect. An Automatic Withdrawal Plan may be terminated at any
time by the shareholder, the Trust or its agent on written notice, and will be
terminated when all shares of 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 $2,500 (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 $2,500 or more. A Fund may also wire all
redemption proceeds where the group maintains a single designated bank account.
Shareholders who withdraw from the group purchase plan through which
they were permitted to initiate accounts under $2,500 will be subject to the
minimum account restrictions described under "EXCHANGES AND REDEMPTIONS--Other
Information."
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of investment program may be suitable for
various investment goals such as, but not limited to, college planning or saving
for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
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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):
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T = (ERV/P)^1/n - 1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
The average annual total return of Scudder Massachusetts Limited Term
Tax Free Fund for the one year period ended October 31, 1996, and life of the
Fund(1) are 3.98% and 4.40%, respectively.
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, 1996 the cumulative total return of Massachusetts
Limited Term Tax Free Fund for the one year period and life of the Fund(1) were
3.98% and 12.38% respectively. 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.
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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:
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, 1996 was 4.02%.
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 7.14% to receive after-tax income equal to the 4.02%
tax-free yield of Massachusetts Limited Term Tax Free Fund for the 30-day period
ended October 31, 1996. 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 Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
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From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio managers, 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.
40
<PAGE>
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
41
<PAGE>
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
42
<PAGE>
ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectus.)
Each Fund is a series of Scudder State Tax Free Trust. The Trust is a
Massachusetts business trust established under a Declaration of Trust dated May
25, 1983. Such Declaration of Trust was amended and restated on December 8,
1987. Its authorized capital consists of an unlimited number of shares of
beneficial interest of $0.01 par value. The shares are currently divided into
six series. The other series of the Trust are: Scudder New York Tax Free Fund,
Scudder New York Tax Free Money Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund. The Trustees have the authority to issue more series
of shares and to designate the relative rights and preferences as between the
different series. Each share of each Fund has equal rights with each other share
of that Fund as to voting, dividends and liquidation. Shareholders have one vote
for each share held on matters on which they are entitled to vote. All shares
issued and outstanding will be fully paid and non-assessable by the Trust, and
redeemable as described in this Statement of Additional Information and in the
Funds' prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with its equitable share of the
general liabilities of the Trust, as determined by the Trustees. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust or any
series, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such shares available for distribution to
shareholders.
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISER
(See "Fund organization--Investment adviser" in the Funds' prospectus.)
Scudder, Stevens & Clark, Inc., an investment counsel firm, acts as
investment adviser to each Fund. This organization is one of the most
experienced investment management firms in the United States. It was established
as a partnership in 1919 and pioneered the practice of providing investment
counsel to individual clients on a fee basis. In 1928 it introduced the first
no-load mutual fund to the public. In 1953, the Adviser introduced Scudder
International Fund, the first mutual fund registered with the SEC in the U.S.
investing internationally in several foreign countries. The firm reorganized
from a partnership to a corporation on June 28, 1985.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
43
<PAGE>
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 Pathway Series, Scudder Securities Trust,
Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax Free
Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund,
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 $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
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 Management 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 Management Agreement between the Trust, on behalf of
Massachusetts Tax Free Fund, and the Adviser was approved by the Trustees on
August 13, 1996 and by the Fund's shareholders on December 10, 1996. The
Massachusetts Limited Term Tax Free Fund Investment Management Agreement dated
February 15, 1994 and the Massachusetts Tax Free Fund Investment Management
Agreement dated December 11, 1996 (collectively, the "Agreements") will continue
in effect until September 30, 1997 and September 30, 1998, respectively, and
from year to year thereafter only if their continuance is approved annually by
the vote of a majority of those Trustees who are not parties to such Agreements
or interested persons of the Adviser or the Trust cast in person at a meeting
called for the purpose of voting on such approval and either by vote of a
majority of the Trustees or a majority of the outstanding voting securities of
each Fund. The Agreements may be terminated at any time without payment of
penalty by either party on sixty days' written notice, and automatically
terminates in the event of its assignment.
Under each Agreement, the Adviser regularly provides a Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the Fund's investment objectives and
policies. The Adviser determines what securities shall be purchased for the
Fund's portfolio, what securities shall be held or sold by the Fund, and what
portion of the Fund's assets shall be held uninvested, subject always to the
provisions of the Trust's Declaration of Trust and By-Laws, the 1940 Act, the
Internal Revenue Code of 1986 and to the Fund's investment objective, policies
and restrictions, and subject further to such policies and instructions as the
Trustees of the Trust may from time to time establish. The Adviser also advises
and assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of each Fund.
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<PAGE>
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Trust and makes available, without
expense to the Trust, the services of such Advisers, Directors, Officers, and
employees as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities and provides investment
advisory, research and statistical facilities and all clerical services relating
to research, statistical and investment work.
For these services, Massachusetts Limited Term Tax Free Fund pays the
Adviser a monthly fee of 0.60 of 1% 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, and fiscal
years ended October 31, 1995 and 1996, pursuant to these agreements, the
investment management fees incurred by Massachusetts Limited Term Tax Free Fund
were $0, $25,208 and $231,096, respectively. Had the Advisor imposed a full
investment management fee for the period February 15, 1994 (commencement of
operations) to October 31, 1994, and fiscal years ended October 31, 1995 and
1996, the investment management fee would have equaled $95,975, $297,710 and
$370,008 respectively. For the fiscal year ended October 31, 1996 for
Massachusetts Limited Term Tax Free Fund, the amount not imposed by the Adviser
equaled $138,912.
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 October 31, 1997.
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
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
45
<PAGE>
and transfer taxes, if any, and a portion of the prospectuses used by a Fund. In
the event that a Fund ceases to employ a principal underwriter to act as the
distributor of a Fund's shares, the expenses of distributing a Fund's shares
will be borne by the Adviser unless a Fund shall have adopted a plan pursuant to
Rule 12b-1 under the 1940 Act providing that a Fund shall be responsible for
some or all of such distribution expenses.
Each Agreement requires the Adviser to return to a Fund all or a
portion of advances of its management fee to the extent annual expenses of a
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which a Fund's shares are offered for sale. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitations. Any such fee advance required to be
returned to a Fund will be returned as promptly as practicable after the end of
each Fund's fiscal year. However, no fee payment will be made to the Adviser
during any fiscal year which will cause year-to-date expenses to exceed the
cumulative pro rata expense limitation at the time of such payment. The
amortization of organizational costs is described herein under "ADDITIONAL
INFORMATION--Other Information."
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.
46
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
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
E. Michael Brown (56)*+ Trustee Managing Director of Scudder, Assistant Treasurer
Stevens & Clark, Inc.
Dawn-Marie Driscoll (49) Trustee Executive Fellow, Center for --
4909 SW 9th Place 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
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
47
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trust Occupation** Services, 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.
</TABLE>
* Messrs. Lee, Ladd, Brown 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.
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of January 31, 1997 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 January 31, 1997 Scudder, Stevens & Clark, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
370,812 shares or 6.77% 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 January 31, 1997, 356,222 shares in the aggregate, 6.50% of the
outstanding shares of the 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 January 31, 1997 no person
owned beneficially more than 5% of either Fund's outstanding shares, except as
stated above.
REMUNERATION
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder, Stevens & Clark, Inc. (The "Advisor"). These "Independent Trustees"
have primary responsibility for assuring that each Fund is managed in the best
interests of its shareholders.
48
<PAGE>
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Funds' investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by each Fund's independent public accountants and
by independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
The Independent Trustees met six times during 1996, including Board and
Committee meetings and meetings to review each Fund's contractual arrangements
as described above. All of the Independent Trustees attended 100% of all such
meetings.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from Funds:
an annual trustee's fee of $12,000; a fee of $300 for attendance at each Board
meeting, audit committee meeting, or other meeting held for the purposes of
considering arrangements between the Funds and the Adviser or any affiliate of
the Adviser; $100 for any other committee meeting (although in some cases the
Independent Trustees have waived committee meeting fees); and reimbursement of
expenses incurred for travel to and from Board Meetings. No additional
compensation is paid to any Independent Trustee for travel time to meetings,
attendance at directors' educational seminars or conferences, service on
industry or association committees, participation as speakers at directors'
conferences, service on special trustee task forces or subcommittees or service
as lead or liaison trustee. Independent Trustees do not receive any employee
benefits such as pension, retirement or health insurance.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type an complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1996 from the Trust and from all of Scudder funds as a group.
Name Scudder Tax Free Trust* All Scudder Funds
---- ----------------------- -----------------
Henry P. Becton, Jr., Trustee $16,900 $91,012 (16 funds)
Dawn-Marie Driscoll, Trustee $17,500 $103,000 (16 funds)
Peter B. Freeman, Trustee $17,500 $131,734 (33 funds)
Wesley W. Marple, Jr., Trustee $17,500 $106,812 (16 funds)
Jean C. Tempel, Trustee $17,138 $102,895 (16 funds)
* Scudder State Tax Free Trust consists of six Funds: Scudder
Massachusetts Limited Term Tax Free Fund, Scudder Massachusetts Tax
Free Fund, Scudder New York Tax Free Money Fund, Scudder New York Tax
Free Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free
Fund.
49
<PAGE>
Members of the Board of Trustees who are employees of Scudder or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of Scudder, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each 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, 1997, 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 13, 1996.
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.
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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
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is excluded from gross income under Section 103(a) of the Code. Each Fund
intends to satisfy this 50% requirement in order to permit its distributions of
tax-exempt interest to be treated as such for federal income tax purposes in the
hands of its shareholders. Distributions to shareholders of tax-exempt interest
earned by a Fund for the taxable year are therefore not expected to be subject
to regular federal income tax, although they may be subject to the individual
and corporate alternative minimum taxes described below. Discount from certain
stripped tax-exempt obligations or their coupons, however, may be taxable.
The Revenue Reconciliation Act of 1993 requires that market discount
recognized on a tax-exempt bond is taxable as ordinary income. This rule applies
only for disposals of bonds purchased after April 30, 1993. A market discount
bond is a bond acquired in the secondary market at a price below its redemption
value. Under prior law, the treatment of market discount as ordinary income did
not apply to tax-exempt obligations. Instead, realized market discount on
tax-exempt obligations was treated as capital gain. Under the new law, gain on
the disposition of a tax-exempt obligation or any other market discount bond
that is acquired for a price less than its principal amount will be treated as
ordinary income (instead of capital gain) to the extent of accrued market
discount.
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%
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(or at a lower rate under an applicable income tax treaty) on amounts
constituting ordinary income received by him or her.
State Taxation
The Trust is organized as a Massachusetts business trust, and neither
the Trust nor either Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund qualifies as a regulated
investment company.
Individual shareholders of a Fund resident in Massachusetts will not be
subject to Massachusetts personal income tax on distributions received from a
Fund to the extent such distributions constitute either (1) exempt-interest
dividends under Section 852(b)(5) of the Code which a Fund properly identifies
as consisting of interest on tax-exempt obligations of the Commonwealth of
Massachusetts for its political subdivisions or any agency or instrumentality of
the foregoing, or (2) dividends which a Fund properly identifies as attributable
to interest on tax-exempt obligations of the United States and instrumentalities
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
investing
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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, 1995 and 1996 were
26.3%, 27.4% and 12.4%, 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
possible to
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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
giving security to principal and
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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
57
<PAGE>
an upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
The rating F-1+ is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1+.
Relative strength or weakness of the above factors determine how the
issuer's commercial paper is rated within the above categories.
Glossary
1. Bond
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
58
<PAGE>
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 $28,116 incurred by Massachusetts Limited Term Tax Free Fund
in conjunction with its organization are amortized over five years beginning
February 15, 1994.
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, 1996 was $36,000 of which $3,000 was unpaid at October 31, 1996. 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, 1996 was $36,098, of which $3,101 was unpaid at October 31, 1996.
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.
59
<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 Annual Report to the Shareholders of the Fund dated October 31, 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
Semiannual Report to the Shareholders of the Fund dated September 30, 1996, and
are hereby deemed to be a part of this Statement of Additional Information.
60
<PAGE>
Scudder Massachusetts Limited Term Tax Free Fund
Annual Report
October 31, 1996
Pure No-Load(TM) Funds
A fund designed to seek 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>
Table of 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
19 Report of Independent Accountants
20 Tax Information
21 Officers and Trustees
22 Investment Products and Services
23 How to Contact Scudder
In Brief
o As of October 31, 1996, Scudder Massachusetts Limited Term Tax Free Fund's
30-day net annualized SEC yield was 4.02%, equivalent to a 7.56% taxable yield
for Massachusetts investors subject to the 46.85% combined federal and state
income tax rate.
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE.
BAR CHART TITLE: 30-Day Yield
CHART PERIOD: on October 31, 1996
CHART DATA:
Massachusetts Taxable IBC/Donoghue's
Limited Term Equivalent Taxable Money
Tax Free Fund Yield Fund Average
------------- ------ ------------
4.02% 7.56% 4.82%
o For the 12 months ended October 31, 1996, Scudder Massachusetts Limited Term
Tax Free Fund posted a total return of 3.98%. This return and the Fund's
two-year average annual return of 6.01% both placed the Fund in the top one
fifth of its peers according to Lipper. See page 7 for additional information on
the Fund's rankings.
2 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Letter From the Fund's President
Dear Shareholders,
We hope you enjoy our newly redesigned shareholder report. The new format,
which is being gradually introduced for all Scudder funds, is designed to
enhance the usefulness and readability of the reports.
Let us know what you think.
We are pleased to report on Scudder Massachusetts Limited Term Tax Free
Fund's performance over its most recent fiscal year. The Fund posted a
competitive total return of 3.98% over 12 months ended October 31, and its 7.56%
tax equivalent yield for investors in the highest combined state and federal tax
brackets is significantly higher than current Massachusetts CD rates. As
portfolio managers Philip Condon and Kathleen Meany report in the portfolio
management discussion that follows, the Fund continues to pursue a conservative
investment strategy, diversifying broadly by investing in a wide variety of
Massachusetts municipal bonds. Please read the discussion beginning on page 6
for more information.
We would like to take this opportunity to highlight some additions made
this fall to the Scudder Family of Funds. Scudder 21st Century Growth Fund seeks
long-term growth by investing primarily in the securities of emerging growth
companies poised to be leaders in the 21st century. Scudder Classic Growth Fund
seeks long-term growth by investing primarily in common stocks of medium to
large U.S. companies; additionally, it seeks to keep the value of its shares
more stable than the typical capital growth mutual fund. Most recently, we
introduced the Scudder Pathway Series, four portfolios -- Conservative,
Balanced, Growth, and International -- each of which include five or more
Scudder funds and which together are designed to meet a range of investor needs.
For more information on these and other Scudder products, please see page 22.
Thank you for your continued investment in Scudder Massachusetts Limited
Term Tax Free Fund. Please do not hesitate to call Scudder Investor Information
at 1-800-225-2470 with any questions regarding your account.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Massachusetts Limited Term Tax Free Fund
3 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of October 31, 1996
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
10/31/96 $10,000 Cumulative Annual
- --------------------------------------
SCUDDER MASSACHUSETTS LIMITED TERM
TAX FREE FUND
- --------------------------------------
1 Year $10,398 3.98% 3.98%
Life of
Fund* $11,238 12.38% 4.40%
- --------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX
(3 YEAR)
- --------------------------------------
1 Year $10,451 4.51% 4.51%
Life of
Fund* $11,351 13.51% 4.86%
- --------------------------------------
*The Fund commenced operations on February 15, 1994.
Index comparisons begin February 28, 1994.
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
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
10/94 $10,030
4/95 $10,414
10/95 $10,840
4/96 $10,997
10/96 $11,271
LEHMAN BROTHERS MUNICIPAL BOND INDEX
(3 YEAR)
Year Amount
- ----------------------
2/94* $10,000
4/94 $ 9,938
10/94 $10,056
4/95 $10,399
10/95 $10,862
4/96 $11,051
10/96 $11,351
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 OCTOBER 31
1994* 1995 1996
------------------------
NET ASSET VALUE... $11.64 $12.02 $11.99
INCOME DIVIDENDS.. $ .36 $ .54 $ .50
FUND TOTAL
RETURN (%)........ .00 8.08 3.98
INDEX TOTAL
RETURN (%)........ .56 8.01 4.51
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 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of October 31, 1996
- --------------------------------------------------------------------------
DIVERSIFICATION
- --------------------------------------------------------------------------
Hospital/Health 31%
Other General Obligation/Lease 22%
Housing Finance Authority 11%
State General Obligation 7%
Higher Education 7%
Student Loans 6%
Pollution Control/Industrial Development 5%
Water/Sewer Revenue 4%
Sales/Special Tax 3%
Miscellaneous Municipal 4%
- ---------------------------------------------
100%
- ---------------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The Fund continues to hold several types of
Massachusetts general obligation bonds, which
offer attractive value, high overall quality,
and relative stability.
- ---------------------------------------------------------------------------
QUALITY
- ---------------------------------------------------------------------------
AAA 65%
AA 14%
A 7%
BBB 7%
Not Rated 5%
Below Investment Grade 2%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
WEIGHTED AVERAGE QUALITY: AA
Overall credit quality remains high with
79% of the Fund's portfolio rated AAA or AA.
- --------------------------------------------------------------------------
EFFECTIVE MATURITY
- --------------------------------------------------------------------------
Less than 1 year 19%
1 - 5 years 47%
5 - 10 years 33%
Greater than 10 years 1%
- --------------------------------------
100%
- --------------------------------------
WEIGHTED AVERAGE EFFECTIVE MATURITY: 4.2 YEARS
Over the Fund's most recent fiscal year we emphasized both
ends of its limited maturity range--the shortest maturities
for safety and the longest maturities (up to 10 years) for
higher yields and possible capital appreciation.
- -----------------------------------------------------------------------------
For more complete details about the Fund's investment portfolio,
see page 10.
5 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
During a 12-month period that witnessed partial government shutdowns, talk of
tax overhaul, and intermittent bond market volatility, Scudder Massachusetts
Limited Term Tax Free Fund continued to provide investors with greater share
price stability than longer-maturity tax-exempt vehicles 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
4.02% as of October 31, 1996, was equivalent to a fully taxable 7.56% yield,
higher than yields currently provided by comparable taxable investments. The
Fund's tax-equivalent yield compares favorably with the 5.40% average yield of
2-year Massachusetts bank certificates of deposit as of October 31, 1996. Of
course, unlike fixed-rate CDs, which are FDIC-insured up to certain limits, the
Fund's yield and share price fluctuate, and principal investments in the Fund
are not insured.
As the graph shows, over the past 12 months, the Fund's tax-equivalent yield has
been consistently higher than the yield of the average 2-year CD tracked
nationally.
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE.
CHART TITLE: Scudder Massachusetts Limited Term Tax Free Fund's
Tax-Equivalent Yield vs. National Two-Year
CD Rates
CHART PERIOD: November 1995 through October 1996
CHART DATA:
National SMLTTFF
average of tax-equivalent
two-year CD yields yield
------------------ --------------
11/95 5.01% 7.75%
4.82 7.60
1/96 4.68 7.22
4.48 7.07
3/96 4.73 7.04
4.83 7.36
5/96 4.94 7.45
5.14 7.32
7/96 5.21 7.09
5.20 7.13
5.25 7.62
10/96 5.22 7.56
Source of CD data: BanxQuote.
Tax equivalent yields are for the 46.85% maximum federal and state tax rate.
For the most recent fiscal year ended October 31, 1996, the Fund's net asset
value declined $0.03 to $11.99 per share, and the Fund provided $0.50 per share
in income distributions, contributing to a total return of 3.98%. This return
compares favorably with the 3.48% return of the 37 similar state municipal bond
funds tracked by Lipper Analytical Services, Inc. As shown in the chart on page
7, the Fund's average annual total return placed it in the top one fifth of its
peer group for one- and two-year periods.
6 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Strong Relative Performance
(Returns for periods ended October 31, 1996)
- ------------------------------------------------------
Scudder
Massachusetts Lipper
Limited Term average Number
Tax Free Fund annual Percentile of Funds
Period return return Ranking tracked
- ------------------------------------------------------
1 year 3.98% 3.48% Top 19% 37
2 years 6.01 5.42 Top 15% 33
======================================================
Past performance does not guarantee future results.
An Update on the
Massachusetts Economy
Massachusetts' steadily recovering economy has helped the Commonwealth replenish
its reserves, while also creating jobs. Fiscal year 1996 operating revenues were
up 5.7% while expenditures rose only 4.0%. The state finished its fiscal year
with an operating surplus of $426 million, and the overall Massachusetts
taxpayer income tax bill for 1996 will be reduced by $150 million from 1995. Key
industries benefiting from the latest but more modest "Massachusetts miracle"
have been computer, mutual fund, consulting, and biotechnology firms.
Approximately two-thirds of the jobs lost in the last recession have been
replaced. The state's unemployment rate in July 1996 of 4.5% -- the lowest since
1989 -- was well below the national average of 5.2%. And Massachusetts continues
to be a wealthy state. Per capita income in 1995 was $26,994, 18% higher than
the national average and fourth highest in the country. Debt levels are high,
but manageable. Lastly, recent federal welfare reform legislation is not
expected to negatively effect the Commonwealth since its own welfare legislation
passed in September 1995 is similar.
Economic and Market Review
During the Fund's most recent fiscal year, bonds alternately prospered and
languished under differing market influences. As we mentioned in our last report
to you, bonds rallied in late 1995 as the Republican-led Congress strove to
balance the U.S. budget deficit through a series of partial government
shutdowns. The municipal bond market then retreated for a time as these efforts
failed and Steve Forbes' presidential campaign temporarily re-floated the "flat
tax" idea. Meanwhile the U.S. economy picked up steam in April as snow from
heavy winter storms melted, shoppers returned to retail stores, and hiring
increased. While many were understandably heartened by this increase in economic
momentum, bond market participants feared a pickup in inflation, and bond yields
headed higher (and prices lower) during the second quarter of 1996. Bond yields
as well as the economy retreated toward the end of the Fund's fiscal year as
consumers seemed to feel the weight of their personal debt -- credit card debt
service payments as a percentage of disposable income rose to an all-time high
this year, and analysts predicted over a million people will declare bankruptcy
in 1996.
7 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Over the past several years, the economy has actually progressed at a fairly
consistent pace, with inflation restrained throughout. The bond market, on the
other hand, has been quite volatile, constantly anticipating far greater changes
than the economy has exhibited. Now, after six years of expansion, the U.S.
economy may actually be slowing. Consumers appear to be overburdened, retail
sales figures were negative during the third quarter, the government's monetary
policy is tight by historical standards (with a Fed Funds rate of 5 1/4%), and
business investment is leveling off. In recent months, bond yields have
fluctuated, but have generally declined in step with this pullback.
For the 12 months ended October 31, municipal bonds, which typically exhibit
less price volatility than Treasury bonds, held their own, thanks to a
relatively light supply. While yields of 10-year Treasury bonds rose three
tenths of a percentage point and prices declined 2% during the period, yields
and prices of 10-year AAA municipal bonds ended essentially unchanged for the
same period. Large numbers of municipal bonds were called or matured during the
period, especially in June and July. The municipal market continues to be
supported both by retail bond buyers and institutions such as insurance
companies.
Our Portfolio Strategy
Over the 12 months we continued to emphasize 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
pursue this strategy because five- to 10-year bonds currently offer the most
attractive after-tax yields and total return potential within the range of
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 (32% as of October
31) 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 of U.S. Treasury bonds designated to retire the
original municipal 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 or AA.
A Further Slowdown?
The U.S. economy is flashing several caution lights. Some companies -- notably
fast food outlets and department stores -- are attempting to interest their
customers in higher priced items. That these and other companies are even
considering raising prices makes us believe that the economy may slow further,
because we are confident that the Federal Reserve will raise interest rates at
the first signs of any uptick in inflation. Though we believe that any excesses
in the U.S. economy would soon be corrected, and that the economy will remain
resilient, any further slowdown should benefit the municipal bond market.
8 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
We will continue to maintain a conservative investment strategy, including
holding premium bonds, diversifying broadly, and keeping the Fund's credit
quality high. We will also search for attractive value by weighing the maturity
characteristics, credit quality, and income potential of each bond we consider
adding to Scudder Massachusetts Limited Term Tax Free Fund's portfolio. Thank
you for investing with Scudder.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Kathleen A. Meany
Philip G. Condon Kathleen A. Meany
Scudder Massachusetts Limited
Term Tax Free Fund: A Team
Approach to Investing
Scudder Massachusetts Limited Term Tax Free Fund is run by a team of Scudder
investment professionals who each play an important role in the Fund's
management process. Team members work together to develop investment strategies
and select securities for the Fund. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in Scudder's offices across the United States and abroad. We believe our
team approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Philip G. Condon, Lead Portfolio Manager, joined Scudder in 1983 and has 16
years of experience as a portfolio manager and in municipal research. Phil has
managed Scudder Massachusetts Limited Term Tax Free Fund since its inception and
Scudder Massachusetts Tax Free Fund since 1989. Kathleen A. Meany, Portfolio
Manager, joined Scudder in 1988 and has 19 years of municipal sales and
portfolio management experience. Kate has managed Scudder Massachusetts Limited
Term Tax Free Fund since its inception and Scudder Massachusetts Tax Free Fund
since 1988.
Your Portfolio Management Team: Kathleen A. Meany and Philip G. Condon
9 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Investment Portfolio as of October 31, 1996
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term Municipal Investments 12.7%
- -----------------------------------------------------------------------------------------------------------------------------
Massachusetts
Massachusetts Bay Transportation Authority, 1984 Series-A, Optional Put,
3.625%, 3/1/14* ............................................................. 1,000,000 A-1+ 1,000,100
Massachusetts, General Obligation, Dedicated Income Tax, Series B, Daily Demand
Note, 3.6%, 12/1/97* ........................................................ 700,000 MIG1 700,000
Massachusetts Health & Educational Facilities Authority:
Brigham and Women's Hospital, Series A, Weekly Demand Note, 3.55%, 7/1/17* .. 900,000 AA 900,000
Harvard University, Series I, Weekly Demand Note, 3.4%, 2/1/16* ............. 1,150,000 A-1+ 1,150,000
Series B, Daily Demand Note, 3.6%, 7/1/05* (c) .............................. 300,000 A-1+ 300,000
Series D, Capital Asset Program, Weekly Demand Note, 3.55%, 1/1/35* (c) ..... 1,100,000 SP1+ 1,100,000
New Bedford, MA, Revenue Anticipation Note, 4.5%, 6/30/97 ..................... 1,000,000 NR 1,004,590
Springfield, MA, Bond Anticipation Note, 4.25%, 2/14/97 ....................... 2,000,000 NR 2,003,480
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-term Municipal Investments (Cost $8,155,401) ...................... 8,158,170
- ------------------------------------------------------------------------------------------------------------------------------
Intermediate-term Municipal Investments 87.3%
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts
Lowell, MA, General Obligation, Prerefunded 2/15/01, 8.3%, 2/15/05** .......... 1,635,000 AAA 1,917,839
Massachusetts Educational Loan Authority, Issue E, Series A, 6.7%, 1/1/02 (c) . 450,000 AAA 485,478
Massachusetts General Obligation:
Series A, 5.25%, 2/1/01 (c) ................................................. 3,000,000 AAA 3,085,950
Series A, 5.2%, 6/1/04 ...................................................... 1,000,000 AA 1,020,670
Series C, 7.5%, 12/1/07, Prerefunded 12/1/00** .............................. 750,000 AAA 849,158
Series C, 7%, 12/1/10, Prerefunded 12/1/00** ................................ 775,000 AAA 850,129
Massachusetts Health & Educational Facilities Authority:
Berkshire Health System, Series D, 5.3%, 10/1/03 (c) ........................ 1,350,000 AAA 1,391,674
Berkshire Health System, Series C, 5.9%, 10/1/11 ............................ 1,000,000 BBB 947,100
Central Massachusetts Medical Center, Series B, 6%, 7/1/02 (c) .............. 500,000 AAA 532,995
Daughters of Charity, Carney Hospital, 7.5%, 7/1/05, Prerefunded 7/1/00** ... 1,000,000 AAA 1,120,160
Daughters of Charity, Series D, 4.9%, 7/1/00 ................................ 700,000 AA 708,379
Medical Academic & Scientific, Series A:
5.9%, 1/1/00 ............................................................. 500,000 A 513,725
6%, 1/1/01 ............................................................... 1,000,000 A 1,033,320
6.1%, 1/1/02 ............................................................. 500,000 A 520,120
St. Joseph's Hospital, Series C, 9.5%, 10/1/20, Prerefunded 10/1/99** ....... 3,375,000 AAA 3,854,115
Valley Regional Health System, Series C, 5.3%, 7/1/00 (c) .................. 1,500,000 AAA 1,528,875
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wheaton College, Series B, 7.2%, 7/1/09, Prerefunded 7/1/99** ................. 590,000 AAA 644,870
Massachusetts Housing Finance Agency:
Housing Project Revenue, Series A, 5.2%, 10/1/00 ............................ 575,000 A 587,006
Multi-Family Housing Project 1988, Series A, 8.7%, 4/1/14, Prerefunded 4/1/98** 1,465,000 A 1,599,428
Multi-Family Housing Project, Series A, 8.8%, 8/1/21 ........................ 665,000 A 696,800
Single-Family Mortgage Revenue, Series 3, 7.875%, 6/1/14 .................... 4,000,000 AA 4,087,320
Massachusetts Industrial Finance Agency:
Boston Museum of Fine Arts, Series 1996, 5.125%, 1/1/04 (c) ................. 1,000,000 AAA 1,021,270
Cape Cod Health Systems, Series 1990, 8.5%, 11/15/20, Prerefunded 11/15/00** 2,150,000 AAA 2,505,889
College of the Holy Cross, Series 1996, 5.5%, 3/1/06 (c) .................... 1,000,000 AAA 1,035,350
East Boston Neighborhood Project, Series 1996, 7.25%, 7/1/06 ................ 1,000,000 BA 1,003,780
Leominister Hospital, Series 1989A, 8.625%, 8/1/09, Prerefunded 8/1/99** .... 2,000,000 AAA 2,257,080
Milton Academy, Revenue Refunding, Series A, 7.25%, 9/1/19,
Prerefunded 9/1/99 (c)** ................................................. 700,000 AAA 768,642
Resource Recovery, North Andover Solid Waste, Series A:
6.15%, 7/1/02 ............................................................ 750,000 BBB 772,103
6.3%, 7/1/05 ............................................................. 2,750,000 BBB 2,877,600
Massachusetts Municipal Wholesale Electric Company, Power Supply System Revenue:
Series B, 6.3%, 7/1/00 ...................................................... 345,000 BBB 363,130
Series B, 6.375%, 7/1/01 .................................................... 1,000,000 BBB 1,065,070
Massachusetts Turnpike Authority, Bond Anticipation Note, Series 1996A, 5%,
6/1/99 ...................................................................... 2,000,000 AA 2,038,220
Massachusetts Water Resource Authority, Series A, 6.75%, 7/15/12
Prerefunded 7/15/02** ....................................................... 1,000,000 AAA 1,125,380
Nantucket, MA, General Obligation, 6.25%, 12/1/02 ............................. 250,000 A 269,873
New England Education Loan Marketing Corp., Massachusetts Student Loan Revenue
Refunding, Issue A, 5.8%, 3/1/02 ............................................ 3,150,000 AAA 3,280,819
South Essex, MA, Sewer District, Series B, 6.75%, 6/1/13, Prerefunded
6/1/04 (c)** ................................................................ 1,000,000 AAA 1,138,700
Southeastern Massachusetts University Building, Series A, 5.5%, 5/1/04 (c) .... 1,010,000 AAA 1,052,157
Springfield, MA, Municipal Purpose Loan, General Obligation, Series 1996,
6.25%, 8/1/06 (c) ........................................................... 1,000,000 AAA 1,093,020
Worcester, MA, General Obligation, Revenue Refunding, Series G, 6%, 7/1/01 (c) 2,000,000 AAA 2,121,420
Puerto Rico
Puerto Rico Public Building Authority, 6.75%, 7/1/04 (c) ...................... 2,250,000 AAA 2,553,165
- ------------------------------------------------------------------------------------------------------------------------------
Total Intermediate-term Municipal Investments (Cost $55,269,962) .............. 56,317,779
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio - 100.0% (Cost $63,425,363) (a) .................... 64,475,949
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
- --------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $63,425,363. At October 31,
1996, net unrealized appreciation for all securities was $1,050,586. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $1,092,687 and
aggregate gross unrealized depreciation for all investment securities in
which there was an excess of tax cost over market value of $42,101.
(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 Services, Inc.
(c) Bond is insured by one of these companies: AMBAC, HIBI, 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.
The accompanying notes are an integral part of the financial statements.
12 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of October 31, 1996
<TABLE>
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $63,425,363) (Note A) .......... $ 64,475,949
Cash ................................................................... 97,933
Interest receivable .................................................... 1,069,306
Receivable for Fund shares sold ........................................ 11,523
Deferred organizations expenses (Note A) ............................... 12,875
----------------
Total assets ........................................................... 65,667,586
----------------
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Dividends payable ...................................................... $ 81,368
Payable for Fund shares redeemed ....................................... 10,290
Accrued management fee (Note C) ........................................ 21,561
Other accrued expenses (Note C) ........................................ 49,279
----------------
Total liabilities ...................................................... 162,498
-------------------------------------------------------------------------------------------
Net assets, at market value ............................................ $ 65,505,088
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Unrealized appreciation on investments ................................. $ 1,050,586
Accumulated net realized loss .......................................... (152,407)
Paid-in capital ........................................................ 64,606,909
-------------------------------------------------------------------------------------------
Net assets, at market value ............................................ $ 65,505,088
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share ($65,505,088 /
5,463,378 outstanding shares of beneficial interest, $.01 par ----------------
value, unlimited number of shares authorized) ....................... $ 11.99
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Statement of Operations
year ended October 31, 1996
<TABLE>
<S> <C> <C>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------------
Interest ....................................................... $ 2,977,286
-----------------
Expenses:
Management fee (Note C) ........................................ $ 370,008
Custodian and accounting fees (Note C) ......................... 53,997
Services to shareholders (Note C) .............................. 49,710
Trustees' fees and expenses (Note C) ........................... 15,078
Auditing ....................................................... 23,694
Legal .......................................................... 3,724
Reports to shareholders ........................................ 12,309
Registration fees .............................................. 11,818
Amortization of organization expenses (Note A) ................. 5,640
Other .......................................................... 8,292
-----------------
Total expenses before reductions ............................... 554,270
Expense reductions (Note C) .................................... (138,912)
-----------------
Expenses, net .................................................. 415,358
-------------------------------------------------------------------------------------------
Net investment income .......................................... 2,561,928
-------------------------------------------------------------------------------------------
Realized and unrealized loss on investment transactions
- ------------------------------------------------------------------------------------------------------------------------------
Net realized loss from investments ............................. (112,182)
Net unrealized depreciation on investments during the period ... (97,803)
-----------------
Net loss on investments ........................................ (209,985)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ........... $ 2,351,943
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended October 31,
Increase (Decrease) in Net Assets 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ...................................... $ 2,561,928 $ 2,266,506
Net realized gain (loss) on investments .................... (112,182) 52,320
Net unrealized appreciation (depreciation) on investments
during the period ....................................... (97,803) 1,598,035
-------------- --------------
Net increase in net assets resulting from operations ....... 2,351,943 3,916,861
-------------- --------------
Distributions to shareholders from net investment income ... (2,561,928) (2,266,506)
-------------- --------------
Fund share transactions:
Proceeds from shares sold .................................. 39,513,439 51,219,003
Net asset value of shares issued to shareholders in
reinvestment of distributions ........................... 1,674,479 1,558,937
Cost of shares redeemed .................................... (30,966,008) (34,483,113)
-------------- --------------
Net increase in net assets from Fund share transactions .... 10,221,910 18,294,827
-------------- --------------
Increase in net assets ..................................... 10,011,925 19,945,182
Net assets at beginning of period .......................... 55,493,163 35,547,981
---------------------------------------------------------------------------------------------
Net assets at end of period ................................ $ 65,505,088 $ 55,493,163
---------------------------------------------------------------------------------------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................. 4,615,167 3,052,899
-------------- --------------
Shares sold ................................................ 3,294,988 4,365,476
Shares issued to shareholders in reinvestment of
distributions ........................................... 139,573 131,715
Shares redeemed ............................................ (2,586,350) (2,934,923)
-------------- --------------
Net increase in Fund shares ................................ 848,211 1,562,268
---------------------------------------------------------------------------------------------
Shares outstanding at end of period ........................ 5,463,378 4,615,167
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Massachusetts Limited Term Tax Free Fund
<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
February 15, 1994
(commencement of
operations) to
Years Ended October 31, October 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
----------------------------------------------
Net asset value, beginning of period ............ $12.02 $11.64 $12.00
----------------------------------------------
Income from investment operations:
Net investment income ........................... .50 .54 .36
Net realized and unrealized gain (loss) on
investment transactions ...................... (.03) .38 (.36)
----------------------------------------------
Total from investment operations ................ .47 .92 .00
----------------------------------------------
Less distributions from net investment income ... (.50) (.54) (.36)
----------------------------------------------
Net asset value, end of period .................. $11.99 $12.02 $11.64
---------------------------------------------------------------------------------------------------
Total Return (%) (a) ............................ 3.98 8.08 0.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......... 66 55 36
Ratio of operating expenses, net to average
daily net assets (%) ......................... .67 .24 --
Ratio of operating expenses before expense ...... .90 .92 1.44*
reductions, to average daily net assets (%)
Ratio of net investment income to average
daily net assets (%) ......................... 4.16 4.56 4.45*
Portfolio turnover rate (%) ..................... 12.4 27.4 26.3*
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
16 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Notes to Financial Statements
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, 1996, the Fund had a net tax basis capital loss carryforward of
approximately $141,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until October 31,
2002, (26,000) and October 31, 2004 (115,000), the respective expiration dates,
whichever occurs first.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and, therefore,
will be distributed to 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.
17 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
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 year ended October 31, 1996, purchases and sales of investments
(excluding short-term) aggregated $19,038,003 and $6,057,700, respectively.
C. Related Parties
Under the Investment Management Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a fee
equal to an annual rate of 0.60% of the Fund's average daily net assets,
computed and accrued daily and payable monthly. As manager of the assets of the
Fund, the Adviser directs the investments of the Fund in accordance with its
investment objectives, policies, and restrictions. The Adviser determines the
securities, instruments, and other contracts relating to investments to be
purchased, sold or entered into by the Fund. In addition to portfolio management
services, the Adviser provides certain administrative services in accordance
with the Agreement. The Agreement also provides that if the Fund's expenses,
exclusive of taxes, interest, and extraordinary expenses, exceed specified
limits, such excess, up to the 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, 1997. For the year ended
October 31, 1996, the Adviser imposed fees amounting to $231,096 and the portion
not imposed amounted to $138,912 at October 31, 1996.
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 October 31, 1996, the amount charged to the Fund by SSC aggregated
$36,098 of which $3,101 was unpaid at October 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
October 31, 1996, the amount charged to the Fund by SFAC aggregated $36,000, of
which $3,000 was unpaid at October 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 October 31, 1996,
Trustees' fees aggregated $15,078.
18 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder State Tax Free Trust and to the Shareholders of
Scudder Massachusetts Limited Term Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Scudder
Massachusetts Limited Term Tax Free Fund, including the investment portfolio, as
of October 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 two years in the
period then ended, and for the period February 15, 1994 (commencement of
operations) to October 31, 1994. 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
October 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 Limited Term Tax Free Fund as of October 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 two years in the period then ended, and for the period February
15, 1994 (commencement of operations) to October 31, 1994 in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
December 18, 1996
19 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Tax Information
Of the dividends paid by the Scudder Massachusetts Limited Term Tax Free Fund
from net investment income for the taxable year ended October 31, 1996, 100%
constituted exempt interest dividends for regular federal income tax and
Massachusetts state income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
20 - Scudder Massachusetts Limited Term Tax Free Fund
<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 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Limited Term
Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
U. S. Income
- ------------
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Zero Coupon 2000 Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
U.S. Growth
- -----------
Value
Scudder Capital Growth Fund
Scudder Value Fund
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund
Scudder Quality Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Fund
Scudder Global Discovery Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Emerging Markets Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund
Retirement Programs
- -------------------
IRA
SEP IRA
SIMPLE IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan *+++ +++
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder World Income Opportunities
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. +++Funds within categories are listed from expected
least to most risk. +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.
22 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
How to Contact Scudder
Account Service and Information
- --------------------------------------------------------------------------------
For existing account services and transactions
Scudder Investor Relations -- 1-800-225-5163
For 24 hour account information, fund information, exchanges, and
an overview of all the services available to you
Scudder Electronic Account Services -- http://funds.scudder.com
For information about your Scudder accounts, exchanges and redemptions
Scudder Automated Information Line (SAIL) -- 1-800-343-2890
Investment Information
- --------------------------------------------------------------------------------
For information about the Scudder funds, including additional
applications and prospectuses, or for answers to investment questions
Scudder Investor Relations -- 1-800-225-2470
[email protected]
Scudder's World Wide Web Site -- http://funds.scudder.com
For establishing 401(k) and 403(b) plans
Scudder Defined Contribution Services -- 1-800-323-6105
Scudder Brokerage Services
- --------------------------------------------------------------------------------
To receive information about this discount brokerage service and to
obtain an application
Scudder Brokerage Services* -- 1-800-700-0820
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 Chicago San Francisco
Boston New York
For information on Scudder Treasurers Trust(TM), an institutional cash
management service for corporations, non-profit organizations and
trusts which utilizes certain portfolios of Scudder Fund, Inc.*
($100,000 minimum), call: 1-800-541-7703.
For information on Scudder Institutional Funds**, funds designed to
meet the broad investment management and service needs of banks and
other institutions, call: 1-800-854-8525.
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061 --
Member NASD/SIPC
** 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.
23 - Scudder Massachusetts Limited Term Tax Free Fund
<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 over 40 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.
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
Semiannual Report
September 30, 1996
Pure No-Load(TM) Funds
For investors seeking double tax-free income exempt from both Massachusetts and
regular federal income taxes.
A pure no-load(TM) fund with no commissions to
buy, sell, or exchange shares.
<PAGE>
Table of 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 Investment Products and Services
23 How to Contact Scudder
In Brief
o As of September 30, 1996, Scudder Massachusetts Tax Free Fund's 30-day net
annualized SEC yield was 4.86%, equivalent to a 9.14% taxable yield for
Massachusetts investors subject to the 46.85% maximum combined federal and state
income tax rate.
o The Fund received five stars from Morningstar, reflecting the highest possible
rating for risk-adjusted performance through September 30, 1996. The Fund has
held a five-star Morningstar rating since June 1994.
For your information, these ratings are subject to change every month and are
calculated from the Fund's five-year average annual return in excess of 90-day
Treasury bill returns with appropriate fee adjustments, and a risk factor that
reflects fund performance below T-bill returns. 561 municipal funds were rated.
10% received five stars, 22.5% received four stars, 35% three stars, 22.5% two
stars, and the bottom 10% one star. The Fund received five stars for three- and
five-year performance as well. Past performance is no guarantee of future
returns.
o For the semiannual and one-year periods ended September 30, 1996, Scudder
Massachusetts Tax Free Fund posted total returns of 2.98% and 6.22%,
respectively, compared with the 3.11% and 5.75% average returns of 51 similar
funds tracked by Lipper Analytical Services over the same periods. The Fund
ranked number one among its peers for the three-, four-, and five-year periods
ended September 30. See page 6 for additional information on the Fund's
rankings.
2 - Scudder Massachusetts Tax Free Fund
<PAGE>
Letter From the Fund's President
Dear Shareholders,
We hope you enjoy our newly redesigned shareholder report. The new format,
which is being gradually introduced for all Scudder funds, is intended to
enhance the usefulness and readability of the reports.
Let us know what you think.
We are very pleased to report Scudder Massachusetts Tax Free Fund's
outstanding long-term performance. In addition to the Fund's five-star
Morningstar rating (see "In Brief" on page 2), the Fund ranked number one among
all Massachusetts tax-free funds over three-, four-, and five-year periods for
total return performance as tracked by Lipper. And as portfolio managers Philip
Condon and Kathleen Meany report in the portfolio management discussion that
follows, the Fund continues to post a high double tax-free yield by investing in
a wide variety of Massachusetts municipal bonds. The Fund also attempts to
approximate the average maturity of the unmanaged Lehman Brothers Municipal Bond
Index but with a superior portfolio structure and the possibility of higher
returns. Please read the discussion beginning on page 6 for more information.
We would like to take this opportunity to introduce the two newest members
of Scudder's family of pure no-load(TM) funds -- Scudder 21st Century Growth
Fund and Scudder Classic Growth Fund. Scudder 21st Century Growth Fund seeks
long-term growth by investing primarily in the securities of emerging growth
companies poised to be leaders in the 21st century. Scudder Classic Growth Fund
seeks long-term growth by investing primarily in common stocks of medium to
large U.S. companies; additionally, it seeks to keep the value of its shares
more stable than the typical capital growth mutual fund. For more information on
either of these new funds and other Scudder products and services, please see
page 22. For questions about Scudder Massachusetts Tax Free Fund, please call a
Scudder Investor Information representative at 1-800-225-2470.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Massachusetts Tax Free Fund
3 - Scudder Massachusetts Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of September 30, 1996
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
9/30/96 $10,000 Cumulative Annual
- --------------------------------------
SCUDDER MASSACHUSETTS TAX FREE FUND
- --------------------------------------
1 Year $10,622 6.22% 6.22%
5 Year $14,769 47.69% 8.11%
Life of
Fund* $21,651 116.51% 8.61%
- --------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------
1 Year $10,604 6.04% 6.04%
5 Year $14,323 43.23% 7.44%
Life of
Fund* $21,340 113.40% 8.46%
*The Fund commenced operations on May 28, 1987.
Index comparisons begin May 31, 1987.
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
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 SEPTEMBER 30
SCUDDER MASSACHUSETTS TAX FREE FUND
Year Amount
- ----------------------
5/31/87 $10000
'87 $ 9871
'88 $11353
'89 $12349
'90 $12933
'91 $14660
'92 $16432
'93 $18981
'94 $18344
'95 $20384
'96 $21651
LEHMAN BROTHERS MUNICIPAL BOND INDEX
Year Amount
- ----------------------
5/31/87 $10000
'87 $10038
'88 $11341
'89 $12325
'90 $13163
'91 $14899
'92 $16426
'93 $18553
'94 $18100
'95 $20124
'96 $21340
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 SEPTEMBER 30
<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... $11.60 $12.30 $12.30 $12.03 $12.74 $13.28 $14.24 $12.95 $13.63 $13.75
INCOME DIVIDENDS.. $ .25 $ .81 $ .85 $ .82 $ .82 $ .83 $ .84 $ .78 $ .72 $ .71
CAPITAL GAINS
AND OTHER
DISTRIBUTIONS..... $ - $ .10 $ .19 $ .02 $ .04 $ .12 $ .18 $ .04 $ - $ -
FUND TOTAL
RETURN (%)........ -1.29 15.01 8.77 4.73 13.35 12.09 15.51 -3.36 11.12 6.22
INDEX TOTAL
RETURN (%)........ .38 12.98 8.68 6.80 13.19 10.45 12.74 -2.44 11.18 6.04
</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 would have been lower.
4 - Scudder Massachusetts Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of September 30, 1996
- --------------------------------------------------------------------------
DIVERSIFICATION
- --------------------------------------------------------------------------
General Obligation 26%
Hospital/Health 21%
Water/Sewer Revenue 12%
Higher Education 11%
Electric Utility Revenue 10%
Housing Finance Authority 5%
Public Housing Authority 5%
Pollution Control Industrial Development 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.
The Fund continues to invest in a broad
selection of Massachusetts municipal bonds.
- ---------------------------------------------------------------------------
QUALITY
- ---------------------------------------------------------------------------
AAA 38%
AA 2%
A 46%
BBB 11%
Not Rated 3%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Weighted average quality: AA
Overall quality remains high, with
86% of portfolio securites rated
A or better.
- ---------------------------------------------------------------------------
EFFECTIVE MATURITY
- ---------------------------------------------------------------------------
Less than 1 year 1%
1-5 years 8%
5-10 years 45%
10-15 years 33%
15 years or greater 13%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Weighted average effective maturity: 10.1 years
To take advantage of opportunities to lock
in a substantial income stream over time,
we buy and hold noncallable municipal
bonds with 10 to 15 year maturities.
- -----------------------------------------------------------------------------
For more complete details about the Fund's investment portfolio,
see page 10.
5 - Scudder Massachusetts Tax Free Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
Over two contrasting quarters of municipal bond market performance, Scudder
Massachusetts Tax Free Fund continued to post a high double tax-free yield and
maintain its superior long-term total return performance. On September 30, 1996,
the Fund's 30-day net annualized SEC yield was 4.86%, equivalent to a 9.14%
taxable yield for shareholders subject to the 46.85% maximum combined state and
federal income tax rate. This "tax-equivalent" yield is significantly higher
than current yields available from taxable investments of similar maturity and
credit quality. During its most recent semiannual period ended September 30, the
Fund's shareholders received $0.35 per share of income exempt from federal and
Massachusetts state income taxes.
During a six-month period that saw modest price gains for the
intermediate-maturity municipal bonds the Fund primarily invests in, the Fund's
share price increased $0.05 to $13.75 per share. The combination of the increase
in the Fund's share price and $0.35 in interest income enabled the Fund to post
a positive total return of 2.98% over the semiannual period. This performance is
roughly in keeping with the 3.11% average total return of similar funds tracked
by Lipper Analytical Services. The Fund continues to earn the number one total
return ranking among its peers for the three-, four-, and five-year periods
ended September 30, 1996.
An Update on the
Massachusetts Economy
Massachusetts' steadily recovering economy has helped the commonwealth replenish
its reserves, while also creating jobs. Fiscal year 1996 operating revenues were
up 5.7% while expenditures rose only 4.0%. The state finished its fiscal year
with an operating surplus of $426 million, and the overall Massachusetts
taxpayer income tax bill for 1996 will be reduced by $150 million from 1995. Key
industries benefiting from the latest but more modest "Massachusetts miracle"
have been computer, mutual fund, consulting, and biotechnology firms.
Approximately two-thirds of the jobs lost in the last recession have been
replaced. The state's unemployment rate in July 1996 of 4.5% -- the lowest since
1989 -- was well below the national average of 5.2%. And Massachusetts continues
to be a wealthy state. Per capita income in 1995 was $26,994, 18% higher than
the national average and fourth highest in the country. Debt levels are high,
but manageable. Lastly, recent federal welfare reform legislation is not
expected to affect the commonwealth negatively since its own welfare legislation
passed in September 1995 is similar.
Economic and Market Review
The U.S. economy continued to grow at a moderate to slow pace during the Fund's
most recent semiannual period. The two quarters were mixed in terms of bond
market performance; for the second quarter of 1996, the economy picked up some
6 - Scudder Massachusetts Tax Free Fund
<PAGE>
Scudder Massachusetts Tax Free Fund:
Superior Long-Term Performance
(Lipper rankings for periods ended September 30, 1996)
Number of Funds
Period Lipper Rank in Peer Group
- ------ ----------- -------------
Six Months 25 of 51
1 Year 10 of 51
2 Years 5 of 42
3 Years 1 of 29
4 Years 1 of 23
5 Years 1 of 20
Past performance does not guarantee future results.
steam as snow from heavy winter storms melted, shoppers returned to retail
stores, and hiring increased. In addition, the collapse of the Congressional
Republicans' budget initiatives was viewed unfavorably by the bond market. These
two factors helped to drive bond yields higher (and prices lower) during the
second quarter. Bond yields as well as the economy retreated during the third
quarter as consumers seemed to feel the weight of their personal debt -- credit
card debt service payments as a percentage of disposable income rose to an
all-time high this year, and analysts predicted over a million people will
declare bankruptcy in 1996.
Over the past several years, the economy has progressed at a fairly consistent
pace, with inflation restrained throughout. The bond market, on the other hand,
has been fairly volatile, constantly anticipating far greater changes than the
economy has exhibited. Now, after six years of expansion, the U.S. economy may
actually be slowing. Consumers appear to be overburdened, retail sales figures
were negative during the third quarter, the government's monetary policy is
tight by historical standards (with a Fed Funds rate of 5 1/4%), and business
investment is slowing. In recent months, bond yields have fluctuated, but have
generally declined in step with this pullback.
For the semiannual period, municipal bonds, which typically exhibit less price
volatility than Treasury bonds, held their own, thanks in part to a relatively
light supply. While yields of long-term Treasury bonds rose two tenths of a
percentage point and prices declined 2.4% during the period, yields of municipal
bonds of similar maturity declined two tenths of a percentage point while prices
rose 2.9% for the same period. Large numbers of municipal bonds were called or
matured during the period, especially in June and July. In September, new
municipal issues totaled $10.5 billion, the lowest monthly number in over a
year. The municipal market continues to be supported both by retail bond buyers
and institutions such as insurance companies.
Three-Point Strategy
Our strategy in managing Scudder Massachusetts Tax Free Fund's portfolio during
the past six months is similar to that cited in our last report to you. We
7 - Scudder Massachusetts Tax Free Fund
<PAGE>
buy and hold noncallable longer-intermediate-maturity bonds (those with
maturities of 10 to 15 years) to take advantage of opportunities to lock in a
substantial income stream for the Fund over time. As of September 30, 33% of the
Fund's securities had maturities in this range. We also continue to look for
opportunities to add some BBB-rated and non-rated bonds to the portfolio. These
bonds, while carrying some additional credit risk, generally exhibit less
interest rate sensitivity than municipal bonds rated A or above. The Fund held
14% of bonds in these two categories as of September 30. (For a summary of the
Fund's quality, diversification, and maturity structure, see page 5.) Lastly,
our goal is to have an average effective maturity similar to that of the
unmanaged Lehman Brothers Municipal Bond Index, the Fund's benchmark, but with a
superior, call-protected structure. As of September 30, the Fund's average
effective maturity was 10 years.
The Fund's overall quality remains high, with 86% of portfolio securities rated
A or better as of September 30. We continue to invest in a broad selection of
Massachusetts municipal bonds, including general obligation, hospital/health,
and water/sewer revenue bonds.
An Emphasis on Income
and Competitive Performance
The Fund seeks to provide investors with a high level of federal and state
tax-exempt income as well as total returns. We pursue the Fund's 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 September 30, 40% of bonds the Fund held were noncallable.
o Steeply discounted callable bonds, which are unlikely to be subject to early
redemption at par value by their issuers.
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 a relatively short time.
A Further Slowdown?
The U.S. economy is flashing several caution lights. Some companies -- notably
fast food outlets and department stores -- are attempting to interest their
customers in higher priced items. That these and other companies are even
considering raising prices makes us believe that the economy may slow further,
because we are confident that the Federal Reserve will raise interest rates at
the first signs of any uptick in inflation. Though we believe that any excesses
in the U.S. economy would soon be corrected, and that the economy will remain
resilient, any further slowdown should benefit the municipal bond market.
8 - Scudder Massachusetts Tax Free Fund
<PAGE>
Meanwhile, as managers we will retain our focus on noncallable,
longer-intermediate-maturity tax-free bonds, because we believe they offer the
most attractive balance of return and risk. We will continue to maintain a
neutral average maturity for the Fund and pay close attention to credit quality
as we pursue double tax-free income and competitive total return for Scudder
Massachusetts Tax Free Fund shareholders.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Kathleen A. Meany
Philip G. Condon Kathleen A. Meany
9 - Scudder Massachusetts Tax Free Fund
<PAGE>
Investment Portfolio as of September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term Municipal Investments 0.5%
- --------------------------------------------------------------------------------------------------------------------------
Massachusetts
Massachusetts General Obligation, Dedicated Income Tax Series B, Daily Demand
Note, 3.859%, 12/1/97* ....................................................... 200,000 MIG1 200,000
Massachusetts Health and Educational Facilities Authority:
Series C, Daily Demand Note, 3.9%, 7/1/05 (c)* ............................... 1,100,000 A-1 1,100,000
Harvard University, 3.6%, 8/1/17* ............................................ 400,000 MIG1 400,000
- --------------------------------------------------------------------------------------------------------------------------
Total Short-term Municipal Investments (Cost $1,700,000) ....................... 1,700,000
- --------------------------------------------------------------------------------------------------------------------------
Long-term Municipal Investments 99.5%
- --------------------------------------------------------------------------------------------------------------------------
Massachusetts
Boston, MA, General Obligation, Series A, 6.5%, 7/1/12 (c) ..................... 2,320,000 AAA 2,508,639
Boston, MA, Industrial Development Authority, Springhouse Project,
9.25%, 7/1/25 ................................................................ 1,000,000 NR 1,023,860
Chicopee, MA, Electric System Revenue, ETM, 7.125%, 1/1/17*** .................. 1,210,000 AAA 1,394,210
Dedham-Westwood, MA, Water District, General Obligation, 5%, 10/15/08 (c) ...... 1,035,000 AAA 1,004,012
Haverhill, MA, Unlimited Tax, General Obligation, Series A, 7%, 6/15/12 (c) .... 600,000 AAA 667,944
Holyoke, MA, General Obligation C06 Series 1996, 6%, 6/15/09 (c) .............. 1,560,000 AAA 1,608,844
Massachusetts Bay Transportation Authority:
Certificate of Participation, 7.75%, 1/15/06 ................................. 1,000,000 A 1,163,450
General Transportation System:
Series A, 5.4%, 3/1/07 ...................................................... 13,325,000 A 13,421,473
Series A, 5.5%, 3/1/12 ...................................................... 3,000,000 A 2,981,370
Series 1993 A, 5.5%, 3/1/09 ................................................. 1,000,000 A 998,170
Series B, 6.2%, 3/1/16 ...................................................... 2,100,000 A 2,235,009
Series C, 6.1%, 3/1/13 ...................................................... 1,250,000 A 1,317,850
Massachusetts General Obligation:
Consolidated Loan, Series A, 7.5%, 6/1/04 .................................... 12,400,000 A 14,336,384
Hynes Convention Center, Zero Coupon, 9/1/04 ................................. 2,000,000 A 1,343,240
Series A, 6.5%, 6/1/08 ....................................................... 5,500,000 A 5,904,580
Series B, 6.5%, 8/1/08 ....................................................... 5,400,000 A 5,968,890
Series C, Zero Coupon, 12/1/04 ............................................... 8,415,000 A 5,666,324
Series D, 5.125%, 11/1/10 (c) ................................................ 5,000,000 AAA 4,813,350
C03 Series 1993B, 4.875%, 10/1/09 (c) ........................................ 9,000,000 AAA 8,474,400
Massachusetts Health & Educational Facilities Authority:
Anna Jaques Hospital, Series B, 6.875%, 10/1/12 .............................. 2,000,000 BBB 2,044,100
Berkshire Health Systems, Series D, 5.6%, 10/1/08 (c) ........................ 1,760,000 AAA 1,795,059
Boston College, Series 1993 K, 5.25%, 6/1/09 ................................. 2,880,000 A 2,845,699
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charlton Memorial Hospital, Series B, 7.25%, 7/1/07 ................ 10,000,000 A 10,916,100
Community College Program, Series A, 6.5%, 10/1/09 ................. 1,000,000 AAA 1,076,690
Cooley Dickinson Hospital Inc.:
Series B, 5.25%, 11/15/10 (c) ..................................... 2,005,000 AAA 1,940,780
7.125%, 11/15/18, Prefunded 5/15/03** ............................. 2,115,000 AAA 2,394,095
Deaconess Hospital, Series B, 6.625%, 4/1/12 (c) ................... 2,000,000 AAA 2,163,040
Faulkner Hospital, Series C, 6%, 7/1/13 ............................ 2,650,000 BBB 2,515,115
Massachusetts General Hospital, Series F, 6.25%, 7/1/12 (c) ........ 5,000,000 AAA 5,374,800
Medical Academic and Scientific, Series A, 6.5%, 1/1/09 ............ 5,000,000 A 5,235,600
Medical Center of Central Massachusetts, Series A, 7%, 7/1/12 (c) .. 3,600,000 AAA 3,949,776
Melrose-Wakefield C06 Series 1996C, 6.625%, 7/1/18 ................. 1,000,000 A 995,860
Newton-Wellesley Hospital:
Series D, 7%,7/1/15 (c) ........................................... 1,500,000 AAA 1,641,735
Series E, 5.9%, 7/1/11 (c) ........................................ 3,015,000 AAA 3,085,069
North Adams, C06 Series 1996C, 6.625%, 7/1/18 ...................... 1,560,000 BBB 1,536,491
Northeastern University Series E:
6.4%, 10/1/07 (c) ................................................. 1,000,000 AAA 1,077,510
6.5%, 10/1/12 (c) ................................................. 450,000 AAA 486,446
St. Luke's Hospital New Bedford, Series C, Yield Curve Notes, 7.22%
8/15/10 (c)**** .................................................. 3,400,000 AAA 3,344,750
South Shore Hospital, 6.5%, 7/1/10 (c) ............................. 2,500,000 AAA 2,695,475
Stonehill College, Series E, 6.55%, 7/1/12 (c) ..................... 5,000,000 AAA 5,421,450
Suffolk University, Series 1996 C, 5.65%, 7/1/11 ................... 1,045,000 AAA 1,042,001
Tufts University, Series C, 7.4%, 8/1/18 ........................... 530,000 A 566,618
Williams College, 5.75%, 7/1/09 .................................... 3,000,000 AA 3,004,770
Massachusetts Housing Finance Agency:
Housing Project Refunding Revenue:
Series B, 6.05%, 12/1/09 (c) ...................................... 3,000,000 AAA 3,050,640
Series A, 6.3%, 10/1/13 ........................................... 7,000,000 A 7,119,630
Housing Project Revenue, Series A, 6.375%, 4/1/21 .................. 3,905,000 A 3,941,941
Residential Development, Series C, 6.875%, 11/15/11 ................ 15,250,000 AAA 16,189,553
Single-Family Mortgage Revenue, Series 44, 5.9%, 12/1/13 ........... 3,000,000 A 3,011,490
Massachusetts Industrial Finance Agency:
Edgewood Retirement Community, Series A, 9%, 11/15/25 .............. 1,650,000 NR 1,693,527
First Mortgage, Evanswood Bethzatha, Series A, 7.875%, 1/15/20 ..... 1,000,000 NR 1,026,890
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Holy Cross College:
C06 Series 1996, 5.5%, 3/1/16 (c) .......................................... 5,000,000 AAA 4,906,200
C06 Series 1996, 5.25%, 3/1/09 (c) ......................................... 1,190,000 AAA 1,170,770
Issue II, 6.375%, 11/1/09 .................................................. 1,000,000 A 1,101,110
Resource Recovery, North Andover Solid Waste, Series A, 6.3%, 7/1/05 ........ 6,500,000 BBB 6,771,960
Massachusetts Biomedical Research Corp.:
Series A, Zero Coupon, 8/1/00 .............................................. 2,860,000 A 2,396,737
Series A, Zero Coupon, 8/1/01 .............................................. 3,650,000 A 2,893,611
Series A, Zero Coupon, 8/1/02 .............................................. 3,650,000 A 2,742,282
Nantucket C06 AMT:
Series 1996 A, 5.75%, 7/1/08 (c) ........................................... 1,400,000 AAA 1,414,168
Series 1996 A, 5.75%, 7/1/09 (c) ........................................... 1,400,000 AAA 1,406,986
Series 1996, 5.875%, 7/1/17 (c) ............................................ 2,000,000 AAA 1,998,600
Pollution Control Revenue, Eastern Edison Company Project, 5.875%, 8/1/08 ... 4,750,000 BBB 4,604,793
Revenue East Boston C06 Series 1996, 7.625%, 7/1/26 ......................... 2,750,000 BB 2,712,903
Solid Waste Disposal, Peabody Monofil Project, 9%, 9/1/05 (d) ............... 3,000,000 NR 3,090,600
Sturdy Memorial Hospital, 7.9%, 6/1/09 ...................................... 1,820,000 A 1,954,134
Pollution Control Revenue, Boston Edison Company, Series A, 5.75%, 2/1/14 ... 2,000,000 BBB 1,912,580
Provider Lease Program, Series 1988 A-1, 8.4%, 7/15/08 ...................... 1,870,000 NR 1,925,763
Massachusetts Municipal Wholesale Electric Company Power Supply System Revenue:
Series A, 6.75%, 7/1/06 ..................................................... 2,855,000 BBB 3,125,254
Series A, 5%, 7/1/12 (c) .................................................... 1,000,000 AAA 927,770
Series A, 5%, 7/1/17 (c) .................................................... 3,610,000 AAA 3,316,796
Series A, 5.1%, 7/1/08 (c) .................................................. 840,000 AAA 816,077
Series B, 6.75%, 7/1/08 ..................................................... 9,000,000 BBB 9,851,940
Series B, 4.95%, 7/1/09 (c) ................................................. 1,575,000 AAA 1,510,425
Series C, 6.625%, 7/1/10 .................................................... 1,000,000 BBB 1,041,320
Series C, 6.625%, 7/1/10 (c) ................................................ 3,500,000 AAA 3,835,475
Massachusetts Port Authority Revenue, Tax Exempt Receipts, ETM,
Zero Coupon, 7/1/13*** ...................................................... 1,000,000 AAA 896,330
Massachusetts Special Obligation, Series 1996 A, 5.5%, 6/1/11 (c) ............. 5,000,000 AAA 4,979,650
Massachusetts Water Pollution Abatement Trust, Pooled Loan Program:
Series 2, 5.625%, 2/1/10 .................................................... 2,820,000 AAA 2,853,925
Series 2, 5.7%, 2/1/15 ...................................................... 1,150,000 AAA 1,157,038
Massachusetts Water Resource Authority:
Series A, 6.5%, 7/15/09 ..................................................... 15,000,000 A 16,450,200
Series A, 6.5%, 7/15/19 ..................................................... 3,000,000 A 3,287,520
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series B, 6%, 11/1/08 ........................................................ 5,785,000 A 6,028,896
General Revenue, Series C, 5.25%, 12/1/08 .................................... 2,705,000 A 2,673,676
General Revenue, Series C, 5.25%, 12/1/15 .................................... 4,030,000 A 3,828,863
Nantucket, MA, General Obligation, 6.8%, 12/1/11 ............................... 1,000,000 A 1,085,530
New England Educational Loan Marketing Corporation, Massachusetts Student Loan
Revenue, 5.7%, 7/1/05 ........................................................ 6,250,000 A 6,357,000
Springfield, Massachusetts General Obligation C06 Series 1996,
5.3%, 8/1/11 (c) ............................................................. 1,250,000 AAA 1,217,350
University of Massachusetts, Building Authority Revenue:
Series B, 6.625%, 5/1/09 ..................................................... 2,415,000 A 2,680,191
Series B, 6.625%, 5/1/10 ..................................................... 2,575,000 A 2,857,349
Series B, 6.75%, 5/1/11 ...................................................... 2,745,000 A 3,080,055
Series B, 6.875%, 5/1/14 ..................................................... 1,300,000 A 1,485,419
Worcester, MA, General Obligation:
6.9%, 5/15/05, Prefunded 5/15/02 (c)** ....................................... 1,850,000 AAA 2,077,495
6.9%, 5/15/06, Prefunded 5/15/02 (c)** ....................................... 1,500,000 AAA 1,684,455
Puerto Rico
Puerto Rico Aqueduct and Sewer Authority, 6%, 7/1/09 ........................... 1,000,000 A 1,033,240
Puerto Rico Highway and Transportation Authority NC Series
1996 Y, 6.25%, 7/1/14 ........................................................ 2,000,000 A 2,130,856
- --------------------------------------------------------------------------------------------------------------------------
Total Long-term Municipal Investments (Cost $300,366,466) 315,287,991
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio - 100.0% (Cost $302,066,466) (a) 316,987,991
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $302,066,466. At September
30, 1996, net unrealized appreciation for all securities based on tax cost
was $14,921,525. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $15,713,591 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$792,066.
(b) All of the securities held have been determined to be of appropriate
credit quality as required by the Fund's investment objectives. Credit
ratings shown are assigned by either Standard & Poor's Ratings Group,
Moody's Investors Service, Inc. or Fitch Investors Service, Inc. Unrated
securities (NR) have been determined to be of comparable quality to rated
eligible securities.
(c) Bond is insured by one of these companies: AMBAC, Connie Lee, FGIC, FSA
or MBIA.
(d) Restricted Security - Security which has not been registered with the
Securities and Exchange Commission under the Securities Act of 1933.
Information concerning such restricted security at September 30, 1996 is
as follows:
Security Acquisition Date Cost ($)
-------- ---------------- ---------
MIFA, Solid Waste, Peabody Monofil 12/30/94 3,000,000
The accompanying notes are an integral part of the financial statements.
13 - Scudder Massachusetts Tax Free Fund
<PAGE>
* 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 September 30, 1996.
The accompanying notes are an integral part of the financial statements.
14 - Scudder Massachusetts Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of September 30, 1996 (Unaudited)
<TABLE>
<S> <C>
Assets
- --------------------------------------------------------------------------------------------------
Investments, at market (identified cost $302,066,466) (Note A) .. $ 316,987,991
Interest receivable ............................................. 5,202,240
Receivable on Fund shares sold .................................. 298,852
Other assets .................................................... 219
-------------
Total assets .................................................... 322,489,302
Liabilities
- --------------------------------------------------------------------------------------------------
Dividends payable ............................................... 543,122
Payable for Fund shares redeemed ................................ 145,939
Accrued management fee (Note C) ................................. 159,385
Other accrued expenses (Note C) ................................. 95,387
-------------
Total liabilities ............................................... 943,833
--------------------------------------------------------------------------------
Net assets, at market value ..................................... $ 321,545,469
--------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------------------------
Net assets consist of:
Unrealized appreciation on investments .......................... 14,921,525
Accumulated net realized loss ................................... (3,812,974)
Shares of beneficial interest ................................... 233,864
Additional paid-in capital ...................................... 310,203,054
--------------------------------------------------------------------------------
Net assets, at market value ..................................... $ 321,545,469
--------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($321,545,469 / 23,386,432 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares -------------
authorized ..................................................... $ 13.75
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Massachusetts Tax Free Fund
<PAGE>
Statement of Operations
six months ended September 30, 1996 (Unaudited)
Investment Income
- ----------------------------------------------------------------------------
Income:
Interest ........................................... $ 9,301,625
-----------
Expenses:
Management fee (Note C) ............................ 944,974
Services to shareholders (Note C) .................. 145,794
Custodian and accounting fees (Note C) ............. 56,237
Trustees' fees and expenses (Note C) ............... 8,708
Reports to shareholders ............................ 22,737
Auditing ........................................... 18,022
Registration fees .................................. 7,724
Legal .............................................. 6,530
Other .............................................. 7,492
-----------
1,218,218
-----------------------------------------------------------------
Net investment income .............................. 8,083,407
-----------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------
Net realized loss from:
Investments ................................. (108,627)
Futures ..................................... (99,181)
-----------
(207,808)
Net unrealized appreciation during the
period on:
Investments ................................. 1,389,379
Futures ..................................... 51,013
-----------
1,440,392
-----------
Net gain on investments ..................... 1,232,584
-----------------------------------------------------------------
Net increase in net assets resulting from
operations $ 9,315,991
-----------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
16 - Scudder Massachusetts Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended
September 30, Year Ended
1996 March 31,
Increase (Decrease) in Net Assets (Unaudited) 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .................................. $ 8,083,407 $ 16,175,218
Net realized gain (loss) from investment transactions .. (207,808) 581,573
Net unrealized appreciation on investment
transactions during the period ...................... 1,440,392 7,364,821
------------- -------------
Net increase in net assets resulting from operations ... 9,315,991 24,121,612
------------- -------------
Distributions to shareholders from net investment
income .............................................. (8,083,407) (16,175,218)
------------- -------------
Fund share transactions:
Proceeds from shares sold .............................. 28,152,694 58,182,143
Net asset value of shares issued to shareholders in
reinvestment of distributions ....................... 4,754,802 9,475,939
Cost of shares redeemed ................................ (26,879,537) (57,794,885)
------------- -------------
Net increase in net assets from Fund share
transactions ........................................ 6,027,959 9,863,197
------------- -------------
Increase in net assets ................................. 7,260,543 17,809,591
Net assets at beginning of period ...................... 314,284,926 296,475,335
------------- -------------
Net assets at end of period ............................ $ 321,545,469 $ 314,284,926
------------- -------------
Other Information
- --------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .............. 22,942,284 22,236,389
------------- -------------
Shares sold ............................................ 2,072,077 4,245,322
Shares issued to shareholders in reinvestment of
distributions ....................................... 348,477 690,492
Shares redeemed ........................................ (1,976,406) (4,229,919)
------------- -------------
Net increase in Fund shares ............................ 444,148 705,895
------------- -------------
Shares outstanding at end of period .................... 23,386,432 22,942,284
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Massachusetts Tax Free Fund
<PAGE>
Financial Highlights
The following table includes select 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
(commence-
Six Months ment of
Ended operations)
September 30 to
1996 Years Ended March 31, March 31,
(unaudited) 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
---------------------------------------------------------------------------------------------
period ......................... $13.70 $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 ............. .35 .72 .74 .81 .84 .81 .83 .82 .81 .69
Net realized and unrealized
gain (loss) on investment
transactions ................... .05 .37 .18 (.33) .96 .46 .19 .13 .22 .21
---------------------------------------------------------------------------------------------
Total from investment operations .. .40 1.09 .92 .48 1.80 1.27 1.02 .95 1.03 .90
---------------------------------------------------------------------------------------------
Less distributions:
From net investment income ........ (.35) (.72) (.74) (.81) (.84) (.81) (.83) (.82) (.88) (.62)
From net realized gains on
investment transactions ........ -- -- -- (.08) (.16) (.09) -- (.11)(a) (.20) --
In excess of net realized gains ... -- -- (.01) (.04) -- -- -- -- -- --
---------------------------------------------------------------------------------------------
Total distributions ............... (.35) (.72) (.75) (.93) (1.00) (.90) (.83) (.93) (1.08) (.62)
---------------------------------------------------------------------------------------------
Net asset value, end of ---------------------------------------------------------------------------------------------
period ......................... $13.75 $13.70 $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28
---------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) .............. 2.98** 8.28 7.37 3.37 14.59 10.46 8.60 7.89 9.50 7.73**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 322 314 296 332 267 120 67 46 31 16
Ratio of operating expenses,
net to average daily net
assets (%) ..................... .77* .75 .47 .07 -- .48 .60 .60 .51 .50*
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) ..................... .77* .76 .77 .77 .83 .93 1.05 1.16 1.20 2.25*
Ratio of net investment income
to average daily net
assets (%) ..................... 5.13* 5.23 5.73 5.80 6.36 6.38 6.72 6.60 7.23 7.55*
Portfolio turnover rate (%) ....... 12.89* 20.9 10.2 17.0 29.6 23.2 27.1 45.5 110.5 95.9*
</TABLE>
(a) Includes $.01 per share distributions in excess of realized gains pursuant
to Internal Revenue Code Section 4982.
(b) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
The accompanying notes are an integral part of the financial statements.
18 - Scudder Massachusetts Tax Free Fund
<PAGE>
Notes to Financial Statements (Unaudited)
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 September 30,
1996 amounted to $3,090,600 which represents .96% 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).
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.
19 - Scudder Massachusetts Tax Free Fund
<PAGE>
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.
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 six months ended September 30, 1996, purchases and sales of municipal
securities (excluding short-term investments) aggregated $31,430,256 and
$20,096,298, respectively.
The aggregate face value of future contracts closed during the six months ended
September 30, 1996 was $7,930,388.
C. Related Parties
Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a fee
equal to an annual rate of approximately 0.60% of the Fund's average daily net
assets, computed and accrued daily and payable monthly. For the six months ended
September 30, 1996, the fee pursuant to the Advisory Agreement amounted to
$944,974.
20 - Scudder Massachusetts Tax Free Fund
<PAGE>
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 September 30, 1996, the amount charged to the Fund by SSC
aggregated $90,989, of which $15,126 is unpaid at September 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 September 30, 1996, the amount charged to the Fund by SFAC aggregated
$29,588, of which $4,931 is unpaid at September 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 September 30,
1996, Trustees' fees and expenses charged to the Fund aggregated $8,708.
21 - Scudder Massachusetts Tax Free Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds
- --------------------------------------------------------------------------------
Money Market
Scudder Cash Investment Trust
Scudder U.S. Treasury Money Fund
Tax Free Money Market+
Scudder Tax Free Money Fund
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
Tax Free+
Scudder California Tax Free Fund*
Scudder High Yield Tax Free Fund
Scudder Limited Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder Massachusetts Limited Term
Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder Medium Term Tax Free Fund
Scudder New York Tax Free Fund*
Scudder Ohio Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
Growth and Income
Scudder Balanced Fund
Scudder Growth and Income Fund
Income
Scudder Emerging Markets Income Fund
Scudder Global Bond Fund
Scudder GNMA Fund
Scudder High Yield Bond Fund
Scudder Income Fund
Scudder International Bond Fund
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Growth
Scudder Capital Growth Fund
Scudder Classic Growth Fund
Scudder Development Fund
Scudder Emerging Markets Growth Fund
Scudder Global Discovery Fund
Scudder Global Fund
Scudder Gold Fund
Scudder Greater Europe Growth Fund
Scudder International Fund
Scudder Latin America Fund
Scudder Micro Cap Fund
Scudder Pacific Opportunities Fund
Scudder Quality Growth Fund
Scudder Small Company Value Fund
Scudder 21st Century Growth Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
- --------------------------------------------------------------------------------
IRAs
Keogh Plans
Scudder Horizon Plan*+++ (a variable annuity)
401(k) Plans
403(b) Plans
SEP-IRAs
Profit Sharing and Money Purchase
Pension Plans
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The First Iberian Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder World Income Opportunities
Fund, Inc.
Institutional Cash Management
- --------------------------------------------------------------------------------
Scudder Institutional Fund, Inc.
Scudder Fund, Inc.
Scudder Treasurers Trust(TM)++
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +A portion of the income from the tax-free funds may
be subject to federal, state, and local taxes. *Not available in all states.
+++A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc., are
traded on various stock exchanges. ++For information on Scudder Treasurers
Trust,(TM) an institutional cash management service that utilizes certain
portfolios of Scudder Fund, Inc. ($100,000 minimum), call 1-800-541-7703.
22 - Scudder Massachusetts Tax Free Fund
<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
Visit the Scudder World Wide Web Site at:
http://funds.scudder.com
Or Stop by a Scudder Funds Center
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they
can be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder Treasurers Trust(TM), an
institutional cash management service for corporations,
non-profit organizations and trusts which utilizes certain
portfolios of Scudder Fund, Inc.* ($100,000 minimum), call:
1-800-541-7703.
For information on Scudder Institutional Funds*, funds designed
to meet the broad investment management and service needs of
banks and other institutions, call:
1-800-854-8525.
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a prospectus
with more complete information, including management fees and expenses. Please
read it carefully before you invest or send money.
23 - Scudder Massachusetts Tax Free Fund
<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 over 40 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.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
<PAGE>
