Filed electronically with the Securities and Exchange Commission
on July 30, 1998.
File No. 2-84021
File No. 811-3749
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
----------
Post-Effective Amendment No. 26
-----------
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27
----------
Scudder State Tax Free Trust
----------------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
----------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2567
--------------
Thomas F. McDonough
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110-4103
----------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
-------
X on August 1, 1998 pursuant to paragraph (b)
-------
60 days after filing pursuant to paragraph (a)(1)
-------
on _____________ pursuant to paragraph (a) of Rule 485
-------
75 days after filing pursuant to paragraph (a)(2)
------- on _____________ pursuant to paragraph (a)(3) of Rule 485
If appropriate, check the following:
this post-effective amendment designates a new effective date
------- for a previously filed post-effective amendment
<PAGE>
CROSS-REFERENCE SHEET
SCUDDER NEW YORK TAX FREE MONEY FUND
AND
SCUDDER NEW YORK TAX FREE FUND
Items Required By Form N-1A
---------------------------
PART A
- ------
<TABLE>
<S> <C> <C>
<CAPTION>
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description of SCUDDER NEW YORK TAX FREE MONEY FUND -- Investment objectives
Registrant and policies
SCUDDER NEW YORK TAX FREE FUND -- Investment objective and
policies
ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION
5. Management of the Fund A MESSAGE FROM SCUDDER'S CHAIRMAN
FUND ORGANIZATION--Investment adviser, Transfer agent
SHAREHOLDER BENEFITS--A team approach to investing
5A. Management's Discussion of NOT APPLICABLE
Fund Performance
6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and Capital
Securities Gains Distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL (Scudder Automated Information Line),
Dividend reinvestment plan, T.D.D. service for the hearing
impaired
HOW TO CONTACT SCUDDER
7. Purchase of Securities Being PURCHASES
Offered TRANSACTION INFORMATION--Purchasing shares
INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION -- Underwriter
8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal Proceedings NOT APPLICABLE
Cross Reference - Page 1
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
AND
SCUDDER NEW YORK TAX FREE FUND
(continued)
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information and History FUND ORGANIZATION
13. Investment Objectives and THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Policies PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities
16. Investment Advisory and Other INVESTMENT ADVISER
Services ADDITIONAL INFORMATION--Experts, Other Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and Other FUND ORGANIZATION
Securities
19. Purchase, Redemption and PURCHASES
Pricing of Securities Being EXCHANGES AND REDEMPTIONS
Offered FEATURES AND SERVICES OFFERED BY THE FUNDS--Dividend and Capital
Gain Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of Performance PERFORMANCE AND OTHER INFORMATION
Information
23. Financial Statements FINANCIAL STATEMENTS
Cross Reference - Page 2
<PAGE>
CROSS-REFERENCE SHEET
SCUDDER OHIO TAX FREE FUND
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial Information FINANCIAL HIGHLIGHTS
4. General Description of INVESTMENT OBJECTIVE AND POLICIES
Registrant ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION
5. Management of the Fund A MESSAGE FROM SCUDDER'S CHAIRMAN
FUND ORGANIZATION--Investment adviser, Transfer agent
SHAREHOLDER BENEFITS--A team approach to investing
5A. Management's Discussion of Fund NOT APPLICABLE
Performance
6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and capital
Securities gains distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL (Scudder Automated Information Line),
Dividend reinvestment plan, T.D.D. service for the hearing
impaired
HOW TO CONTACT SCUDDER
7. Purchase of Securities Being PURCHASES
Offered TRANSACTION INFORMATION--Purchasing shares
INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION--Underwriter
8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal Proceedings NOT APPLICABLE
Cross Reference - Page 3
<PAGE>
SCUDDER OHIO TAX FREE FUND
(continued)
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information and History FUND ORGANIZATION
13. Investment Objectives and THE FUNDS' INVESTMENT OBJECTIVE AND POLICIES
Policies PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities
16. Investment Advisory and Other INVESTMENT ADVISER
Services ADDITIONAL INFORMATION--Experts, Other Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and Other FUND ORGANIZATION
Securities
19. Purchase, Redemption and PURCHASES
Pricing of Securities Being EXCHANGES AND REDEMPTIONS
Offered FEATURES AND SERVICES OFFERED BY THE FUND--Dividend and Capital
Gain Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of Performance PERFORMANCE INFORMATION
Information
23. Financial Statements FINANCIAL STATEMENTS
Cross Reference - Page 4
<PAGE>
CROSS-REFERENCE SHEET
SCUDDER PENNSYLVANIA TAX FREE FUND
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description of INVESTMENT OBJECTIVE AND POLICIES
Registrant ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION
5. Management of the Fund A MESSAGE FROM SCUDDER'S CHAIRMAN
FUND ORGANIZATION--Investment adviser, transfer agent
SHAREHOLDER BENEFITS--A team approach to investing
5A. Management's Discussion of NOT APPLICABLE
Fund Performance
6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and capital
Securities gains distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL (Scudder Automated Information Line),
Dividend reinvestment plan, T.D.D. service for the hearing
impaired
HOW TO CONTACT SCUDDER
7. Purchase of Securities Being PURCHASES
Offered TRANSACTION INFORMATION--Purchasing shares
INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION--Underwriter
8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal Proceedings NOT APPLICABLE
Cross Reference - Page 5
<PAGE>
SCUDDER PENNSYLVANIA TAX FREE FUND
(continued)
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information and History FUND ORGANIZATION
13. Investment Objectives and THE FUNDS' INVESTMENT OBJECTIVE AND POLICIES
Policies PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities
16. Investment Advisory and Other INVESTMENT ADVISER
Services ADDITIONAL INFORMATION--Experts, Other Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and Other FUND ORGANIZATION
Securities
19. Purchase, Redemption and PURCHASES
Pricing of Securities Being EXCHANGES AND REDEMPTIONS
Offered FEATURES AND SERVICES OFFERED BY THE FUND--Dividend and Capital
Gain Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of Performance Data PERFORMANCE INFORMATION
23. Financial Statements FINANCIAL STATEMENTS
Cross Reference - Page 6
<PAGE>
CROSS-REFERENCE SHEET
SCUDDER MASSACHUSETTS TAX FREE FUND
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description of INVESTMENT OBJECTIVE AND POLICIES
Registrant ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION
5. Management of the Fund A MESSAGE FROM SCUDDER'S CHAIRMAN
FUND ORGANIZATION--Investment adviser, Transfer agent
SHAREHOLDER BENEFITS--A team approach to investing
5A. Management's Discussion of NOT APPLICABLE
Fund Performance
6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and capital
Securities gains distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL (Scudder Automated Information
Line), Dividend reinvestment plan, T.D.D. service for the
hearing impaired
HOW TO CONTACT SCUDDER
7. Purchase of Securities Being PURCHASES
Offered TRANSACTION INFORMATION--Purchasing shares
INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION -- Underwriter
8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal Proceedings NOT APPLICABLE
Cross Reference - Page 7
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
(continued)
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information and History FUND ORGANIZATION
13. Investment Objectives and THE FUNDS' INVESTMENT OBJECTIVE AND POLICIES
Policies PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities
16. Investment Advisory and Other INVESTMENT ADVISER
Services ADDITIONAL INFORMATION--Experts, Other Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and Other FUND ORGANIZATION
Securities
19. Purchase, Redemption and PURCHASES
Pricing of Securities Being EXCHANGES AND REDEMPTIONS
Offered FEATURES AND SERVICES OFFERED BY THE FUND--Dividend and Capital
Gain Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of Performance PERFORMANCE INFORMATION
Information
23. Financial Statements FINANCIAL STATEMENTS
Cross Reference - Page 8
<PAGE>
CROSS-REFERENCE SHEET
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description of INVESTMENT OBJECTIVE AND POLICIES
Registrant ADDITIONAL INFORMATION ABOUT POLICIES AND INVESTMENTS
FUND ORGANIZATION
5. Management of the Fund A MESSAGE FROM SCUDDER'S CHAIRMAN
FUND ORGANIZATION--Investment adviser, Transfer agent
SHAREHOLDER BENEFITS--A team approach to investing
5A. Management's Discussion of NOT APPLICABLE
Fund Performance
6. Capital Stock and Other DISTRIBUTION AND PERFORMANCE INFORMATION--Dividends and capital
Securities gains distributions
FUND ORGANIZATION
TRANSACTION INFORMATION--Tax information
SHAREHOLDER BENEFITS--SAIL (Scudder Automated Information Line),
Dividend reinvestment plan, T.D.D. service for the hearing
impaired
HOW TO CONTACT SCUDDER
7. Purchase of Securities Being PURCHASES
Offered TRANSACTION INFORMATION--Purchasing shares
INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION--Underwriter
8. Redemption or Repurchase EXCHANGES AND REDEMPTIONS
TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal Proceedings NOT APPLICABLE
Cross Reference - Page 9
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
(continued)
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information and History FUND ORGANIZATION
13. Investment Objectives and THE FUNDS' INVESTMENT OBJECTIVE AND POLICIES
Policies PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities
16. Investment Advisory and Other INVESTMENT ADVISER
Services ADDITIONAL INFORMATION--Experts, Other Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and Other FUND ORGANIZATION
Securities
19. Purchase, Redemption and PURCHASES
Pricing of Securities Being EXCHANGES AND REDEMPTIONS
Offered FEATURES AND SERVICES OFFERED BY THE FUND--Dividend and Capital
Gain Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of Performance PERFORMANCE INFORMATION
Information
23. Financial Statements FINANCIAL STATEMENTS
</TABLE>
Cross Reference - Page 10
<PAGE>
<PAGE>
This combined prospectus sets forth concisely the information about Scudder New
York Tax Free Money Fund and Scudder New York Tax Free Fund, each a
non-diversified series of Scudder State Tax Free Trust, an open-end management
investment company, that a prospective investor should know before investing.
Please retain it for future reference.
Shares of the Funds are not insured or guaranteed by the U.S. Government.
Scudder New York Tax Free Money Fund seeks to maintain a constant net asset
value of $1.00 per share but there can be no assurance that the stable net asset
value will be maintained.
If you require more detailed information, a Statement of Additional Information
for the Funds dated August 1, 1998, as amended from time to time, may be
obtained without charge by writing Scudder Investor Services, Inc., Two
International Place, Boston, MA 02110-4103 or calling 1-800-225-2470. The
Statement, which is incorporated by reference into the Funds' prospectus, has
been filed with the Securities and Exchange Commission and is available along
with other related materials on the SEC's Internet Web site
(http://www.sec.gov).
Because of its focus on New York tax-exempt investments, Scudder New York Tax
Free Money Fund may have to concentrate a significant percentage of its assets
in a single issuer. An investment in this Fund may be riskier than an investment
in a money market fund that does not focus on investments from a single state.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Contents--see page 5.
NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE
SCUDDER [LOGO]
Scudder New York
Tax Free Money Fund
- -------------------
Scudder New York
Tax Free Fund
Prospectus
August 1, 1998
Two pure no-load(TM) (no sales charges) mutual fund series which seek to provide
triple tax-free income, exempt from New York state and New York City personal
income taxes and regular federal income tax.
<PAGE>
Expense information
How to compare a Scudder Family of Funds pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder New York Tax Free Money Fund and Scudder New
York Tax Free Fund (the "Funds"). By reviewing this table and those in other
mutual funds' prospectuses, you can compare each Fund's fees and expenses with
those of other funds. With Scudder's pure no-load(TM) funds, you pay no
commissions to purchase or redeem shares, or to exchange from one fund to
another. As a result, all of your investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in either Fund for various transactions.
<TABLE>
<S> <C> <C>
<CAPTION>
Scudder New York Scudder New York
Tax Free Money Fund Tax Free Fund
------------------- -------------
Sales commissions to purchase shares (sales load) NONE NONE
Commissions to reinvest dividends NONE NONE
Redemption fees NONE* NONE*
Fees to exchange shares NONE NONE
2) Annual Fund operating expenses: Expenses paid by either Fund before it
distributes its net investment income, expressed as a percentage of its
average daily net assets for the fiscal year ended March 31, 1998.
Investment management fees (after waiver, if applicable) 0.32%** 0.63%
12b-1 fees NONE NONE
Other expenses 0.28% 0.20%
----- -----
Total Fund operating expenses (after waiver, if applicable) 0.60%** 0.83%
===== =====
Example
Based on the levels of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by each Fund before it distributes its
net investment income to shareholders. (As noted above, the Funds have no
redemption fees of any kind.)
One year $ 6 $ 8
Three years 19 26
Five years 33 46
Ten years 75 103
</TABLE>
See "Fund organization--Investment adviser" for further information about the
investment management fees. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and returns vary from year to year and may be higher or lower than
those shown.
* You may redeem by writing or calling the Funds, or by Write-A-Check for
Scudder New York Tax Free Money Fund. If you wish to receive redemption
proceeds via wire, there is a $5 wire service fee. For additional
information, please refer to "Transaction information--Redeeming shares."
** Until July 31, 1999, the Adviser has agreed to waive a portion of its fee
for Scudder New York Tax Free Money Fund to the extent necessary so that
the total annualized expenses of the Fund do not exceed 0.60% of average
daily net assets. If the Adviser had not done so, Fund expenses would have
been: investment management fee 0.50%, other expenses 0.28% and total
operating expenses 0.78% for the fiscal year ended March 31, 1998.
2
<PAGE>
Financial highlights
Scudder New York Tax Free Money Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated March 31, 1998, which may be obtained without charge
by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning -----------------------------------------------------------------------------------
of period ..................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
-----------------------------------------------------------------------------------
Net investment income ............ .030 .028 .031 .025 .017 .022 .035 .046 .052 .047
Distributions from net
investment income ............. (.030) (.028) (.031) (.025) (.017) (.022) (.035) (.046) (.052) (.047)
Net asset value, end of -----------------------------------------------------------------------------------
period ........................ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
-----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ............. 3.06 2.85 3.18 2.57 1.75 2.22 3.55 4.69 5.33 4.78
Ratios and Supplemental Data
Net assets, end of period
($ millions) .................. 93 60 58 55 47 40 36 40 36 41
Ratio of operating expenses, net
to average daily net
assets (%) .................... .60 .60 .60 .60 .60 .60 .60 .60 .60 .53
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) .......... .78 .85 .86 .89 .97 .97 1.01 1.08 1.08 .98
Ratio of net investment income to
average daily net assets (%) .. 3.00 2.81 3.13 2.56 1.73 2.19 3.46 4.57 5.21 4.76
(a) Total returns would have been lower had certain expenses not been reduced.
3
<PAGE>
Financial highlights
Scudder New York Tax Free Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Fund's performance, a
complete portfolio listing and audited financial statements are available in the
Fund's Annual Report dated March 31, 1998, which may be obtained without charge
by writing or calling Scudder Investor Services, Inc.
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $10.63 $10.67 $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39
Income from investment .51 .53 .53 .52 .54 .61 .65 .67 .69 .72
operations:
Net investment income
Net realized and unrealized .66 (.03) .29 .11 (.35) 1.03 .50 .13 .16 .14
gain
(loss) on investment
transactions
Total from investment
operations 1.17 .50 .82 .63 .19 1.64 1.15 .80 .85 .86
Less distributions:
From net investment income (.51) (.53) (.53) (.52) (.54) (.61) (.65) (.67) (.69) (.72)
From paid-in capital -- -- -- -- -- -- -- -- (.08) --
From net realized gains (.02) (.01) -- -- (.67) (.61) (.25) -- (.01) --
In excess of net realized gains -- -- -- (.05) (.06) -- -- -- -- --
Total distributions (.53) (.54) (.53) (.57) (1.27) (1.22) (.90) (.67) (.78) (.72)
Net asset value, end of
period $11.27 $10.63 $10.67 $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53
----------------------------------------------------------------------------------------------------------------------
Total Return (%) 11.20 4.76 7.95 6.39 1.31 15.60 11.11 7.79 8.18 8.55
Ratios and Supplemental Data
Net assets, end of period 196 181 192 194 207 201 159 142 132 123
($ millions)
Ratio of operating expenses to .83 .83 .82 .82 .82 .82 .87 .91 .89 .89
average daily net assets (%)
Ratio of net investment 4.65 4.95 4.91 5.13 4.80 5.36 5.96 6.29 6.39 6.89
income to average daily
net assets (%)
Portfolio turnover rate (%) 28.8 71.0 80.5 83.8 158.0 201.4 168.2 224.9 114.3 132.1
</TABLE>
4
<PAGE>
A message from the President
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $200 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts. It is one of the ten
largest mutual fund companies in the U.S.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also 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 numerous other open- and closed-end funds that invest in this
country and other 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 shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
Funds or fund classes in the Scudder Family of Funds are offered without
commissions to purchase or redeem 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/Edmond D. Villani
The Funds
o active portfolio management by the Adviser's professional team of credit
analysts and municipal bond market experts
o dividends declared daily and paid monthly
Scudder New York Tax Free Money Fund
o capital stability and income exempt from New York state and New York City
personal income taxes and regular federal income tax
o seeks to maintain a constant share price of $1.00 and investment in high
quality, short-term municipal securities tax-exempt in New York
Scudder New York Tax Free Fund
o income exempt from New York state and New York City personal income taxes
and regular federal income tax
o primarily long-term investment-grade municipal securities tax-exempt in New
York
Contents
Why invest in these Funds? 6
Summary of important features 7
Tax-exempt vs. taxable income 7
Scudder New York Tax Free Money Fund 8
Scudder New York Tax Free Fund 9
Additional information about policies
and investments 11
Distribution and performance information 15
Fund organization 17
Transaction information 18
Shareholder benefits 22
Purchases 25
Exchanges and redemptions 26
Trustees and Officers 28
Investment products and services 29
How to contact Scudder 30
5
<PAGE>
Why invest in these Funds?
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund (the
"Funds") are each non-diversified series of Scudder State Tax Free Trust, and
are designed for investors seeking double tax-free income (triple tax-free
income for New York City taxpayers)--exempt from New York state and New York
City personal income taxes and regular federal income tax. Because these Funds
are intended for investors subject to New York and regular federal income taxes,
they may not be appropriate for all investors and are not available in all
states.
Tax-free income
As illustrated in the chart on the following page, depending on your tax bracket
and individual situation, you may earn a substantially higher after-tax return
from these Funds than from comparable investments that pay income subject to New
York state and New York City personal income taxes and regular federal income
tax. For example, if your federal marginal tax rate is 36%, your New York state
marginal tax rate is 6.85% and your New York City marginal tax rate is 2.21%,
your effective combined marginal tax rate is 41.80%. Thus, you would need to
earn a taxable return of 5.10% to receive after-tax income equal to the 2.97%
tax-free yield provided by Scudder New York Tax Free Money Fund for the
seven-day period ended March 31, 1998, or earn a taxable return of 6.87% to
receive after-tax income equal to the 4.00% tax-free yield provided by Scudder
New York Tax Free Fund for the 30-day period ended March 31, 1998. In other
words, it would be necessary to earn $1,718 from a taxable investment to equal
$1,000 of tax-free income you receive from either Fund. The yield levels of
tax-free and taxable investments change continuously. Before investing in either
Fund, you should compare its yield to the after-tax yield you would receive from
a comparable investment paying taxable income. For up-to-date yield information
on either Fund, shareholders can call SAIL, Scudder Automated Information Line,
for toll-free information at any time.
Investment characteristics of each Fund
The Funds are income-oriented portfolios advised by Scudder Kemper Investments,
Inc. (the "Adviser"). Each Fund seeks to provide income free from New York state
and New York City personal income taxes and regular federal income tax. The two
Funds, however, have different investment objectives and characteristics. The
two Funds' prospectuses are presented together so you can understand their
important differences and decide which Fund or combination of the two is most
suitable for your needs.
Scudder New York Tax Free Money Fund's objectives include stability of capital
and the maintenance of a $1.00 net asset value per share. Scudder New York Tax
Free Fund ordinarily provides a higher, more stable income stream, but its net
asset value per share will fluctuate with market changes. As a result of these
different objectives, the average portfolio maturities of the Funds are
different.
Scudder New York Tax Free Money Fund invests primarily in short-term municipal
obligations (notes and bonds) with individual remaining maturities of 397
calendar days or less. The weighted average maturity of the portfolio is 90 days
or less. Scudder New York Tax Free Fund has flexible investment policies
regarding maturity but normally invests primarily in long-term municipal bonds.
The yield and the potential for price fluctuation are generally greater, the
greater the maturity of the municipal security. Other factors affecting the
yield and price variability include the absolute level of interest rates, the
relationship among short-, medium- and long-term interest rates, the quality of
each Fund's investments and each Fund's expenses.
6
<PAGE>
Summary of important features
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Investment objectives
and characteristics Investments Maturity Quality Dividends
Scudder o price stability o short-term o average maturity o 100% of o declared daily
New York New York of 90 days or investments and paid monthly
Tax Free o income exempt from municipal less; no single rated within top
Money Fund New York state and securities investment two quality o option to
New York City maturity longer ratings or receive in cash
personal income than 397 judged to be of or reinvest in
taxes and regular calendar days comparable additional
federal income tax quality shares
Scudder o prices will o primarily o primarily o 100% of o declared daily
New York fluctuate with long-term long-term bonds investments and paid monthly
Tax Free Fund changes in New York rated within top
interest rates municipal six quality o option to
bonds ratings or receive in cash
o income exempt from judged to be of or reinvest in
New York state and comparable additional
New York City quality shares
personal income
taxes and regular
federal income tax
- -----------------------------------------------------------------------------------------------------------------------
Tax-exempt vs. taxable income
- -----------------------------------------------------------------------------------------------------------------------
Tax Free Yields and Corresponding Taxable Equivalents: The table below shows New
York City taxpayers what an investor would have to earn from a comparable
taxable investment to equal Scudder New York Tax Free Fund and Scudder New York
Tax Free Money Fund's triple tax-free yield. Today many investors may find that
regular federal income tax and New York City and New York state personal income
tax rates make these Funds attractive alternatives to investments paying taxable
income.
TO EQUAL HYPOTHETICAL TAX-FREE YIELDS
COMBINED OF 5%, 7% AND 9%, A TAXABLE INVESTMENT
1998 TAXABLE INCOME: MARGINAL TAX WOULD HAVE TO EARN*:
INDIVIDUAL JOINT RETURN RATE: 5% 7% 9%
$40,001-61,400 $42,351-102,300 34.52% 7.64% 10.69% 13.75%
61,401-128,100 102,301-155,950 37.25 7.97 11.16 14.34
128,101-278,450 155,951-278,450 41.80 8.59 12.03 15.46
OVER $278,450 OVER $278,450 45.07 9.10 12.74 16.39
</TABLE>
Combined marginal tax rates are adjusted for the deductibility of state and City
taxes. *These illustrations assume a marginal federal income tax rate of 28% to
39.6% and that the federal alternative minimum tax is not applicable. Upper
income individuals may be subject to an effective federal income tax rate in
excess of the applicable marginal rate as a result of the phase-out of personal
exemptions and itemized deductions made permanent by the Revenue Reconciliation
Act of 1993. Moreover, upper income taxpayers will also be subject to a tax
table benefit recapture imposed by New York state that will have the effect of
increasing their effective tax rate. Individuals subject to these phase-out
provisions would have to invest in taxable securities with a yield in excess of
those shown on the table in order to achieve an after-tax yield equivalent to
the yield on a comparable tax-exempt security.
7
<PAGE>
Except as otherwise indicated, each Fund's investment objectives 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 objectives will
be met.
Scudder New York Tax Free Money Fund
Investment objectives and policies
Scudder New York Tax Free Money Fund seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while providing
New York taxpayers income exempt from New York state and New York City personal
income taxes and regular federal income tax. The Fund is a professionally
managed portfolio of high quality, short-term New York municipal securities. All
of the Fund's investments are high quality, have a remaining maturity of 397
calendar days or less and have minimal credit risk as determined by the Adviser.
The weighted average effective maturity of the Fund's portfolio is 90 days or
less.
Quality
All of the Fund's municipal securities must meet certain quality criteria at the
time of purchase. Generally, the Fund may purchase only securities which are
rated, or issued by an issuer rated, within the two highest quality ratings of
two or more of the following rating agencies: Moody's Investors Service, Inc.
("Moody's") (Aaa and Aa, MIG-1 and MIG-2, and P1 and P2), Standard & Poor's
Corporation ("S&P") (AAA and AA, SP1+ and SP1, A1+ and A1 and A2) and Fitch
Investors Service, Inc. ("Fitch") (AAA and AA, F1+, F1 and F2). The Fund may
invest its assets in these securities to the extent permitted by Rule 2a-7 of
the Investment Company Act of 1940 (the "1940 Act"). The Fund may invest up to
20% of its assets in securities subject to the alternative minimum tax ("AMT
bonds"). The Fund's distributions from interest on AMT bonds may be taxable
depending upon an investor's particular situation. Where only one rating agency
has rated a security (or its issuer), the Fund may purchase that security as
long as the rating falls within the categories described above. Where a security
(or its issuer) is unrated, the Fund may purchase that security if, in the
judgment of the Adviser, it is comparable in quality to securities described
above. All of the securities in which the Fund may invest are dollar-denominated
and must meet credit standards applied by the Adviser pursuant to procedures
established by the Trustees. Should an issue of municipal securities cease to be
rated or if its rating is reduced below the minimum required for purchase by a
money market fund, the Adviser will dispose of any such security unless the
Trustees of the Fund determine that such disposal would not be in the best
interests of the Fund.
Investments
The Fund's portfolio consists primarily of obligations issued by municipalities
located in New York state and other qualifying issuers (including Puerto Rico,
the U.S. Virgin Islands and Guam). It is the opinion of bond counsel, rendered
on the date of issuance, that income from these obligations is exempt from
regular federal income tax as well as New York state and New York City personal
income taxes ("New York municipal securities"). These securities include general
obligation and revenue bonds and notes of issuers located in New York and of
other qualifying issuers. General obligation bonds and notes are secured by the
issuer's pledge of its full faith, credit and taxing power for payment of
principal and interest. Revenue bonds and notes are generally paid from the
revenues of a particular facility or a specific excise tax or other revenue
source.
The Fund may invest in municipal notes, which are generally used to provide
short-term capital
8
<PAGE>
needs, and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes. The Fund may also invest in
municipal bonds with remaining maturities of 397 calendar days or less.
Ordinarily, the Fund expects that 100% of its portfolio securities will be New
York municipal securities. The Fund may also, for temporary defensive purposes,
hold cash or invest its assets in short-term taxable securities. It is
impossible to accurately predict how long such alternative strategies may be
utilized.
Scudder New York Tax Free Money Fund is concentrated in securities issued by New
York governments and related entities. Changes in the financial condition or
market assessment of the financial condition of these entities could have a
significant adverse impact on the Fund. Consequently, an investment in the Fund
may be riskier than an investment in a money market fund that does not
concentrate in securities issued by, or within, a single state.
The Fund may invest in stand-by commitments, third party puts, when-issued
securities, illiquid securities, and enter into repurchase agreements and
reverse repurchase agreements, which may involve certain expenses and risks,
including credit risks. The Fund may also invest in variable rate demand
instruments. These securities and techniques are not expected to comprise a
major portion of the Fund's investments. See "Additional information about
policies and investments" for more information about certain of these investment
techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
Scudder New York Tax
Free Fund
Investment objective and policies
Scudder New York Tax Free Fund seeks to provide New York taxpayers with income
exempt from New York state and New York City personal income taxes and regular
federal income tax. The Fund is a professionally managed portfolio consisting
primarily of investment- grade municipal securities.
The Adviser believes that investment results can be enhanced by active
professional management. Professional management distinguishes the Fund from
unit investment trusts, which cannot be actively managed.
Quality
Normally, at least 75% of the intermediate- and long-term securities purchased
by the Fund will be investment-grade municipal securities which are those rated
Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or Fitch, or unrated
securities judged by the Adviser to be of equivalent quality, or securities
issued or guaranteed by the U.S. Government. The Fund may also invest up to 25%
of its total assets in fixed-income securities rated below investment-grade,
that is, rated below Baa by Moody's or below BBB by S&P or Fitch, or in unrated
securities of equivalent quality as determined by the Adviser. The Fund may not
invest in fixed-income securities rated below B by Moody's, S&P or Fitch, or
their equivalent. The Fund expects to invest principally in securities rated A
or better by Moody's, S&P or Fitch or unrated securities judged by the Adviser
to be of equivalent quality at the time of purchase. Securities in these three
rating categories are judged by the Adviser to have an adequate if not strong
capacity to repay principal and pay interest.
During the fiscal year ended March 31, 1998, based upon the dollar-weighted
average ratings of the Fund's portfolio holdings at the end of each month during
that period, the Fund had the following percentage of its net assets invested in
debt securities rated below investment-grade (or if unrated, considered by the
Adviser to be equivalent to rated securities) in the category indicated: 1.94%
unrated.
9
<PAGE>
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds") have
produced higher yields in the past than investment-grade bonds, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the Adviser.
Should the rating of a portfolio security be downgraded after being purchased by
the Fund, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
Investments
The Fund's portfolio consists primarily of obligations issued by municipalities
located in New York state and other qualifying issuers (including Puerto Rico,
the U.S. Virgin Islands and Guam). It is the opinion of bond counsel, rendered
on the date of issuance, that income from these obligations is exempt from
regular federal, as well as New York state and New York City personal income tax
("New York municipal securities"). The Fund may invest in municipal bonds, which
meet longer-term capital needs and generally have maturities of more than one
year when issued. These securities include general obligation and revenue bonds
and notes of issuers located in New York and of other qualifying issuers. The
Fund may invest in municipal notes, which are generally used to provide
short-term capital needs, and have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes. General obligation bonds and
notes are secured by the issuer's pledge of its full faith, credit and taxing
power for payment of principal and interest. Revenue bonds and notes are
generally paid from the revenues of a particular facility or a specific excise
tax or other revenue source.
Under normal market conditions, the Fund expects to invest principally in New
York municipal securities with long-term maturities (i.e., more than 10 years).
The Fund has the flexibility, however, to invest in New York municipal
securities with short- and medium-term maturities as well.
The Fund may also invest up to 20% of its total assets in municipal securities
the interest income from which is taxable or subject to the alternative minimum
tax ("AMT" bonds). Fund distributions from interest on certain municipal
securities subject to the alternative minimum tax such as private activity
bonds, will be a preference item for purposes of calculating individual and
corporate alternative minimum taxes, depending upon investors' particular
situations. In addition, state and local taxes may apply, depending upon state
and local tax laws.
Ordinarily, the Fund expects that 100% of its portfolio securities will be New
York municipal securities. The Fund may also, for temporary defensive purposes,
hold cash or invest its assets in short-term taxable securities. It is
impossible to accurately predict how long such alternative strategies may be
utilized.
The Fund may invest in stand-by commitments, third party puts, when-issued
securities, illiquid securities, and enter into repurchase agreements and
reverse repurchase agreements, which may involve certain expenses and risks,
including credit risks. The Fund may also invest in variable rate demand
instruments. These securities and techniques are not expected to comprise a
major portion of the Fund's investments. The Fund may also utilize various other
strategic transactions. See "Additional information about policies and
investments" for more information about these investment techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
10
<PAGE>
Additional information about policies and investments
Investment restrictions
The Funds have certain investment restrictions which are designed to reduce the
Funds' investment risk. Fundamental investment restrictions may not be changed
without a vote of shareholders; non-fundamental investment restrictions may be
changed by a vote of the Trust's Board of Trustees.
As a matter of fundamental policy, the Funds may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Funds may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes.
As a matter of fundamental policy, the Funds may not make loans except through
the lending of portfolio securities, the purchase of debt securities or
interests in indebtedness or through repurchase agreements. The Funds have
adopted a non-fundamental policy restricting the lending of portfolio securities
to no more than 5% of total assets.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Funds' Statement of Additional
Information.
Investing in New York
Each Fund is more susceptible to factors adversely affecting issuers of New York
municipal securities than are comparable municipal bond funds that do not focus
on investments of New York issuers.
Each Fund's ability to achieve its investment objective is dependent upon the
ability of the issuers of New York municipal securities to meet their continuing
obligations for the payment of principal and interest. New York State and New
York City face long-term economic problems that could seriously affect their
ability and that of other issuers of New York municipal securities to meet their
financial obligations.
Certain substantial issuers of New York municipal securities (including issuers
whose obligations may be acquired by the Funds) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. Although
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by S&P
and Moody's. In recent years, the most recent actions of S&P and Moody's have
been to place the debt obligations of New York State and New York City on Credit
Watch with positive implications and to upgrade the debt obligations of New York
City, respectively. Strong demand for New York municipal securities has also at
times had the effect of permitting New York municipal securities to be issued
with yields relatively lower, and after issuance, to trade in the market at
prices relatively higher, than comparably rated municipal obligations issued by
other jurisdictions. A recurrence of the financial difficulties previously
experienced by certain issuers of New York municipal securities could result in
defaults or declines in the market values of those issuers' existing obligations
and, possibly, in the obligations of other issuers of New York municipal
securities. Although, as of the date of this prospectus, no issuers of New York
municipal securities are in default with respect to the payment of their
municipal securities, the occurrence of any such default could adversely affect
the market values and marketability of all New York municipal securities and,
consequently, the net asset value of each Fund's portfolio.
11
<PAGE>
For additional information about the New York economy and other considerations
affecting each Fund's investments in New York municipal securities see the
Funds' Statement of Additional Information dated August 1, 1998.
When-issued securities
Each Fund may purchase securities on a when-issued or forward delivery basis,
for payment and delivery at a later date. The price and yield are generally
fixed on the date of commitment to purchase. During the period between purchase
and settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, each
Fund may enter into repurchase agreements with selected banks and
broker/dealers. Under a repurchase agreement, a Fund acquires securities,
subject to the seller's agreement to repurchase at a specified time and price.
Income from repurchase agreements will be taxable when distributed to
shareholders.
Stand-by commitments
To facilitate liquidity, each Fund may enter into "stand-by commitments"
permitting them to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost to the Fund, and
any costs would be, in any event, limited to no more than 0.50% of the value of
the total assets of the Fund. Any such costs may, however, reduce yield.
Third party puts
Each Fund may purchase long-term fixed-rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Fund at
specified intervals (not exceeding 397 calendar days in the case of Scudder New
York Tax Free Money Fund) to tender (or "put") its bonds to the institution and
receive the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps.
Variable rate demand instruments
Each Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit each Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent.
Municipal lease obligations
Scudder New York Tax Free Fund may invest in municipal lease obligations and
participation interests in such obligations. These obligations, which may take
the form of a lease, an installment purchase contract or a conditional sales
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, the Fund will
not hold such obligations directly, but will purchase a certificate of
participation or other participation interest in a municipal obligation from a
bank or other financial intermediary. A participation interest gives the Fund a
proportionate interest in the underlying obligation.
Indexed securities
Scudder New York Tax Free Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). The interest rate or (unlike
most fixed-income securities) the principal amount payable at maturity of an
indexed security may be increased or decreased, depending on changes in the
value of the reference instrument.
Illiquid securities
Each Fund may invest a portion of its assets in securities for which there is
not an active trading market, or which have resale restrictions. These types of
securities generally offer a higher return than more readily marketable
securities, but
12
<PAGE>
carry the risk that the Fund may not be able to dispose of them at an
advantageous time or price.
Strategic Transactions and derivatives
Scudder New York Tax Free Fund may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates and broad or specific market movements), to manage the
effective maturity or duration of the Fund's portfolio, or to enhance potential
gain. These strategies may be executed through the use of derivative contracts.
Such strategies are generally accepted as a part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments may change over time as new instruments
and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, Scudder New York Tax Free
Fund may purchase and sell exchange-listed and over-the-counter put and call
options on securities, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, and enter
into various interest rate transactions such as swaps, caps, floors or collars
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used without limit to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of Scudder New York Tax Free
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not to create leveraged exposure in a Fund. Please refer
to "Risk factors--Strategic Transactions" for more information.
Risk factors
The Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Funds may use from time to time.
Non-diversified investment company. As "non-diversified" investment companies,
each Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers than a diversified investment company would.
Investment in each Fund may involve greater risk than investment in a
diversified fund.
Investing in New York. If either New York or any of its local governmental
entities or public instrumentalities were to be unable to meet its financial
obligations, the income derived by the Funds, their net asset value or liquidity
and the ability to preserve or realize appreciation of each Fund's capital could
be adversely affected. Although as of the date of this prospectus, no issuers of
New York municipal securities are in
13
<PAGE>
default with respect to the payment of their municipal obligations, the
occurrence of any such default could adversely affect the market values and
marketability of all New York municipal securities and, consequently, the net
asset value of each Fund's portfolio. See "Investing in New York" in the Funds'
Statement of Additional Information for further details about the risks of
investing in New York obligations.
Securities backed by guarantees. The Scudder New York Tax Free Money Fund
invests in securities backed by guarantees from banks, insurance companies and
other financial institutions. The Fund's ability to maintain a stable share
price may depend upon such guarantees, which are not supported by federal
deposit insurance. Consequently, changes in the credit quality of these
institutions could have an adverse impact on securities they have guaranteed or
backed, which could cause losses to the Fund and affect its share price.
Lower-grade debt securities. While Scudder New York Tax Free Fund invests 75% of
its assets in investment-grade securities, the Fund may invest a portion of its
assets in securities rated below Baa by Moody's or BBB by S&P or Fitch. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics. Securities rated below investment-grade are
commonly referred to as "junk bonds" and involve greater price volatility and
higher degrees of speculation with respect to the payment of principal and
interest than higher quality fixed-income securities. The market prices of such
lower-rated debt securities may decline significantly in periods of general
economic difficulty. In addition, the trading market for these securities is
generally less liquid than for higher-rated securities and the Fund may have
difficulty disposing of these securities at the time it wishes to do so. The
lack of a liquid secondary market for certain securities may also make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing its portfolio and calculating its net asset value.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of the securities may be restricted, or
the value of the securities may decline before the Fund is able to dispose of
them. In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities.
Third party puts. In connection with third party puts, the financial institution
granting the option does not provide credit enhancement, and typically if there
is a default on or significant downgrading of the bond or a loss of its
tax-exempt status, the put option will terminate automatically, the risk to the
Fund will be that of holding a long-term bond and, in the case of Scudder New
York Tax Free Money Fund, the weighted average maturity of the Fund's portfolio
would be adversely affected.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Fund. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that
14
<PAGE>
is unrated, the Adviser will consider a number of factors including the
likelihood that the governmental issuer will discontinue appropriating funding
for the leased property. For more information please refer to the Funds'
Statement of Additional Information.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, the Fund will bear the
market risk of the reference instrument.
Illiquid securities. The absence of a trading market can make it difficult to
ascertain a market value for these investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Funds' Statement of
Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Funds' dividends from net investment income are declared daily and
distributed monthly. The Funds intend to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of federal excise tax, although an additional
distribution may be made, 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
15
<PAGE>
purposes as if received on December 31 of the calendar year declared. According
to preference, shareholders may receive distributions in cash or have them
reinvested in additional shares of the Funds.
Distributions derived from interest on New York municipal securities are not
subject to New York state or New York City personal income taxes or to regular
federal income taxes, except for the possible applicability of the federal
alternative minimum tax. For federal income tax purposes, a portion of each
Fund's income may be taxable to shareholders as ordinary income. Long-term
capital gain distributions, if any, are taxable to individual shareholders at a
maximum 20% or 28% capital gains rate (depending on the Fund's holding period
for the assets giving rise to the gain), 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.
The Funds expect to ordinarily provide income that is 100% free from New York
state, New York City and regular federal income taxes. However, income from
repurchase agreements and gains from certain Strategic Transactions are taxable.
Some of a Fund's interest income may be treated as a tax preference item that
may subject an individual investor to liability (or increased liability) under
the alternative minimum tax, depending upon an investor's particular situation.
However, at least 80% of a Fund's net assets will normally be invested in New
York municipal securities whose interest income is not treated as a tax
preference item under the individual alternative minimum tax. Tax-exempt income
may also subject a corporate investor to liability (or increased liability)
under the corporate alternative minimum tax.
Each Fund sends detailed tax information to shareholders about the amount and
type of its distributions by January 31 of each year.
Performance information
From time to time, quotations of the Funds' performance may be included in
advertisements, sales literature or shareholder reports. All performance figures
are historical, show the performance of a hypothetical investment and are not
intended to indicate future performance. The "yield" of Scudder New York Tax
Free Money Fund refers to income generated by an investment in the Fund over a
specified seven-day period. The "SEC yield" of Scudder New York Tax Free Fund is
an annualized expression of the net income generated by the Fund over a
specified 30-day (one month) period, as a percentage of the Fund's share price
on the last day of that period. This yield is calculated according to methods
required by the SEC, and therefore may not equate to the level of income paid to
shareholders. The "effective yield" of Scudder New York Tax Free Money Fund is
expressed similarly but, when annualized, the income earned by an investment in
the Fund is assumed to be reinvested and will reflect the effects of
compounding. Each Fund's "tax-equivalent yield" is calculated by determining the
rate of return that would have to be achieved on a fully taxable investment to
produce the combined federal and state after-tax equivalent of the Fund's yield,
assuming certain tax brackets for a Fund shareholder. Yields are expressed as
annualized percentages. "Total return" is the change in value of an investment
in a Fund for a specified period. The "average annual total return" of each Fund
is the average annual compound rate of return of an investment in a Fund
assuming the investment has been held for one year, five years and ten years as
of a stated ending date. "Cumulative total return"
16
<PAGE>
represents the cumulative change in value of an investment in each Fund for
various periods. All types of total return calculations assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund.
Performance will vary based upon, among other things, changes in market
conditions and the level of each Fund's expenses.
Fund organization
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund are
series of Scudder State Tax Free Trust (the "Trust"), an open-end management
investment company registered under the 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 advisory contract. Shareholders
will be assisted in communicating with other shareholders in connection with
removing a Trustee as if Section 16(c) of the 1940 Act were applicable.
The prospectuses of both Funds are combined in this prospectus. Each Fund offers
only its own shares, yet it is possible that a Fund might become liable for a
misstatement or omission in the prospectus of the other Fund. The Trustees of
the Trust have considered this and approved the use of a combined prospectus.
Investment adviser
Each Fund retains the investment management firm of Scudder Kemper Investments,
Inc., a Delaware corporation formerly known as Scudder, Stevens & Clark, Inc.
("Scudder"), to manage its daily investment and business affairs subject to the
policies established by the Board of Trustees. The Trustees have overall
responsibility for the management of the Funds under Massachusetts law.
Pursuant to the terms of an agreement, Scudder and Zurich Insurance Company
("Zurich"), an international insurance and financial services organization, have
formed a new global investment organization by combining Scudder with Zurich's
subsidiary, Zurich Kemper Investments, Inc. As a result of the transaction,
Zurich owns approximately 70% of the Adviser, with the balance owned by the
Adviser's officers and employees.
For the fiscal year ended March 31, 1998, the Adviser received monthly an
investment management fee equal to 0.63% of Scudder New York Tax Free Fund's
average daily net assets. The fee is graduated so that increases in the Fund's
net assets may result in a lower fee and decreases in the Fund's net assets may
result in a higher fee.
The fee payable under Scudder New York Tax Free Money Fund's Investment
Management Agreement is equal to an annual rate of 0.50% of the Fund's average
daily net assets. The Adviser has agreed to maintain the annualized expenses of
the Fund at not more than 0.60% of the average daily net assets of the Fund
until July 31, 1999.
For the fiscal year ended March 31, 1998, the Adviser received monthly an
investment management fee equal to 0.32% of Scudder New York Tax Free Money
Fund's average daily net assets on an annual basis.
Each Fund's management fee is payable monthly, provided that a Fund will make
such interim payments as may be requested by the Adviser not to exceed 75% of
the amount of the fee then accrued on the books of a Fund and unpaid.
17
<PAGE>
All of a Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.
Scudder Kemper Investments, Inc. is located at Two International Place, Boston,
Massachusetts.
Like other mutual funds and financial and business organizations worldwide, the
Funds could be adversely affected if computer systems on which the Funds rely,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to correctly process date-related information on
and after January 1, 2000. This risk is commonly called the Year 2000 Issue.
Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the Fund's business and
operations. The Adviser has commenced a review of the Year 2000 Issue as it may
affect the Funds and is taking steps it believes are reasonably designed to
address the Year 2000 Issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 Issue will not have an adverse effect on the companies whose securities are
held by the Funds or on global markets or economies generally.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Funds.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Funds'
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of each Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Funds.
Custodian
State Street Bank and Trust Company is the Funds' custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Funds' transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone or by "Write-A-Check," in the case of Scudder New York Tax
Free Money Fund, prior to the expiration of the seven-day period will not be
accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
18
<PAGE>
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By exchange. Each Fund may be exchanged for shares of other funds in the Scudder
Family of Funds, unless otherwise determined by the Board of Trustees. Your new
account will have the same registration and address as your existing account.
The exchange requirements for corporations, other organizations, trusts,
fiduciaries, agents, institutional investors and retirement plans may be
different from those for regular accounts. Please call 1-800-225-5163 for more
information, including information about the transfer of special account
features.
You can also make exchanges among your Scudder fund accounts on SAIL, the
Scudder Automated Information Line, by calling 1-800-343-2890.
By telephone order. To a limited extent, certain financial institutions may
place orders to purchase shares of Scudder New York Tax Free Fund unaccompanied
by payment prior to the close of regular trading on the New York Stock Exchange
(the "Exchange"), normally 4 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 "QuickBuy." If you elected "QuickBuy" 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
"QuickBuy," call 1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases may not be for
more than $250,000. Proceeds in the amount of your purchase will be transferred
from your bank checking account in two or three business days following your
call. For requests received by the close of regular trading on the Exchange,
shares will be purchased at the net asset value per share calculated at the
close of trading on the day of your call. "QuickBuy" requests received after the
close of regular trading on the Exchange will begin their processing and be
purchased at the net asset value calculated the following business day.
If you purchase shares by "QuickBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA accounts.
Redeeming shares
The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
provided your banking information on your application, you can call to request
that federal funds be sent to your authorized bank account. If you did not
include your banking information 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.
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<PAGE>
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
By "QuickSell." If you elected "QuickSell" 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 "QuickSell,"
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. "QuickSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"QuickSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
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. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the Securities and Exchange Commission. Signature
guarantees by notaries public are not acceptable. Redemption requirements for
corporations, other organizations, trusts, fiduciaries, agents, institutional
investors and retirement plans may be different from those for regular accounts.
For more information, please call 1-800-225-5163.
By "Write-A-Check." You may redeem shares of Scudder New York Tax Free Money
Fund by writing checks against your account balance for at least $100. Your Fund
investments will continue to earn dividends until your check is presented to the
Fund for payment.
Checks will be returned by the Fund's transfer agent if there are insufficient
shares to meet the withdrawal amount. You should not attempt to close an account
by check, because the exact balance at the time the check clears will not be
known when the check is written.
Telephone transactions
Shareholders automatically receive the ability to exchange by telephone and the
right to redeem by telephone up to $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.
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<PAGE>
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share for
Scudder New York Tax Free Money Fund as of twelve o'clock noon and as of the
close of regular trading on the New York Stock Exchange (the "Exchange"),
normally 4 p.m. eastern time, on each day the Exchange is open for trading. For
Scudder New York Tax Free Fund, Scudder Fund Accounting Corporation determines
net asset value per share as of the close of regular trading on the Exchange.
Net asset value per share is calculated by dividing the value of total Fund
assets, less all liabilities, by the total number of shares outstanding. In
calculating the net asset value per share, Scudder New York Tax Free Fund uses
the current market value of the securities, and Scudder New York Tax Free Money
Fund uses the amortized cost value.
Processing time
All purchase and redemption requests must be received in good order by the
Funds' transfer agent. For Scudder New York Tax Free Money Fund, purchases made
by wire and received by the Fund's transfer agent before noon on any business
day are executed at noon on that day and begin earning income the same day.
Those made by wire between noon and the close of regular trading on the Exchange
on any business day are executed at the close of trading the same day and begin
earning income the next business day. Purchases made by check are executed on
the day the check is received in good order by the Fund's transfer agent and
begin earning income on the next business day. Redemption requests received in
good order by the Fund's transfer agent between noon and the close of regular
trading on the Exchange are executed at the net asset value calculated at the
close of regular trading on that day and will earn a dividend on the redeemed
shares that day. If a redemption request for Scudder New York Tax Free Money
Fund is received by noon, proceeds will normally be wired that day, if requested
by the shareholder, but no dividend will be earned on the redeemed shares on
that day.
For Scudder New York Tax Free Fund, those requests received by the close of
regular trading on the Exchange are executed at the net asset value per share
calculated at the close of trading that day. Purchase and redemption requests
received after the close of regular trading on the Exchange will be executed the
following business day. Purchases made by federal funds wire before noon eastern
time will begin earning income that day; all other purchases received before the
close of regular trading on the Exchange will begin earning income the next
business day. Redeemed shares will earn income on the day on which the
redemption request is executed.
If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.
Each Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales of shares of Scudder New York Tax Free Fund should be made
for long-term investment purposes only. The Fund and Scudder Investor Services,
Inc. each reserves the right to reject purchases of Fund shares (including
exchanges) for any reason including when a pattern of frequent purchases and
sales made in response to short-term fluctuations in the Fund's share price
appears evident.
Tax information
A redemption of shares of Scudder New York Tax Free Fund, including an exchange
into another Scudder fund, is a sale of shares and may result in a gain or loss
for income tax purposes (although no gain or loss will be realized in the case
of a redemption or exchange of shares of Scudder New
21
<PAGE>
York Tax Free Money Fund if it maintains a constant net asset value per share).
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires a Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a correct 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 correct 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 correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
redemption by providing the Fund with a tax identification number during the
30-day notice period.
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 a Fund's shares are arranged and settlement is
made at an investor's election through a member of the National Association of
Securities Dealers, Inc., other than Scudder Investor Services, Inc., that
member may, at its discretion, charge a fee for that service.
Redemption-in-kind
Scudder New York Tax Free Fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Fund and valued as they are for purposes of computing
the Fund's net asset value (a redemption-in-kind). If payment is made in
securities, a shareholder may incur transaction expenses in converting these
securities to cash.
Shareholder benefits
Experienced professional management
Scudder Kemper Investments, Inc., one of the nation's most experienced
investment management firms, actively manages your fund investment. Professional
management is an important advantage for investors who do not have the time or
expertise to invest directly in individual securities.
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<PAGE>
A team approach to investing
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund are each
managed by a team of investment professionals who each play an important role in
the Funds' management process. Team members work together to develop investment
strategies and select securities for the Funds' portfolios. They are supported
by the Adviser's large staff of economists, research analysts, traders and other
investment specialists. We believe our team approach benefits the Funds'
investors by bringing together many disciplines and leveraging the Adviser's
extensive resources.
Scudder New York Tax Free Money Fund's Lead Portfolio Manager Frank J.
Rachwalski, Jr. assumed responsibility for the Fund's day-to-day management in
1998. Mr. Rachwalski joined the Adviser in 1973 and he has 25 years of
experience managing money market portfolios. Jerri I. Cohen, Portfolio Manager,
joined the Fund's team in January 1998. Ms. Cohen, who has been with the Adviser
since 1981, has 17 years of experience in the financial industry including five
years in tax-exempt money fund investing.
Scudder New York Tax Free Fund's Lead Portfolio Manager, Jeremy L. Ragus, has
had responsibility for the Fund's day-to-day operations since he joined the
Adviser in 1990. Mr. Ragus has 17 years of experience in municipal investing.
Christopher J. Mier, Portfolio Manager, joined the Fund's management team in
1998. Mr. Mier, who has been with the Adviser since 1986, has more than 20 years
of experience in municipal investing and portfolio management.
SAIL(TM)--Scudder Automated Information Line
For personalized account information including fund prices, yields and account
balances, to perform transactions in existing Scudder fund accounts, or to
obtain information on any Scudder fund, shareholders can call Scudder's
Automated Information Line (SAIL) at 1-800-343-2890, 24 hours a day. During
periods of extreme economic or market changes, or other conditions, it may be
difficult for you to effect telephone transactions in your account. In such an
event you should write to the Fund; please see "How to contact Scudder" for the
address.
Investment flexibility
Scudder offers toll-free telephone exchange between funds at current net asset
value. You can move your investments among money market, income, growth,
tax-free and growth and income funds with a simple toll-free call or, if you
prefer, by sending your instructions through the mail or by fax. (The exchange
privilege may not be available for certain Scudder funds or classes thereof. For
more information, please call 1-800-225-5163.) 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 Kemper Investments, Inc., combines the benefits of a
customized portfolio of no-load mutual funds with ongoing portfolio monitoring
and individualized service, for an annual fee of generally 1.25% or less of
assets. In addition, it draws upon the Adviser'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.
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<PAGE>
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 will receive a detailed statement summarizing account activity, including
dividend and capital gain reinvestment, purchases and redemptions. All of your
statements should be retained to help you keep track of account activity and the
cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Investor Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor 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.
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<PAGE>
Purchases
<TABLE>
<S> <C> <C>
<CAPTION>
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 The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291
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 Investor Centers to complete your application with the
help of a Scudder representative. Investor Center locations are listed
under Shareholder benefits.
- -----------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional shares
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
o In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center locations
are listed under Shareholder benefits.
o By Telephone Please see Transaction information--Purchasing shares--
By QuickBuy or By telephone order for more details.
o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
</TABLE>
25
<PAGE>
Exchanges and redemptions
<TABLE>
<S> <C>
<CAPTION>
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 The Scudder Funds 1-800-821-6234
P.O. Box 2291 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184
- -----------------------------------------------------------------------------------------------------------------------
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 of your Scudder New York Tax Free Money Fund by writing
A-Check" checks against your account balance as often as you like for at least $100, but
not more than $5,000,000.
o By Mail Send your instructions for redemption to the appropriate address or fax number
or Fax above and include:
- the name of the Fund and account number you are redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
A signature guarantee is required for redemptions over $100,000.
See Transaction information--Redeeming shares.
o By Automatic You may arrange to receive automatic cash payments periodically. Call
Withdrawal 1-800-225-5163 for more information and an enrollment form.
Plan
</TABLE>
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 Scudder Roth No-Fee IRA
o Keogh Plans
o 401(k) Plans
o Profit Sharing and Money Purchase Pension 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 and most 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.
Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.
27
<PAGE>
Trustees and Officers
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics;
President, Driscoll Associates
Peter B. Freeman
Trustee; Corporate Director and Trustee
George M. Lovejoy, Jr.
Trustee; President and Director, Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration,
Northeastern University College of Business Administration
Kathryn L. Quirk*
Trustee; Vice President and Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner, Technology Equity Partners
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, Treasurer and Secretary
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
28
<PAGE>
Investment products and services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series--
Premium Shares*
Managed Shares*
Scudder Government Money Market Series--
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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 Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *A class of
shares of the Fund. **Not available in all states. ***Only the Scudder Shares of
the Fund are part of the Scudder Family of Funds. ++Only the International
Shares of the Fund are part of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New
York Stock Exchange and, in some cases, on various foreign stock exchanges.
29
<PAGE>
<TABLE>
<CAPTION>
How to contact Scudder
Account Service and Information:
<S> <C>
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 Investor Center:
Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:
Boca Raton Chicago San Francisco
Boston New York
Scudder Investor Relations and Scudder Investor Centers are services provided
through Scudder Investor Services, Inc., Distributor.
</TABLE>
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA
02061--Member NASD/SIPC.
30
<PAGE>
This combined prospectus sets forth concisely the information about Scudder
Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax Free
Fund, each a non-diversified series of Scudder State Tax Free Trust, an open-end
management investment company, that a prospective investor should know before
investing. Please retain it for future reference.
If you require more detailed information, a Statement of Additional Information
for the Funds dated August 1, 1998, 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Contents--see page 6.
NOT FDIC-
INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
Scudder Massachusetts
Limited Term Tax Free Fund
- ------------------------------
Scudder Massachusetts
Tax Free Fund
Prospectus
August 1, 1998
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 Family of Funds 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, 1997.
Investment management fee (after waiver) 0.44%**
12b-1 fees NONE
Other expenses 0.31%
-------
Total Fund operating expenses (after waiver) 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 February 28, 1999, 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, Fund expenses would have been:
investment management fee 0.60%, other expenses 0.33% and total operating
expenses 0.93% for the fiscal year ended October 31, 1997.
2
<PAGE>
Expense information
Scudder Massachusetts Tax Free Fund How to compare a Scudder Family of Funds
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, 1998.
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."
3
<PAGE>
Financial highlights
Scudder Massachusetts Limited Term Tax Free Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements. If you would like more detailed information concerning the Fund's
performance, a complete portfolio listing and financial statements are
available in the Fund's Semiannual Report dated April 30, 1998, which may be
obtained without charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
For the Period
February 15,
Six Months 1994
Ended (commencement
April 30, Years Ended October 31, of operations)
1998 to October 31,
(Unaudited) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------
Net asset value, beginning of period ........................ $12.10 $11.99 $12.02 $11.64 $12.00
Income from investment operations: -------------------------------------------------------------------
Net investment income ....................................... .25 .53 .50 .54 .36
Net realized and unrealized gain (loss) on investment
transactions ............................................. (.04) .11 (.03) .38 (.36)
-------------------------------------------------------------------
Total from investment operations ............................ .21 .64 .47 .92 .00
-------------------------------------------------------------------
Less distributions from net investment income ............... (.25) (.53) (.50) (.54) (.36)
-------------------------------------------------------------------
Net asset value, end of period .............................. $12.06 $12.10 $11.99 $12.02 $11.64
-------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ........................................ 1.76** 5.44 3.98 8.08 0.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ...................... 93 80 66 55 36
Ratio of operating expenses, net to average daily net
assets (%) ............................................... .75* .75 .67 .24 --
Ratio of operating expenses before expense reductions,
to average daily net assets (%) .......................... .85* .93 .90 .92 1.44*
Ratio of net investment income to average daily net
assets (%) ............................................... 4.17* 4.40 4.16 4.56 4.45*
Portfolio turnover rate (%) ................................. 13.2* 9.8 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, 1998,
which may be obtained without charge by writing or calling Scudder Investor
Services, Inc.
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of ---------------------------------------------------
period ......................... $ 13.72 $ 13.70 $ 13.33 $ 13.16 $ 13.61
---------------------------------------------------
Income from investment operations:
Net investment income ............. .70 .70 .72 .74 .81
Net realized and unrealized gain
(loss) on investment
transactions ................... .62 .02 .37 .18 (.33)
---------------------------------------------------
Total from investment operations .. 1.32 .72 1.09 .92 .48
---------------------------------------------------
Less distributions:
From net investment income ........ (.70) (.70) (.72) (.74) (.81)
From net realized gains on
investment transactions ........ -- -- -- -- (.08)
In excess of net realized gains ... -- -- -- (.01) (.04)
---------------------------------------------------
Total distributions ............... (.70) (.70) (.72) (.75) (.93)
---------------------------------------------------
Net asset value, end of ---------------------------------------------------
period ......................... $ 14.34 $ 13.72 $ 13.70 $ 13.33 $ 13.16
- -----------------------------------------------------------------------------------------
Total Return (%) (b) .............. 9.82 5.39 8.28 7.37 3.37
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 374 330 314 296 332
Ratio of operating expenses, net to
average daily net assets (%) ... .76 .76 .75 .47 .07
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... .76 .76 .76 .77 .77
Ratio of net investment income to
average daily net assets (%) .. 4.97 5.12 5.23 5.73 5.80
Portfolio turnover rate (%) ....... 8.4 11.5 20.9 10.2 17.0
<CAPTION>
Years Ended March 31,
1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of ----------------------------------------------------
period ......................... $ 12.81 $ 12.44 $ 12.25 $ 12.23 $ 12.28
----------------------------------------------------
Income from investment operations:
Net investment income ............. .84 .81 .83 .82 .81
Net realized and unrealized gain
(loss) on investment
transactions ................... .96 .46 .19 .13 .22
----------------------------------------------------
Total from investment operations .. 1.80 1.27 1.02 .95 1.03
----------------------------------------------------
Less distributions:
From net investment income ........ (.84) (.81) (.83) (.82) (.88)
From net realized gains on
investment transactions ........ (.16) (.09) -- (.11)(a) (.20)
In excess of net realized gains ... -- -- -- -- --
----------------------------------------------------
Total distributions ............... (1.00) (.90) (.83) (.93) (1.08)
----------------------------------------------------
Net asset value, end of ----------------------------------------------------
period ......................... $ 13.61 $ 12.81 $ 12.44 $ 12.25 $ 12.23
- ------------------------------------------------------------------------------------------
Total Return (%) (b) .............. 14.59 10.46 8.60 7.89 9.50
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 267 120 67 46 31
Ratio of operating expenses, net to
average daily net assets (%) ... -- .48 .60 .60 .51
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... .83 .93 1.05 1.16 1.20
Ratio of net investment income to
average daily net assets (%) .. 6.36 6.38 6.72 6.60 7.23
Portfolio turnover rate (%) ....... 29.6 23.2 27.1 45.5 110.5
</TABLE>
(a) Includes $.01 per share distributions in excess of realized gains pursuant
to Internal Revenue Code Section 4982.
(b) Total returns would have been lower had certain expenses not been reduced
through March 31, 1996.
5
<PAGE>
A message from the President
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced invest- ment management
organizations world- wide, managing more than $200 billion in assets globally
for mutual fund investors, retirement and pension plans, institutional and
corporate clients, and private family and individual accounts. It is one of the
ten largest mutual fund companies in the U.S.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also 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 numerous other open- and closed-end funds that invest in this
country and other 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 shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
Funds or fund classes in the Scudder Family of Funds are offered without
commissions to purchase or redeem 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/Edmond Villani
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 a 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
Distribution and performance information 16
Fund organization 17
Transaction information 18
Shareholder benefits 22
Purchases 25
Exchanges and redemptions 26
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 state 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 that 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
Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or if unrated,
judged by the Fund's investment adviser, Scudder Kemper Investments, 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>
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 October 31, 1997 for Scudder Massachusetts Limited
Term Tax Free Fund, the average dollar weighted market value of the bonds in the
Fund's portfolio rated lower than Baa by Moody's or BBB by S&P or Fitch, or
their equivalent, was 0%. During the fiscal year ended March 31, 1998, based
upon the dollar-weighted average ratings of Scudder Massachusetts Tax Free
Fund's portfolio holdings at the end of each month during that period, the Fund
had the following percentage of its net assets invested in debt securities rated
below investment-grade (or if unrated, considered by the Adviser to be
equivalent to rated securities) in the category indicated: 3.65% unrated.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds") have
produced higher yields in the past than investment-grade bonds, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The 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
8
<PAGE>
Summary of important features
<TABLE>
<CAPTION>
<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>
Tax-exempt vs. taxable income
Tax Free Yields and Corresponding Taxable Equivalents. The table below shows
Massachusetts taxpayers what an investor would have to earn from a comparable
taxable investment to equal Scudder Massachusetts Limited Term Tax Free Fund's
or Scudder Massachusetts Tax Free Fund's double tax-free yield. Today many
investors may find that federal tax and Massachusetts personal income tax rates
make either Fund an attractive alternative to investments paying taxable
income.
<TABLE>
<CAPTION>
<S> <C> <C>
COMBINED TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7% AND 9%, A
TAXABLE INVESTMENT WOULD HAVE TO EARN*:
1998 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
INDIVIDUAL
$ 25,351-61,400 36.64% 7.89% 11.05% 14.20%
61,401-128,100 39.28 8.23 11.53 14.82
128,101-278,450 43.68 8.88 12.43 15.98
OVER 278,450 46.85 9.41 13.17 16.93
JOINT RETURN
$ 42,351-102,300 36.64% 7.89% 11.05% 14.20%
102,301-155,950 39.28 8.23 11.53 14.82
155,951-278,450 43.68 8.88 12.43 15.98
OVER 278,450 46.85 9.41 13.17 16.93
</TABLE>
* These illustrations assume a marginal federal income tax rate of 28% to
39.6% and that the federal alternative minimum tax is not applicable. Upper
income individuals may be subject to an effective federal income tax rate
in excess of the applicable marginal rate as a result of the phase-out of
personal exemptions and itemized deductions made permanent by the Revenue
Reconciliation Act of 1993. Individuals subject to these phase-out
provisions would have to invest in taxable securities with a yield in
excess of those shown on the table in order to achieve an after-tax yield
equivalent to the yield on a comparable tax-exempt security.
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.
9
<PAGE>
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. It is impossible to accurately predict how long such alternative
strategies may be utilized.
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 AMT bonds, 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. The Funds may also enter into 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 illiquid 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 7.88% to receive after-tax income equal
to the 4.19% tax-free yield provided by Scudder Massachusetts Tax Free Fund for
the 30-day period ended March 31, 1998, or earn a taxable return of 6.9% to
receive after-tax income equal to the 3.9% tax-free yield provided by Scudder
Massachusetts Limited Term Tax Free Fund for the 30-day period ended October 31,
1997. In other words, it would be necessary to earn $1,775 from a taxable
10
<PAGE>
investment to equal $1,000 of tax-free income you receive from either Fund. The
yield levels of tax-free and taxable investments continually change. Before
investing in a Fund, you should compare its yield to the after-tax yield you
would receive from a comparable investment paying taxable income. For up-to-date
yield information on the Funds, shareholders can call SAIL, Scudder Automated
Information Line, for toll-free information at any time.
Investment characteristics
Scudder Massachusetts Limited Term Tax Free Fund is managed for current income,
liquidity and a relatively high degree of price stability. For the investor who
can tolerate more price volatility, Scudder Massachusetts Limited Term Tax Free
Fund can be used as an alternative to a tax-free money market fund. While a
tax-free money fund is managed for total price stability, it generally offers
lower and less stable yields than a short-term municipal bond fund. Further,
Scudder Massachusetts Limited Term Tax Free Fund may appeal to investors
concerned about market volatility or the possibility of rising interest rates,
and so are willing to accept somewhat lower yields than normally provided by a
longer-term bond fund in exchange for greater price stability. Some investors
may view Scudder Massachusetts Limited Term Tax Free Fund as a tax-free
alternative to a bank certificate of deposit ("CD"). While an investment in
Scudder Massachusetts Limited Term Tax Free Fund is not federally insured and
there is no guarantee of price stability, an investment in the Fund--unlike a
CD--is not locked away for any period, may be redeemed at any time without
incurring early withdrawal penalties and may provide a higher after-tax yield.
Investors may choose Scudder Massachusetts Tax Free Fund as an alternative or
complement to tax-free money market or tax-free shorter-term investments.
Although shareholders will be assuming the possibility of greater price
fluctuation, they will typically be receiving a higher yield than normally
provided by tax-free income funds with relatively short maturities. Investors in
either Fund will also benefit from the convenience, cost-savings and
professional management of a mutual fund free of sales commissions.
Additional information about policies and investments
Investment restrictions
The Funds have certain investment restrictions which are designed to reduce the
Funds' investment risk. Fundamental investment restrictions may not be changed
without a vote of shareholders; non-fundamental investment restrictions may be
changed by a vote of the Trust's Board of Trustees.
As a matter of fundamental policy, the Funds may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Funds may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes.
As a matter of fundamental policy, the Funds may not make loans except through
the lending of portfolio securities, the purchase of debt securities or
interests in indebtedness or through repurchase agreements. The Funds have
adopted a non-fundamental policy restricting the lending of portfolio securities
to no more than 5% of total assets.
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. In 1989, Massachusetts
experienced growth rates significantly below the national average and an
11
<PAGE>
economic recession in 1990 and 1991 caused negative growth rates in
Massachusetts. All sectors of the economy experienced job losses, including high
technology, construction and financial industries. In addition, the economy
experienced shifts in employment from labor-intensive manufacturing industries
to technology and service-based industries. After declining since 1989, however,
total Massachusetts employment showed positive annual growth in 1993 and 1994.
Employment in 1993 and 1994 increased in all sectors, except manufacturing which
had experienced declines in each year since 1985. In 1995, total
non-agricultural employment in Massachusetts grew at a rate of 2.4% with the
most rapid growth coming in the construction sector and the services sector,
which grew at rates of 4.7% and 4.9%, respectively. The unemployment rate for
the Commonwealth for 1996 and 1997 was 4.1% and 4.0%, respectively, compared to
the national rate of 5.2% for the same periods. In addition, in 1997 employment
in manufacturing increased by almost 2%, the largest annual increase in
manufacturing in over twelve years. Real income levels in Massachusetts declined
between 1989 and 1991. Since 1994, however, real per capita income levels in
Massachusetts continue to increase faster than the national average, showing
growth rates of 6.2% and 6.0% in 1996 and 1997, respectively. Massachusetts had
the third highest level of personal income in the United States in 1995. For
additional information about the Massachusetts economy, see the Funds' Statement
of Additional Information dated August 1, 1998.
When-issued securities
Each Fund may purchase securities on a when-issued or forward delivery basis,
for payment and delivery at a later date. The price and yield are generally
fixed on the date of commitment to purchase. During the period between purchase
and settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, Scudder
Massachusetts Tax Free Fund may enter into repurchase agreements with selected
banks and broker/dealers. Under a repurchase agreement, the Fund acquires
securities, subject to the seller's agreement to repurchase at a specified time
and price. Income from repurchase agreements will be taxable when distributed to
shareholders.
Stand-by commitments
To facilitate liquidity, Scudder Massachusetts Tax Free Fund may enter into
"stand-by commitments" permitting it to resell municipal securities to the
original seller at a specified price. Stand-by commitments generally involve no
cost to the Fund, and any costs would be, in any event, limited to no more than
0.50% of the value of the total assets of the Fund. Any such costs may, however,
reduce yield.
Third party puts
Each Fund may purchase long-term fixed rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Funds at
specified intervals to tender (or "put") its bonds to the institution and
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.
12
<PAGE>
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.
Illiquid securities
The Funds may invest in securities for which there is not an active trading
market, or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities, but carry the
risk that the Funds may not be able to dispose of them at an advantageous time
or price.
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
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
13
<PAGE>
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 to create
leveraged exposure in each Fund. 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 its assets in the securities of a
smaller number of issuers than a diversified investment company. Investment in
either Fund may involve greater risk than investment in a diversified fund.
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 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 and 1996 with
operating gains of $137 million and $446.4 million, respectively, and ending
fund balances of $726 million and $1.173 billion, respectively. The Commonwealth
ended fiscal year 1997 with an ending fund balance of $1.39 billion. The fiscal
year 1998 budget calls for approximately $18.7 billion in expenditures; the
aggregate ending fund balance is projected to be $1.2 billion.
As of the date of this prospectus, the Commonwealth's general obligation bonds
are rated AA- by S&P and A1 by Moody's. From time to time, the rating agencies
may change their ratings in response to budgetary matters or other economic
indicators. Massachusetts local governmental entities are subject to certain
limitations on their taxing power that could affect their ability or the ability
of the Commonwealth to meet their respective financial obligations. See
"Investing in Massachusetts" in the Funds' Statement of Additional Information
for further details about the risks of investing in Massachusetts.
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
14
<PAGE>
securities at the time it wishes to. The lack of a liquid secondary market for
certain securities may also make it more difficult for a Fund to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its net
asset value.
Third party puts. In connection with a third party put, the financial
institution granting the option does not provide credit enhancement, and
typically if there is a default on or significant downgrading of the bond or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Funds will be that of holding a long-term bond.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Funds. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, a Fund will bear the
market risk of the reference instrument.
Illiquid securities. The absence of a trading market can make it difficult to
ascertain a market value for these investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Funds to sell them promptly at an
acceptable price.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to a Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation a 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
15
<PAGE>
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 to
individual shareholders at a maximum 20% or 28% capital gains rate (depending on
the Fund's holding period for the assets giving rise to the gain), for federal
income tax purposes, regardless of the length of time shareholders have owned
their shares. Short-term capital gains and any other taxable income
distributions are taxable as ordinary income. Distributions of tax-exempt income
are taken into consideration in computing the portion, if any, of Social
Security and railroad retirement benefits subject to federal and, in some cases,
state taxes.
Under Massachusetts law, dividends paid by the Funds are exempt from
Massachusetts personal income tax for individuals who reside in Massachusetts to
the extent such dividends are exempt from regular federal income tax and are
identified by the Funds as derived from interest payments on Massachusetts
municipal securities and certain other qualifying securities (including Puerto
Rico, the U.S. Virgin Islands and Guam). Long-term capital gains distributions
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.
16
<PAGE>
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 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, ten years and/or the life of the Fund as of
a stated ending date. (If a Fund has not been in operation for at least ten
years, the life of the Fund is used where applicable.) "Cumulative total return"
represents the cumulative change in value of an investment in a Fund for various
periods. All types of total return calculations assume that all dividends and
capital gains distributions during the period were reinvested in shares of a
Fund.
Performance will vary based upon, among other things, changes in market
conditions and the level of each Fund's expenses.
Fund organization
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax
Free Fund are series of Scudder State Tax Free Trust (the "Trust"), an open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"). The Trust was organized as a Massachusetts business trust
in May 1983.
The Funds' activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
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
The Fund retains the investment management firm of Scudder Kemper Investments,
Inc., a Delaware corporation formerly known as Scudder, Stevens & Clark, Inc.
("Scudder"), to manage its daily investment and business affairs subject to the
policies established by the Board of Trustees. The Trustees have overall
17
<PAGE>
responsibility for the management of the Fund under Massachusetts law.
Scudder and Zurich Insurance Company ("Zurich"), an international insurance and
financial services organization, have formed a new global investment
organization by combining Scudder's business with that of Zurich's subsidiary,
Zurich Kemper Investments, Inc. and Scudder has changed its name to Scudder
Kemper Investments, Inc. As a result of the transaction, Zurich owns
approximately 70% of the Adviser, with the balance owned by the Adviser's
officers and employees.
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. Each Fund's
fee is payable monthly, provided that a Fund will make such interim payments as
may be requested by the Adviser not to exceed 75% of the amount of the fee then
accrued on the books of a Fund and unpaid.
Until February 28, 1999, the Adviser has agreed to maintain the total annualized
expenses for Scudder Massachusetts Limited Term Tax Free Fund at 0.75% of
average daily net assets. Accordingly, for the fiscal year ended October 31,
1997, the Adviser received an investment management fee of 0.44% 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 Kemper Investments, Inc. is located at Two International Place, Boston,
Massachusetts.
Like other mutual funds and financial and business organizations worldwide, the
Funds could be adversely affected if computer systems on which the Funds rely,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to correctly process date-related information on
and after January 1, 2000. This risk is commonly called the Year 2000 Issue.
Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the Funds' business and
operations. The Adviser has commenced a review of the Year 2000 Issue as it may
affect the Funds and is taking steps it believes are reasonably designed to
address the Year 2000 Issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 Issue will not have an adverse effect on the companies whose securities are
held by the Funds or on global markets or economies generally.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Funds.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Funds'
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of each Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Funds.
Custodian
State Street Bank and Trust Company is the Funds' custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Funds' transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
18
<PAGE>
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
a Fund may hold redemption proceeds until the purchase check has cleared. If you
purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone or by "Write-A-Check," in the case of Scudder
Massachusetts Limited Term Tax Free Fund, prior to the expiration of the
seven-day period will not be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested, -- the account
number of the fund, and -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By exchange. Each Fund may be exchanged for shares of other funds in the Scudder
Family of Funds, unless otherwise determined by the Board of Trustees. 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 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 "QuickBuy." If you elected "QuickBuy" 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
"QuickBuy," call 1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases may not be for
more than $250,000. Proceeds in the amount of your purchase will be transferred
from your bank checking account in two or three business days following your
call. For requests received by the close of regular trading on the Exchange,
shares will be purchased at the net asset value per share calculated at the
close of trading on the day of your call. "QuickBuy" requests received after the
close of regular trading on the Exchange will begin their processing and be
purchased at the net asset value calculated the following business day.
If you purchase shares by "QuickBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
19
<PAGE>
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA accounts.
Redeeming shares
The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
provided your banking information on your application, you can call to request
that federal funds be sent to your authorized bank account. If you did not
include your banking information on your application, call 1-800-225-5163 for
more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL by calling
1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
By "QuickSell." If you elected "QuickSell" 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 "QuickSell,"
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. "QuickSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"QuickSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
By "Write-A-Check." You may redeem shares of Scudder Massachusetts Limited Term
Tax Free Fund by writing checks against your account balance for at least $100.
Your Fund investments will continue to earn dividends until your check is
presented to the Fund for payment.
Checks will be returned by the Fund's transfer agent if there are insufficient
shares to meet the withdrawal amount. You should not attempt to close an account
by check because the exact balance at the time the check clears will not be
known when the check is written.
Signature guarantees. For your protection and to prevent fraudulent redemptions,
on written redemption requests in excess of $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
20
<PAGE>
agencies deemed eligible by the SEC. 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 reserves the right to reject
purchases of Fund shares (including exchanges) for any reason including when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in 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 the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a correct certified Social Security or tax identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required. The Fund reserves the right to reject new
account applications without a correct certified Social Security or tax
21
<PAGE>
identification number. The Fund also reserves the right, following 30 days'
notice, to redeem all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
redemption by providing the Fund with a tax identification number during the
30-day notice period.
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.
Redemption-in-kind
Each Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by a Fund
and valued as they are for purposes of computing a Fund's net asset value (a
redemption-in-kind). If payment is made in securities, a shareholder may incur
transaction expenses in converting these securities to cash.
Shareholder benefits
Experienced professional management
Scudder Kemper Investments, 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 investment professionals who each play
an important role in the Funds' management process. Team members work together
to develop investment strategies and select securities for the Funds'
portfolios. They are supported by the Adviser'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 our extensive resources.
Philip G. Condon, Lead Portfolio Manager of each Fund, joined Scudder in 1983
and has 17 years of experience in municipal investing and portfolio management.
22
<PAGE>
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 20 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. (The exchange
privilege may not be available for certain Scudder funds or classes thereof. For
more information, please call 1-800-225-5163.) 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 CounselSM -- 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 Kemper Investments, 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 the Adviser'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 will receive a detailed statement summarizing account activity, including
dividend and capital gain reinvestment, purchases and redemptions. All of your
statements should be retained to help you keep track of account activity and the
cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
23
<PAGE>
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 Investor Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor 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.
24
<PAGE>
Purchases
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Opening
an account Minimum initial investment: $2,500; IRAs $1,000
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
o By Mail Send your completed and signed application and check
Make checks
payable to "The
Scudder Funds."
by regular mail or by express, registered,
to: or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291
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 Investor Centers to complete your application with the
help of a Scudder representative. Investor Center locations are listed
under Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing
additional shares Minimum additional investment: $100; IRAs $50
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares-- By wire for details, including
the ABA wire transfer number.
o In Person Visit one of our Investor Centers to make an additional investment in your
Scudder fund account. Investor Center locations are listed under Shareholder
benefits.
o By Telephone Please see Transaction information--Purchasing shares-- By QuickBuy or By telephone
order for more details.
o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
25
<PAGE>
Exchanges and redemptions
Exchanging shares
Minimum investments: $2,500 to establish a new account;
$100 to exchange among existing accounts
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184
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 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. Call
Withdrawal Plan 1-800-225-5163 for more information and an enrollment form.
</TABLE>
26
<PAGE>
Scudder tax-advantaged retirement plans
Scudder Kemper offers a variety of tax-advantaged retirement plans for
individuals, businesses and non-profit organizations. These flexible plans are
designed for use with the Scudder Family of Funds (except Scudder tax-free
funds, which are inappropriate for such plans). Scudder Funds offer a broad
range of investment objectives and can be used to seek almost any investment
goal. Using Scudder's retirement plans can help shareholders save on current
taxes while building their retirement savings.
Scudder No-Fee IRA
Scudder Roth No-Fee IRA
Keogh Plans
401(k) Plans
Profit Sharing and Money Purchase Pension Plans
403(b) Plans
SEP-IRA
Scudder Horizon Plan (a variable annuity)
Scudder Trust Company (an affiliate of the Adviser) is Trustee or Custodian for
some of these plans and is paid an annual fee for some of the above retirement
plans. For information about establishing a Scudder No-Fee IRA, SEP-IRA, Profit
Sharing Plan, Money Purchase Pension Plan or a Scudder Horizon Plan, please call
1-800-225-2470. For information about 401(k)s or 403(b)s please call
1-800-323-6105. To effect transactions in existing IRA, SEP-IRA, and most 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.
Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.
27
<PAGE>
Trustees and Officers
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager,
WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and Trustee
George M. Lovejoy, Jr.
Trustee; President and Director, Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
College of Business Administration
Kathryn L. Quirk*
Trustee, Vice President and Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
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*
Treasurer, Vice President and Secretary
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
28
<PAGE>
Investment products and services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series--
Premium Shares*
Managed Shares*
Scudder Government Money Market Series--
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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 Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *A class of
shares of the Fund. **Not available in all states. ***Only the Scudder Shares of
the Fund are part of the Scudder Family of Funds. ++Only the International
Shares of the Fund are part of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New
York Stock Exchange and, in some cases, on various foreign stock exchanges.
29
<PAGE>
<TABLE>
<CAPTION>
How to contact Scudder
Account Service and Information:
<S> <C>
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 Investor Center:
Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:
Boca Raton Chicago San Francisco
Boston New York
Scudder Investor Relations and Scudder Investor Centers are services provided
through Scudder Investor Services, Inc., Distributor.
</TABLE>
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA
02061--Member NASD/SIPC.
30
<PAGE>
This prospectus sets forth concisely the information about Scudder Ohio Tax Free
Fund, a non-diversified series of Scudder State Tax Free Trust, an open-end
management investment company, that a prospective investor should know before
investing. Please retain it for future reference.
If you require more detailed information, a Statement of Additional Information
dated August 1, 1998, 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Contents--see page 4.
NOT FDIC-
INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
Scudder
Ohio
Tax Free Fund
Prospectus
August 1, 1998
A pure no-load(TM) (no sales charges) mutual fund series which seeks to provide
double tax-free income, exempt from both Ohio personal income tax and regular
federal income tax.
<PAGE>
Expense information
How to compare a Scudder Family of Funds pure no-load(TM) fund This information
is designed to help you understand the various costs and expenses of investing
in Scudder Ohio Tax Free Fund (the "Fund"). By reviewing this table and those in
other mutual funds' prospectuses, you can compare the Fund's fees and expenses
with those of other funds. With Scudder's pure no-load(TM) funds, you pay no
commissions to purchase or redeem shares, or to exchange from one fund to
another. As a result, all of your investment goes to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended March 31, 1998.
Investment management fee (after waiver) 0.26%**
12b-1 fees NONE
Other expenses 0.26%
--------
Total Fund operating expenses (after waiver) 0.52%**
========
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its
net investment income to shareholders. (As noted above, the Fund has no
redemption fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$5 $17 $29 $65
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than
those shown.
* You may redeem by writing or calling the Fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."
** Until January 31, 1999, 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 0.60% of average daily net assets. If the Adviser had
not done so, Fund expenses would have been: investment management fee
0.60%, other expenses 0.26% and total operating expenses 0.86% for the
fiscal year ended March 31, 1998.
2
<PAGE>
Financial highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements. If you would like more detailed information concerning the Fund's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated March 31, 1998, which may be
obtained without charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of ---------------------------------------------------------------------------------------------
period .......................... $12.94 $12.95 $12.77 $12.68 $13.13 $12.47 $12.14 $11.97 $11.94 $11.65
Income from investment operations: ---------------------------------------------------------------------------------------------
Net investment income .............. .68 .68 .69 .70 .70 .72 .75 .78 .82 .79
Net realized and unrealized gain
(loss) on investment transactions .60 .03 .30 .13 (.35) .85 .36 .23 .10 .36
---------------------------------------------------------------------------------------------
Total from investment operations ... 1.28 .71 .99 .83 .35 1.57 1.11 1.01 .92 1.15
---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (.68) (.68) (.69) (.70) (.70) (.72) (.75) (.78) (.82) (.84)
Net realized gains on investment
transactions .................... (.03) (.04) (.12) -- (.08) (.19) (.03) (.06) (.07) (.02)
In excess of net realized gains .... -- -- -- (.04) (.02) -- -- -- -- --
---------------------------------------------------------------------------------------------
Total distributions ................ (.71) (.72) (.81) (.74) (.80) (.91) (.78) (.84) (.89) (.86)
---------------------------------------------------------------------------------------------
Net asset value, end of ---------------------------------------------------------------------------------------------
period .......................... $13.51 $12.94 $12.95 $12.77 $12.68 $13.13 $12.47 $12.14 $11.97 $11.94
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ............... 10.08 5.58 7.85 6.82 2.48 13.04 9.33 8.75 7.80 10.83
Ratios and Supplemental Data
Net assets, end of period
($ millions) .................... 94 84 84 78 80 69 51 37 25 12
Ratio of operating expenses, net to
average daily net assets (%) .... .52 .50 .50 .50 .50 .50 .50 .50 .50 .50
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............ .86 .88 .89 .91 .90 .95 1.03 1.21 1.62 2.14
Ratio of net investment income to
average daily net assets (%) .... 5.09 5.23 5.30 5.59 5.23 5.61 6.05 6.50 6.74 7.13
Portfolio turnover rate (%) ........ 4.9 9.7 19.6 19.9 12.2 34.7 13.2 22.6 15.9 35.7
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
3
<PAGE>
A message from Scudder's chairman
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $200 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts. It is one of the ten
largest mutual fund companies in the U.S.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also 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 numerous other open- and closed-end funds that invest in this
country and other 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 shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
Funds or fund classes in the Scudder Family of Funds are offered without
commissions to purchase or redeem 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/Edmond Villani
Scudder Ohio Tax Free Fund
Investment objective
o income exempt from Ohio personal income tax and regular federal income tax
Investment characteristics
o primarily long-term investment-grade municipal securities tax-exempt in
Ohio
o active professional management
o dividends declared daily and paid monthly
Contents
Investment objective and policies 5
Tax-exempt vs. taxable income 6
Why invest in the Fund? 7
Additional information about policies
and investments 8
Distribution and performance information 12
Fund organization 14
Transaction information 15
Shareholder benefits 19
Purchases 21
Exchanges and redemptions 22
Trustees and Officers 24
Investment products and services 25
How to contact Scudder 26
4
<PAGE>
Investment objective and policies
Scudder Ohio Tax Free Fund (the "Fund"), a non-diversified series of Scudder
State Tax Free Trust, seeks to provide Ohio taxpayers with income exempt from
both Ohio personal income tax and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of investment-grade
municipal securities.
The Fund's investment adviser, Scudder Kemper Investments, Inc. (the "Adviser"),
believes that investment results can be enhanced by active professional
management. Professional management distinguishes the Fund from unit investment
trusts, which cannot be actively managed.
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a shareholder vote. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
Quality
Normally, at least 75% of the intermediate- and long-term securities purchased
by the Fund will be investment-grade municipal securities which are those rated
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A,
or BBB by Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or unrated securities judged by the Adviser to be of equivalent
quality, or securities issued or guaranteed by the U.S. Government. The Fund may
also invest up to 25% of its total assets in fixed-income securities rated below
investment-grade, that is, rated below Baa by Moody's or below BBB by S&P or
Fitch, or in unrated securities of equivalent quality as determined by the
Adviser. The Fund may not invest in fixed-income securities rated below B by
Moody's, S&P or Fitch, or their equivalent.
The Fund expects to invest principally in securities rated A or better by
Moody's, S&P or Fitch or unrated securities judged by the Adviser to be of
equivalent quality at the time of purchase. Securities in these three rating
categories are judged by the Adviser to have an adequate if not strong capacity
to repay principal and pay interest.
During the fiscal year ended March 31, 1998, based upon the dollar-weighted
average ratings of the Fund's portfolio holdings at the end of each month during
that period, the Fund had the following percentage of its net assets invested in
debt securities rated below investment-grade (or if unrated, considered by the
Adviser to be equivalent to rated securities) in the category indicated: 1.22%
BB-.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds") have
produced higher yields in the past than investment-grade bonds, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the Adviser.
Should the rating of a portfolio security be downgraded after being purchased by
the Fund, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
Investments
The Fund invests in municipal securities of issuers located in Ohio and other
qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and Guam). It
is the opinion of bond
5
<PAGE>
Tax-exempt vs. taxable income
Tax Free Yields and Corresponding Taxable Equivalents. The table below shows
Ohio taxpayers what an investor would have to earn from a comparable taxable
investment to equal Scudder Ohio Tax Free Fund's double tax-free yield. Today
many investors may find that federal tax and Ohio personal income tax rates
make Scudder Ohio Tax Free Fund an attractive alternative to investments paying
taxable income.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
COMBINED TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 3%, 4%, 5% AND 6%, A
MARGINAL TAXABLE INVESTMENT WOULD HAVE TO EARN*:
TAX RATE:
1998 TAXABLE INCOME: 3% 4% 5% 6%
INDIVIDUAL
$ 20,000-25,350 18.64% 3.69% 4.92% 6.15% 7.37%
25,351-40,000 31.08 4.35 5.80 7.25 8.71
40,001-61,400 31.59 4.39 5.85 7.31 8.77
61,401-80,000 34.45 4.58 6.10 7.63 9.15
80,001-100,000 34.94 4.61 6.15 7.68 9.22
100,001-128,100 35.57 4.66 6.21 7.76 9.31
128,101-200,000 40.24 5.02 6.69 8.37 10.04
200,001-278,450 40.61 5.05 6.73 8.42 10.10
OVER $278,450 43.95 5.35 7.14 8.92 10.70
JOINT RETURN
$ 40,001-42,350 19.24% 3.71% 4.95% 6.19% 7.43%
42,351-80,000 31.59 4.39 5.85 7.31 8.77
80,001-100,000 32.11 4.42 5.89 7.36 8.84
100,001-102,300 32.77 4.46 5.95 7.44 8.92
102,301-155,950 35.57 4.66 6.21 7.76 9.31
155,951-200,000 40.24 5.02 6.69 8.37 10.04
200,001-278,450 40.61 5.05 6.73 8.42 10.10
OVER $278,450 43.95 5.35 7.14 8.92 10.70
</TABLE>
* These illustrations assume a marginal federal income tax rate of 28% to
39.6% and that the federal alternative minimum tax is not applicable. Upper
income individuals may be subject to an effective federal income tax rate in
excess of the applicable marginal rate as a result of the phase-out of
personal exemptions and itemized deductions made permanent by the Revenue
Reconciliation Act of 1993. Individuals subject to these phase-out
provisions would have to invest in taxable securities with a yield in excess
of those shown on the table in order to achieve an after-tax yield
equivalent to the yield on a comparable tax-exempt security.
6
<PAGE>
counsel, rendered on the date of issuance, that interest on these obligations is
exempt from both Ohio personal income tax and regular federal income tax ("Ohio
municipal securities"). These securities include municipal bonds, which meet
longer-term capital needs and generally have maturities of more than one year
when issued. Municipal bonds include general obligation bonds, which are secured
by the issuer's pledge of its faith, credit and taxing power for payment of
principal and interest, and revenue bonds, which may be issued to finance
projects owned or used by either private or public entities and which include
bonds issued to finance industrial enterprises and pollution control facilities.
The Fund may invest in other municipal securities such as variable rate demand
instruments. The Fund may also invest in municipal notes of issuers located in
Ohio and other qualifying issuers. They are generally used to provide capital
needs and have maturities of one year or less. Municipal notes include tax
anticipation notes, revenue anticipation notes and bond anticipation notes. For
federal income tax purposes, the income earned from municipal securities may be
entirely tax-free, taxable or subject to only the alternative minimum tax.
Under normal market conditions, the Fund expects to invest principally in Ohio
municipal securities with long-term maturities (i.e., more than 10 years). The
Fund has the flexibility, however, to invest in Ohio municipal securities with
short- and medium-term maturities as well.
The Fund may also invest up to 20% of its total assets in municipal securities
the interest income from which is taxable or subject to the alternative minimum
tax ("AMT" bonds). Fund distributions from interest on certain AMT bonds such as
private activity bonds, will be a preference item for purposes of calculating
individual and corporate alternative minimum taxes, depending upon investors'
particular situations. In addition, state and local taxes may apply, depending
upon your state and local tax laws.
Ordinarily, the Fund expects that 100% of its portfolio securities will be Ohio
municipal securities. The Fund may also hold cash or invest its assets in
taxable securities.
The Fund may invest in stand-by commitments, illiquid securities, third party
puts, when-issued or forward delivery securities, and enter into repurchase
agreements and reverse repurchase agreements, which may involve certain expenses
and risks, including credit risks. These securities and techniques are not
expected to comprise a major portion of the Fund's investments. The Fund may
engage in strategic transactions for hedging purposes and to seek gain. See
"Additional information about policies and investments" for more information
about these investment techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
Why invest in the Fund?
The Fund is designed for investors seeking double tax-free income--exempt both
from Ohio personal income tax and regular federal income tax. Because the Fund
is intended for investors subject to Ohio personal income tax and regular
federal income tax, it may not be appropriate for all investors and is not
available in all states.
As illustrated by the chart on the preceding page, depending on your tax bracket
and individual situation, you may earn a substantially higher after-tax return
from the Fund than from comparable investments that pay income subject to both
Ohio state personal income tax and regular federal income tax. For example, if
your regular federal marginal tax rate is 36% and your Ohio tax rate is 6.9%,
your effective combined marginal tax rate is 40.24% when adjusted for the
deductibility of state taxes. Thus, you would need to earn a taxable return of
7.03% to receive after-tax income equal to the 4.19% tax-free yield provided by
7
<PAGE>
Scudder Ohio Tax Free Fund for the 30-day period ended March 31, 1998. In other
words, it would be necessary to earn $1,678 from a taxable investment to equal
$1,000 of tax-free income you receive from the Fund. The yield levels of
tax-free and taxable investments continually change. Before investing in the
Fund, you should compare its yield to the after-tax yield you would receive from
a comparable investment paying taxable income. For up-to-date yield information
on the Fund, shareholders can call SAIL, Scudder Automated Information Line, for
toll-free information at any time.
Additional information about policies and investments
Investment restrictions
The Fund has certain investment restrictions which are designed to reduce the
Fund's investment risk. Fundamental investment restrictions may not be changed
without a vote of shareholders; non-fundamental investment restrictions may be
changed by a vote of the Trust's Board of Trustees.
As a matter of fundamental policy, the Fund may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Fund may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes.
As a matter of fundamental policy, the Fund may not make loans except through
the lending of portfolio securities, the purchase of debt securities or
interests in indebtedness or through repurchase agreements. The Fund has adopted
a non-fundamental policy restricting the lending of portfolio securities to no
more than 5% of total assets.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund's Statement of Additional
Information.
Investing in Ohio
The Fund is more susceptible to factors adversely affecting issuers of Ohio
municipal securities than is a comparable municipal bond fund that does not
focus on such issuers. Ohio encountered, successfully dealt with, and abated
some financial difficulties in prior years and may, as may any state, face some
long-term problems in certain regions of the State and in certain sectors of its
economy, which continues to rely in part on durable goods manufacturing, largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. For additional information about the Ohio economy, see the
Fund's Statement of Additional Information dated August 1, 1998.
When-issued securities
The Fund may purchase securities on a when-issued or forward delivery basis, for
payment and delivery at a later date. The price and yield are generally fixed on
the date of commitment to purchase. During the period between purchase and
settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, the Fund
may enter into repurchase agreements with selected banks and broker/dealers.
Under a repurchase agreement, the Fund acquires securities, subject to the
seller's agreement to repurchase at a specified time and price. Income from
repurchase agreements will be taxable when distributed to shareholders.
Stand-by commitments
To facilitate liquidity, the Fund may enter into "stand-by commitments"
permitting it to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost to the Fund, and
any costs would be, in any event, limited to no more than 0.50% of the value of
8
<PAGE>
the total assets of the Fund. Any such costs may, however, reduce yield.
Third party puts
The Fund may purchase long-term fixed rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Fund at
specified intervals to tender (or "put") its bonds to the institution and
receive the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps.
Variable rate demand instruments
The Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit the Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent.
Municipal lease obligations
The Fund may invest in municipal lease obligations and participation interests
in such obligations. These obligations, which may take the form of a lease, an
installment purchase contract or a conditional sales contract, are issued by
state and local governments and authorities to acquire land and a wide variety
of equipment and facilities. Generally, the Fund will not hold such obligations
directly, but will purchase a certificate of participation or other
participation interest in a municipal obligation from a bank or other financial
intermediary. A participation interest gives the Fund a proportionate interest
in the underlying obligation.
Indexed securities
The Fund may invest in indexed securities, the value of which is linked to
currencies, interest rates, commodities, indices or other financial indicators
("reference instruments"). The interest rate or (unlike most fixed-income
securities) the principal amount payable at maturity of an indexed security may
be increased or decreased, depending on changes in the value of the reference
instrument.
Illiquid securities
The Fund may invest a portion of its assets in securities for which there is not
an active trading market, or which have resale restrictions. These types of
securities generally offer a higher return than more readily marketable
securities, but carry the risk that the Fund may not be able to dispose of them
at an advantageous time or price.
Strategic Transactions and derivatives
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of the Fund's
portfolio or to enhance potential gain. These strategies may be executed through
the use of derivative contracts. Such strategies are generally accepted as a
part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").
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Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of the Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not to create leveraged exposure in the Fund. Please
refer to "Risk factors--Strategic Transactions and derivatives" for more
information.
Risk factors
The Fund's risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Fund may use from time to time.
Non-diversified investment company. As a "non-diversified" investment company,
the Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers than a diversified investment company. Investment in
the Fund may involve greater risk than investment in a diversified fund.
Investing in Ohio. If either Ohio or any of its local governmental entities were
to be unable to meet its financial obligations, the income derived by the Fund,
its net asset value or liquidity and the ability to preserve or realize
appreciation of the Fund's capital could be adversely affected.
Since the Fund will invest primarily in securities of Ohio issuers, political
and economic factors affecting Ohio could affect the creditworthiness and the
value of the securities in its portfolio. The Ohio economy, while diversifying
more into the service and other non-manufacturing areas, continues to rely in
part on durable goods manufacturing largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a result, general
economic activity in Ohio, as in many other industrially developed states, tends
to be more cyclical than in some other states and in the nation as a whole.
Agriculture is an important segment of the economy, with over half the State's
area devoted to farming and approximately 16% of total employment in
agribusiness. In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, for
the last seven years the State rates were below the national rates (4.6% versus
4.9% in 1997). The unemployment rate and its effects vary among geographic areas
of the State. Future national, regional or statewide economic difficulties, and
the resulting impact on State or local government finances generally, could
adversely affect the market value of Ohio municipal securities held in the
portfolio of the Fund or the ability of particular obligors to make timely
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payments of debt service on those obligations. See "Investing in Ohio" in the
Fund's Statement of Additional Information for further details about the risks
of investing in Ohio obligations.
Lower-grade debt securities. While the Fund invests 75% of its assets in
investment-grade securities, the Fund may invest in securities rated below Baa
by Moody's or BBB by S&P or Fitch. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. Securities
rated below investment-grade are commonly referred to as "junk bonds" and
involve greater price volatility and higher degrees of speculation with respect
to the payment of principal and interest than higher quality fixed-income
securities. The market prices of such lower-rated debt securities may decline
significantly in periods of general economic difficulty. In addition, the
trading market for these securities is generally less liquid than for higher
rated securities and the Fund may have difficulty disposing of these securities
at the time it wishes to do so. The lack of a liquid secondary market for
certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing its portfolio and calculating
its net asset value.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of securities may be restricted, or the
value of the securities may decline before the Fund is able to dispose of them.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities before being able to sell the
securities.
Third party puts. In connection with a third party put, the financial
institution granting the option does not provide credit enhancement, and
typically if there is a default on or significant downgrading of the bond or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Fund will be that of holding a long-term bond.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, or, in Ohio, not be
renewed, with the possibility of default on the lease obligation and significant
loss to the Fund. Although "non-appropriation" obligations are secured by the
leased property, disposition of that property in the event of foreclosure might
prove difficult, time consuming and costly. In addition, the tax treatment of
such obligations in the event of non-appropriation is unclear. In evaluating the
credit quality of a municipal lease obligation that is unrated, the Adviser will
consider a number of factors including the likelihood that the governmental
issuer will discontinue appropriating funding for the leased property. For more
information please refer to the Fund's Statement of Additional Information.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, the Fund will bear the
market risk of the reference instrument.
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Illiquid securities. The absence of a trading market can make it difficult to
ascertain a market value for these investments. Disposing of illiquid
investments may involve time- consuming negotiation and legal expenses, and it
may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Fund's dividends from net investment income are declared daily and
distributed monthly. The Fund intends to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of federal excise tax, although an additional
distribution may be made if necessary. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. According to preference, shareholders may receive
distributions in cash or have them reinvested in additional shares of the Fund.
Distributions derived from interest on Ohio municipal securities are not subject
to regular federal income taxes, except for the possible applicability of the
federal alternative minimum tax. For federal income tax purposes, a portion of
the Fund's income may be taxable to shareholders as ordinary income. Long-term
capital gains distributions, if any, are taxable to individual shareholders at a
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maximum 20% or 28% capital gains rate (depending on the Fund's holding period
for the assets giving rise to the gain), regardless of the length of time
shareholders have owned their shares. Short-term capital gains and any other
taxable income distributions are taxable as ordinary income. Distributions of
tax-exempt income are taken into consideration in computing the portion, if any,
of Social Security and railroad retirement benefits subject to federal and, in
some cases, state taxes. Under Ohio law, provided that at all times the Fund
qualifies as a regulated investment company for federal income tax purposes and
at least 50% of the value of the total assets of the Fund consists of
obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof and agencies and instrumentalities of the State or its political
subdivisions ("Ohio Obligations") or similar obligations of other states or
their subdivisions, (i) individuals otherwise subject to the Ohio personal
income tax will not be subject to such tax on dividends paid by the Fund to the
extent such dividends are properly attributable to interest payments on Ohio
Obligations; and (ii) dividends paid by the Fund will be excluded from the net
income base for purposes of the Ohio corporation franchise tax to the extent
such dividends are excluded from gross income for federal income tax purposes or
are properly attributable to interest payments on Ohio Obligations. However, the
Fund's shares will be included in the net worth base for purposes of the Ohio
corporation franchise tax.
The Fund expects to ordinarily provide income that is 100% free from Ohio
personal income tax and regular federal income tax. However, income from
repurchase agreements and gains from certain Strategic Transactions are taxable.
Some of the Fund's interest income may be treated as a tax preference item that
may subject an individual investor to liability (or increased liability) under
the alternative minimum tax, depending upon an investor's particular situation.
However, at least 80% of the Fund's net assets will normally be invested in Ohio
municipal securities whose interest income is not treated as a tax preference
item under the individual alternative minimum tax. Tax-exempt income may also
subject a corporate investor to liability (or increased liability) under the
corporate alternative minimum tax.
The Fund sends detailed tax information to shareholders about the amount and
type of its distributions by January 31 of the following year.
Performance information
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature, or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance.
The "SEC yield" of the Fund is an annualized expression of the net income
generated by the Fund over a specified 30-day (one month) period, as a
percentage of the Fund's share price on the last day of that period. This yield
is calculated according to methods required by the SEC, and therefore may not
equate to the level of income paid to shareholders. The Fund's "tax-equivalent
yield" is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after-tax equivalent of
the Fund's yield, assuming certain tax brackets for a Fund shareholder. Yields
are expressed as annualized percentages. "Total return" is the change in value
of an investment in the Fund for a specified period. The "average annual total
return" of the Fund is the average annual compound rate of return of an
investment in the Fund assuming the investment has been held for one year, five
years and ten years as of a stated ending date. "Cumulative total return"
represents the cumulative change in value of an investment in the Fund for
various periods. All types of total return calculations assume that all
dividends and capital gains distributions during the period were reinvested in
shares of the Fund. Performance will vary based upon, among other things,
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changes in market conditions and the level of the Fund's expenses.
Fund organization
Scudder Ohio Tax Free Fund is a non-diversified series of Scudder State Tax Free
Trust (the "Trust"), an open-end management investment company registered under
the Investment Company Act of 1940 (the "1940 Act"). The Trust was organized as
a Massachusetts business trust in May 1983.
The Fund's activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Trustees, changing
fundamental investment policies or approving an investment management contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Trustee as if Section 16(c) of the 1940 Act were
applicable.
Investment adviser
The Fund retains the investment management firm of Scudder Kemper Investments,
Inc., a Delaware corporation formerly known as Scudder, Stevens & Clark, Inc.
("Scudder"), to manage its daily investment and business affairs subject to the
policies established by the Board of Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law.
Scudder and Zurich Insurance Company ("Zurich"), an international insurance and
financial services organization, have formed a new global investment
organization by combining Scudder's business with that of Zurich's subsidiary,
Zurich Kemper Investments, Inc. and Scudder has changed its name to Scudder
Kemper Investments, Inc. As a result of the transaction, Zurich owns
approximately 70% of the Adviser, with the balance owned by the Adviser's
officers and employees.
The Adviser receives monthly an investment management fee for its services,
which fee equals approximately 0.60% of the Fund's average daily net assets on
an annual basis. The Fund's fee is payable monthly, provided that the Fund will
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Fund and unpaid.
The Adviser has agreed to maintain the annualized expenses of the Fund at not
more than 0.60% of the average daily net assets of the Fund until January 31,
1999. For the fiscal year ended March 31, 1998, the Adviser received an
investment management fee of 0.26% of the Fund's average daily net assets on an
annual basis.
All of the Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.
Scudder Kemper Investments, Inc. is located at Two International Place, Boston,
Massachusetts.
Like other mutual funds and financial and business organizations worldwide, the
Fund could be adversely affected if computer systems on which the Fund relies,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to correctly process date-related information on
and after January 1, 2000. This risk is commonly called the Year 2000 Issue.
Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the Fund's business and
operations. The Adviser has commenced a review of the Year 2000 Issue as it may
affect the Fund and is taking steps it believes are reasonably designed to
address the Year 2000 Issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 Issue will not have an adverse effect on the companies whose securities are
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held by the Fund or on global markets or economies generally.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser, is the transfer, shareholder servicing and
dividend-paying agent for the Fund.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Fund's
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of the Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.
Custodian
State Street Bank and Trust Company is the Fund's custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone prior to the expiration of the seven-day period will not
be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
You may also make additional investments of $100 or more to your existing
account by wire.
By exchange. The Fund may be exchanged for shares of other funds in the Scudder
Family Of Funds, unless otherwise determined by the Board of Trustees. 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.
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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 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 "QuickBuy." If you elected "QuickBuy" 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 "QuickBuy," call 1-800-225-5163
for more information.
To purchase additional shares, call 1-800-225-5163. Purchases may not be for
more than $250,000. Proceeds in the amount of your purchase will be transferred
from your bank checking account in two or three business days following your
call. For requests received by the close of regular trading on the Exchange,
shares will be purchased at the net asset value per share calculated at the
close of trading on the day of your call. "QuickBuy" requests received after the
close of regular trading on the Exchange will begin their processing and be
purchased at the net asset value calculated the following business day.
If you purchase shares by "QuickBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "QuickBuy" transactions are not
available for Scudder IRA accounts and most other retirement plan accounts.
Redeeming shares
The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
provided your banking information on your application, you can call to request
that federal funds be sent to your authorized bank account. If you did not
include your banking information on your application, call 1-800-225-5163 for
more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL by calling
1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
By "QuickSell." If you elected "QuickSell" 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 "QuickSell,"
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
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redeemed at the net asset value per share calculated at the close of trading on
the day of your call. "QuickSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"QuickSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
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. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the SEC. 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. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine.
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share as of
the close of regular trading on the New York Stock Exchange (the "Exchange"),
normally 4 p.m. eastern time, on each day the Exchange is open for trading. Net
asset value per share is calculated by dividing the value of total Fund assets,
less all liabilities, by the total number of shares outstanding.
Processing time
All purchase and redemption requests must be received in good order by the
Fund's transfer agent. Those requests received by the close of regular trading
on the Exchange are executed at the net asset value per share calculated at the
close of trading that day. Purchase and redemption requests received after the
close of regular trading on the Exchange will be executed the following business
day. Purchases made by federal funds wire before noon eastern time will begin
earning income that day; all other purchases received before the close of
regular trading on the Exchange will begin earning income the next business day.
Redeemed shares will earn income on the day on which the redemption request is
executed.
If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.
The Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to reject
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<PAGE>
purchases of Fund shares (including exchanges) for any reason including when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in the Fund's share price appears evident.
Tax information
A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a correct certified Social Security or tax identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required. The Fund reserves the right to reject new
account applications without a correct certified Social Security or tax
identification number. The Fund also reserves the right, following 30 days'
notice, to redeem all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
redemption by providing the Fund with a tax identification number during the
30-day notice period.
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.
Redemption-in-kind
The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by the Fund
and valued as they are for purposes of computing the Fund's net asset value (a
redemption-in-kind). If payment is made in securities, a shareholder may incur
transaction expenses in converting these securities to cash.
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Shareholder benefits
Experienced professional management
Scudder Kemper Investments, Inc., one of the nation's most experienced
investment management firms, actively manages your Scudder fund investment.
Professional management is an important advantage for investors who do not have
the time or expertise to invest directly in individual securities.
A team approach to investing
Scudder Ohio Tax Free Fund is managed by a team of investment professionals, who
each play an important role in the Fund's management process. Team members work
together to develop investment strategies and select securities for the Fund's
portfolio. They are supported by the Adviser'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 our extensive resources.
Lead Portfolio Manager Christopher J. Mier assumed responsibilities for the
Fund's day-to-day management and investment strategies in January 1998. Mr.
Mier, who joined the Adviser in 1986, has more than 20 years of experience in
municipal investing and portfolio management. Rebecca L. Wilson, Portfolio
Manager, became a member of the team in 1998. Ms. Wilson, who joined the Adviser
in 1986, has 12 years of experience in municipal investing and research.
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. (The exchange
privilege may not be available for certain Scudder funds or classes thereof. For
more information, please call 1-800-225-5163.) 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 CounselSM -- 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 Kemper Investments, Inc., combines the benefits of a
customized portfolio of no-load mutual funds with ongoing portfolio monitoring
and individualized service, for an annual fee of generally 1.25% or less of
assets. In addition, it draws upon the Adviser'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.
19
<PAGE>
Shareholder statements
You will receive a detailed statement summarizing account activity, including
dividend and capital gain reinvestment, purchases and redemptions. All of your
statements should be retained to help you keep track of account activity and the
cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Investor Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor 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.
20
<PAGE>
Purchases
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Opening
an account Minimum initial investment: $2,500; IRAs $1,000
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
o By Mail Send your completed and signed application and check
Make checks
payable to "The
Scudder Funds."
by regular mail or by express, registered,
to: or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291
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 Investor Centers to complete your application with the
help of a Scudder representative. Investor Center locations are listed
under Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing
additional shares Minimum additional investment: $100; IRAs $50
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares-- By wire for details, including
the ABA wire transfer number.
o In Person Visit one of our Investor Centers to make an additional investment in your
Scudder fund account. Investor Center locations are listed under Shareholder
benefits.
o By Telephone Please see Transaction information--Purchasing shares-- By QuickBuy or By telephone
order for more details.
o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
21
<PAGE>
Exchanges and redemptions
Exchanging shares
Minimum investments: $2,500 to establish a new account;
$100 to exchange among existing accounts
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184
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 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. Call
Withdrawal Plan 1-800-225-5163 for more information and an enrollment form.
</TABLE>
22
<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 Scudder Roth No-Fee IRA
o Keogh Plans
o 401(k) Plans
o Profit Sharing and Money Purchase Pension 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 and most 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.
Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.
23
<PAGE>
Trustees and Officers
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center for Business Ethics; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and Trustee
George M. Lovejoy, Jr.
Trustee; President and Director, Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University College
of Business Administration
Kathryn L. Quirk*
Trustee, Vice President and Assistant Secretary
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, Treasurer and Secretary
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
24
<PAGE>
Investment products and services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series--
Premium Shares*
Managed Shares*
Scudder Government Money Market Series--
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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 Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *A class of
shares of the Fund. **Not available in all states. ***Only the Scudder Shares of
the Fund are part of the Scudder Family of Funds. ++Only the International
Shares of the Fund are part of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New
York Stock Exchange and, in some cases, on various foreign stock exchanges.
25
<PAGE>
<TABLE>
<CAPTION>
How to contact Scudder
Account Service and Information:
<S> <C>
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 Investor Center:
Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:
Boca Raton Chicago San Francisco
Boston New York
Scudder Investor Relations and Scudder Investor Centers are services provided
through Scudder Investor Services, Inc., Distributor.
</TABLE>
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA
02061--Member NASD/SIPC.
26
<PAGE>
This prospectus sets forth concisely the information about Scudder Pennsylvania
Tax Free Fund, a non-diversified series of Scudder State Tax Free Trust, an
open-end management investment company, that a prospective investor should know
before investing. Please retain it for future reference.
If you require more detailed information, a Statement of Additional Information
dated August 1, 1998, 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Contents--see page 4.
NOT FDIC-
INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
SCUDDER [LOGO]
Scudder
Pennsylvania
Tax Free Fund
Prospectus
August 1, 1998
A pure no-load(TM) (no sales charges) mutual fund series which seeks to provide
double tax-free income, exempt from both Pennsylvania personal income tax and
regular federal income tax.
<PAGE>
Expense information
How to compare a Scudder Family of Funds pure no-load(TM) fund
This information is designed to help you understand the various costs and
expenses of investing in Scudder Pennsylvania Tax Free Fund (the "Fund"). By
reviewing this table and those in other mutual funds' prospectuses, you can
compare the Fund's fees and expenses with those of other funds. With Scudder's
pure no-load(TM) funds, you pay no commissions to purchase or redeem shares, or
to exchange from one fund to another. As a result, all of your investment goes
to work for you.
1) Shareholder transaction expenses: Expenses charged directly to your
individual account in the Fund for various transactions.
Sales commissions to purchase shares (sales load) NONE
Commissions to reinvest dividends NONE
Redemption fees NONE*
Fees to exchange shares NONE
2) Annual Fund operating expenses: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the
Fund's average daily net assets for the fiscal year ended March 31, 1998.
Investment management fee (after waiver) 0.21%**
12b-1 fees NONE
Other expenses 0.31%
-------
Total Fund operating expenses (after waiver) 0.52%**
=======
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$5 $17 $29 $65
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Fund. If you wish to receive your
redemption proceeds via wire, there is a $5 wire service fee. For
additional information, please refer to "Transaction information--Redeeming
shares."
** Until January 31, 1999, 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 0.60% of average daily net assets. If the Adviser had
not done so, Fund expenses would have been: investment management fee
0.60%, other expenses 0.31% and total operating expenses 0.91% for the
fiscal year ended March 31, 1998.
2
<PAGE>
Financial highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements. If you would like more detailed information concerning the Fund's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated March 31, 1998 which may be obtained
without charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of -----------------------------------------------------------------------------------
period ............................. $13.27 $13.31 $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income ................. .70 .71 .71 .73 .75 .76 .77 .82 .84 .79
Net realized and unrealized gain
(loss) on investment transactions .. .61 (.02) .25 .15 (.36) .87 .52 .08 .20 .40
Total from investment
operations ......................... 1.31 .69 .96 .88 .39 1.63 1.29 .90 1.04 1.19
-----------------------------------------------------------------------------------
Less distributions:
From net investment
income ............................. (.70) (.71) (.71) (.73) (.75) (.76) (.77) (.82) (.84) (.85)
From net realized gains on -----------------------------------------------------------------------------------
investment transactions ............ (.03) (.02) (.07) (.03) (.09) (.21) (.07) -- (.01) (.06)
-----------------------------------------------------------------------------------
Total distributions ................... (.73) (.73) (.78) (.76) (.84) (.97) (.84) (.82) (.85) (.91)
-----------------------------------------------------------------------------------
Net asset value, end of -----------------------------------------------------------------------------------
period ............................. $13.85 $13.27 $13.31 $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) .................. 10.08 5.30 7.45 7.09 2.70 13.19 10.70 7.58 8.75 11.00
Ratios and Supplemental Data
Net assets, end of period
($ millions) ....................... 79 74 76 72 74 61 39 26 18 11
Ratio of operating expenses, net to
average daily net assets (%) ....... .52 .50 .50 .50 .50 .50 .50 .50 .50 .50
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............... .91 .92 .91 .94 .95 1.02 1.13 1.43 1.84 2.43
Ratio of net investment income to
average daily net assets (%) ....... 5.12 5.32 5.30 5.74 5.42 5.79 6.05 6.67 6.78 7.09
Portfolio turnover rate (%) ........... 20.4 11.6 11.1 26.2 17.4 29.2 11.2 7.8 2.0 13.5
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
3
<PAGE>
A message from the President
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $200 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts. It is one of the ten
largest mutual fund companies in the U.S.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also 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 numerous other open- and closed-end funds that invest in this
country and other 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 shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
Funds or fund classes in the Scudder Family of Funds are offered without
commissions to purchase or redeem 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/Edmond Villani
Scudder Pennsylvania Tax
Free Fund
Investment objective
o income exempt from Pennsylvania personal income tax and regular federal
income tax
Investment characteristics
o primarily long-term investment-grade municipal securities tax-exempt in
Pennsylvania
o active professional management
o dividends declared daily and paid monthly
Contents
Investment objective and policies 5
Tax-exempt vs. taxable income 6
Why invest in the Fund? 7
Additional information about policies
and investments 7
Distribution and performance information 11
Fund organization 13
Transaction information 14
Shareholder benefits 18
Purchases 20
Exchanges and redemptions 21
Investment products and services 23
How to contact Scudder Back cover
4
<PAGE>
Investment objective and policies
Scudder Pennsylvania Tax Free Fund (the "Fund"), a non-diversified series of
Scudder State Tax Free Trust, seeks to provide Pennsylvania taxpayers with
income exempt from both Pennsylvania personal income tax and regular federal
income tax. Shares of the Fund are also not subject to Pennsylvania personal
property tax, to the extent the Fund's assets would not be subject to such tax
if held directly by individual shareholders. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal securities.
Except as otherwise indicated, the Fund's investment objective and policies are
not fundamental and may be changed without a shareholder vote. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
Quality
Normally, at least 75% of the intermediate- and long-term securities purchased
by the Fund will be investment-grade municipal securities which are those rated
Aaa, Aa, A, or Baa by Moody's Investors Service, Inc. ("Moody's") or AAA, AA, A,
or BBB by Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or unrated securities judged by the Fund's investment adviser,
Scudder Kemper Investments, Inc. (the "Adviser") to be of equivalent quality, or
securities issued or guaranteed by the U.S. Government. The Fund may also invest
up to 25% of its total assets in fixed-income securities rated below
investment-grade, that is, rated below Baa by Moody's or below BBB by S&P or
Fitch, or in unrated securities of equivalent quality as determined by the
Adviser. The Fund may not invest in fixed-income securities rated below B by
Moody's, S&P or Fitch, or their equivalent. During the fiscal year ended March
31, 1998, based upon the dollar-weighted average ratings of the Fund's portfolio
holdings at the end of each month during that period, the Fund had the following
percentage of its net assets invested in debt securities rated below
investment-grade (or if unrated, considered by the Adviser to be equivalent to
rated securities) in the category indicated: 1.27% unrated.
The Fund expects to invest principally in securities rated A or better by
Moody's, S&P or Fitch or unrated securities judged by the Adviser to be of
equivalent quality at the time of purchase. Securities in these three rating
categories are judged by the Adviser to have an adequate if not strong capacity
to repay principal and pay interest.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds"), have
produced higher yields in the past than investment-grade bonds, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the Adviser.
Should the rating of a portfolio security be downgraded after being purchased by
the Fund, the Adviser will determine whether it is in the best interest of the
Fund to retain or dispose of the security.
Investments
The Fund invests in municipal securities of issuers located in Pennsylvania and
other qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam). It is the opinion of bond counsel, rendered on the date of issuance, that
5
<PAGE>
income from these obligations is exempt from both Pennsylvania personal income
tax and regular federal income tax ("Pennsylvania municipal securities"). These
securities include municipal bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued. Municipal bonds
include general obligation bonds, which are secured by the issuer's pledge of
its faith, credit and taxing power for payment of principal and interest, and
revenue bonds, which may be issued to finance projects owned or used by either
private or public entities and which include bonds issued to finance industrial
enterprises and pollution control facilities. The Fund may invest in other
municipal securities such as variable rate demand instruments. The Fund may also
invest in municipal notes of issuers located in Pennsylvania and other
qualifying issuers. They are generally used to provide short-term capital needs
and have maturities of one year or less.
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.
Tax-exempt vs. taxable income
- -------------------------------------------------------------------------------
Tax Free Yields and Corresponding Taxable Equivalents. The table below shows
Pennsylvania taxpayers what an investor would have to earn from a comparable
taxable investment to equal Scudder Pennsylvania Tax Free Fund's double tax-free
yield. Today many investors may find that federal tax and Pennsylvania personal
income tax rates make Scudder Pennsylvania Tax Free Fund an attractive
alternative to investments paying taxable income.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
COMBINED TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7% AND
9%, A TAXABLE INVESTMENT WOULD HAVE TO EARN*:
1998 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
INDIVIDUAL
$25,350-61,400 30.02% 7.14% 10.00% 12.86%
61,401-128,100 32.93 7.46 10.44 13.42
128,101-278,450 37.79 8.04 11.25 14.47
OVER $278,450 41.29 8.52 11.92 15.33
JOINT RETURN
$42,351-102,300 30.02% 7.14% 10.00% 12.86%
102,301-155,950 32.93 7.46 10.44 13.42
155,951-278,450 37.79 8.04 11.25 14.47
OVER $278,450 41.29 8.52 11.92 15.33
</TABLE>
* These illustrations assume a marginal federal income tax rate of 28% to
39.6%, an effective Pennsylvania personal income tax rate of 2.80% for 1998
and that the federal alternative minimum tax is not applicable. Upper
income individuals may be subject to an effective federal income tax rate
in excess of the applicable marginal rate as a result of the phase-out of
personal exemptions and itemized deductions made permanent by the Revenue
Reconciliation Act of 1993. Individuals subject to these phase-out
provisions would have to invest in taxable securities with a yield in
excess of those shown on the table in order to achieve an after-tax yield
equivalent to the yield on a comparable tax-exempt security.
6
<PAGE>
Under normal market conditions, the Fund expects to invest principally in
Pennsylvania municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in Pennsylvania
municipal securities with short- and medium-term maturities as well.
The Fund may also invest up to 20% of its total assets in municipal securities
the interest income from which is taxable or subject to the alternative minimum
tax ("AMT" bonds). Fund distributions from interest on certain municipal
securities subject to the alternative minimum tax such as private activity
bonds, will be a preference item for purposes of calculating individual and
corporate alternative minimum taxes, depending upon investors' particular
situations. In addition, state and local taxes may apply, depending upon your
state and local tax laws.
Ordinarily, the Fund expects that 100% of its portfolio securities will be
Pennsylvania municipal securities. The Fund may also hold cash or invest its
assets in taxable securities.
The Fund may invest in stand-by commitments, third party puts, illiquid
securities, when-issued or forward delivery securities, and enter into
repurchase agreements and reverse repurchase agreements, which may involve
certain expenses and risks, including credit risks. These securities and
techniques are not expected to comprise a major portion of the Fund's
investments. The Fund may engage in strategic transactions for hedging purposes
and to seek gain. See "Additional information about policies and investments"
for more information about these investment techniques.
A portion of the Fund's income may be subject to federal, state and local income
taxes.
Why invest in the Fund?
The Fund is designed for investors seeking double tax-free income--exempt both
from Pennsylvania personal income tax and regular federal income tax. Because
the Fund is intended for investors subject to Pennsylvania personal income tax
and regular federal income tax, it may not be appropriate for all investors and
is not available in all states.
As illustrated by the chart on the preceding page, depending on your tax bracket
and individual situation, you may earn a substantially higher after-tax return
from the Fund than from comparable investments that pay income subject to both
Pennsylvania state personal income tax and regular federal income tax. For
example, if your regular federal marginal tax rate is 36% and your Pennsylvania
tax rate is 2.8%, your effective combined marginal tax rate is 37.8% when
adjusted for the deductibility of state taxes. Thus, you would need to earn a
taxable return of 7.14% to receive after-tax income equal to the 4.19% tax-free
yield provided by Scudder Pennsylvania Tax Free Fund for the 30-day period ended
March 31, 1998. In other words, it would be necessary to earn $1,608 from a
taxable investment to equal $1,000 of tax-free income you receive from the Fund.
The yield levels of tax-free and taxable investments continually change. Before
investing in the Fund, you should compare its yield to the after-tax yield you
would receive from a comparable investment paying taxable income. For up-to-date
yield information on the Fund, shareholders can call SAIL, Scudder Automated
Information Line, for toll-free information at any time.
Additional information about policies and investments
Investment restrictions
The Fund has certain investment restrictions which are designed to reduce the
Fund's investment risk. Fundamental investment restrictions may not be changed
without a vote of shareholders; non-fundamental investment restrictions may be
changed by a vote of the Trust's Board of Trustees.
7
<PAGE>
As a matter of fundamental policy, the Fund may not borrow money, except as
permitted under Federal law. Further, as a matter of non-fundamental policy, the
Fund may not borrow money in an amount greater than 5% of total assets, except
for temporary or emergency purposes.
As a matter of fundamental policy, the Fund may not make loans except through
the lending of portfolio securities, the purchase of debt securities or
interests in indebtedness or through repurchase agreements. The Fund has adopted
a non-fundamental policy restricting the lending of portfolio securities to no
more than 5% of total assets.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund's Statement of Additional
Information.
Investing in Pennsylvania
The Fund is more susceptible to factors adversely affecting issuers of
Pennsylvania municipal securities than is a comparable municipal bond fund that
does not focus on investments of Pennsylvania issuers. Pennsylvania encountered
some financial difficulties in prior years and may, as may any state, face some
long-term problems in certain regions of the State and in certain sectors of the
economy, which is concentrated in agriculture, heavy industry, medical and
health services, financial institutions, education and trade. For additional
information about the Pennsylvania economy, see the Fund's Statement of
Additional Information dated August 1, 1998.
When-issued securities
The Fund may purchase securities on a when-issued or forward delivery basis, for
payment and delivery at a later date. The price and yield are generally fixed on
the date of commitment to purchase. During the period between purchase and
settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Repurchase agreements
As a means of earning taxable income for periods as short as overnight, the Fund
may enter into repurchase agreements with selected banks and broker/dealers.
Under a repurchase agreement, the Fund acquires securities, subject to the
seller's agreement to repurchase at a specified time and price. Income from
repurchase agreements will be taxable when distributed to shareholders.
Stand-by commitments
To facilitate liquidity, the Fund may enter into "stand-by commitments"
permitting it to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost to the Fund, and
any costs would be, in any event, limited to no more than 0.50% of the value of
the total assets of the Fund. Any such costs may, however, reduce yield.
Third party puts
The Fund may purchase long-term fixed rate bonds that have been coupled with an
option granted by a third party financial institution allowing the Fund at
specified intervals to tender (or "put") its bonds to the institution and
receive the face value thereof. These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps.
Variable rate demand instruments
The Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit the Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent.
Municipal lease obligations
The Fund may invest in municipal lease obligations and participation interests
in such obligations. These obligations, which may take the form of a lease, an
8
<PAGE>
installment purchase contract or a conditional sales contract, are issued by
state and local governments and authorities to acquire land and a wide variety
of equipment and facilities. Generally, the Fund will not hold such obligations
directly, but will purchase a certificate of participation or other
participation interest in a municipal obligation from a bank or other financial
intermediary. A participation interest gives the Fund a proportionate interest
in the underlying obligation.
Indexed securities
The Fund may invest in indexed securities, the value of which is linked to
currencies, interest rates, commodities, indices or other financial indicators
("reference instruments"). The interest rate or (unlike most fixed-income
securities) the principal amount payable at maturity of an indexed security may
be increased or decreased, depending on changes in the value of the reference
instrument.
Illiquid securities
The Fund may invest a portion of its assets in securities for which there is not
an active trading market, or which have resale restrictions. These types of
securities generally offer a higher return than more readily marketable
securities, but carry the risk that the Fund may not be able to dispose of them
at an advantageous time or price.
Strategic Transactions and derivatives
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of the Fund's
portfolio or to enhance potential gain. These strategies may be executed through
the use of derivative contracts. Such strategies are generally accepted as a
part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of the Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
9
<PAGE>
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 to create leveraged exposure in the Fund. Please
refer to "Risk factors--Strategic Transactions and derivatives" for more
information.
Risk factors
The Fund's risks are determined by the nature of the securities held and the
portfolio management strategies used by the Adviser. The following are
descriptions of certain risks related to the investments and techniques that the
Fund may use from time to time.
Non-diversified investment company. As a "non-diversified" investment company,
the Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers than a diversified investment company. Investment in
the Fund may involve greater risk than investment in a diversified fund.
Investing in Pennsylvania. If either Pennsylvania or any of its local
governmental entities were to be unable to meet its financial obligations, the
income derived by the Fund, its net asset value or liquidity and the ability to
preserve or realize appreciation of the Fund's capital could be adversely
affected. Since the Fund will invest primarily in securities of Pennsylvania
issuers, political and economic factors affecting Pennsylvania could affect the
creditworthiness and the value of the securities in its portfolio. See
"Investing in Pennsylvania" in the Fund's Statement of Additional Information
for further details about the risks of investing in Pennsylvania obligations.
Lower-grade debt securities. While the Fund invests 75% of its assets in
investment-grade securities, the Fund may invest in securities rated below Baa
by Moody's or BBB by S&P or Fitch. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. Securities
rated below investment-grade are commonly referred to as "junk bonds" and
involve greater price volatility and higher degrees of speculation with respect
to the payment of principal and interest than higher quality fixed-income
securities. The market prices of such lower-rated debt securities may decline
significantly in periods of general economic difficulty. In addition, the
trading market for these securities is generally less liquid than for higher
rated securities and the Fund may have difficulty disposing of these securities
at the time it wishes to do so. The lack of a liquid secondary market for
certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing its portfolio and calculating
its net asset value.
Repurchase agreements. If the seller under a repurchase agreement becomes
insolvent, the Fund's right to dispose of securities may be restricted, or the
value of the securities may decline before the Fund is able to dispose of them.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the securities
under a repurchase agreement, the Fund may encounter delay and incur costs,
including a decline in the value of the securities before being able to sell the
securities.
Third party puts. In connection with a third party put, the financial
institution granting the option does not provide credit enhancement, and
typically if there is a default on or significant downgrading of the bond or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Fund will be that of holding a long-term bond.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
10
<PAGE>
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Fund. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property. For more information
please refer to the Fund's Statement of Additional Information.
Illiquid securities. The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Fund to sell them promptly at an
acceptable price.
Strategic Transactions and derivatives. Strategic Transactions, including
derivative contracts, have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.
Distribution and performance information
Dividends and capital gains distributions
The Fund's dividends from net investment income are declared daily and
distributed monthly. The Fund intends 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
11
<PAGE>
distribution may be made if necessary. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. According to preference, shareholders may receive
distributions in cash or have them reinvested in additional shares of the Fund.
Distributions derived from interest on Pennsylvania municipal securities are not
subject to regular federal income taxes, except for the possible applicability
of the federal alternative minimum tax. For federal income tax purposes, a
portion of the Fund's income may be taxable to shareholders as ordinary income.
Long-term capital gains distributions, if any, are taxable to individual
shareholders at a maximum 20% or 28% capital gains rate (depending on the Fund's
holding period for the assets giving rise to the gain), regardless of the length
of time shareholders have owned their shares. Short-term capital gains and any
other taxable income distributions are taxable as ordinary income. Distributions
of tax-exempt income are taken into consideration in computing the portion, if
any, of Social Security and railroad retirement benefits subject to federal and,
in some cases, state taxes.
Under Pennsylvania law, distributions paid by the Fund are exempt from
Pennsylvania personal income tax for individuals who reside in Pennsylvania to
the extent such distributions constitute dividends derived from interest
payments on Pennsylvania municipal securities or distributions of gain from the
sale of Pennsylvania municipal securities issued before February 1, 1994.
Other distributions, including capital gains not described in the preceding
sentence, are taxable. Dividends derived from interest payments on Pennsylvania
municipal securities or distributions of gain from the sale of Pennsylvania
municipal securities issued before February 1, 1994 are not included in the
Pennsylvania taxable income of a corporate shareholder subject to the
Pennsylvania corporate net income tax.
The Fund ordinarily provides income that is 100% free from Pennsylvania personal
income tax and regular federal income tax. However, income from repurchase
agreements is taxable.
Some of the Fund's interest income may be treated as a tax preference item that
may subject an individual investor to liability (or increased liability) under
the federal alternative minimum tax, depending upon an investor's particular
situation. However, at least 80% of the Fund's net assets will normally be
invested in Pennsylvania municipal securities whose interest income is not
treated as a tax preference item under the individual alternative minimum tax.
Tax-exempt income may also subject a corporate investor to liability (or
increased liability) under the corporate alternative minimum tax.
The Fund sends detailed tax information to shareholders about the amount and
type of its distributions by January 31 of the following year.
Performance information
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature, or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance. The "SEC yield" of the Fund is
an annualized expression of the net income generated by the Fund over a
specified 30-day (one month) period, as a percentage of the Fund's share price
on the last day of that period. This yield is calculated according to methods
required by the SEC, and therefore may not equate to the level of income paid to
shareholders. The Fund's "tax-equivalent yield" is calculated by determining the
rate of return that would have to be achieved on a fully taxable investment to
produce the after-tax equivalent of the Fund's yield, assuming certain tax
12
<PAGE>
brackets for a Fund shareholder. Yields are expressed as annualized percentages.
"Total return" is the change in value of an investment in the Fund for a
specified period. The "average annual total return" of the Fund is the average
annual compound rate of return of an investment in the Fund assuming the
investment has been held for one year, five years and ten years as of a stated
ending date. "Cumulative total return" represents the cumulative change in value
of an investment in the Fund for various periods. All types of total return
calculations assume that all dividends and capital gains distributions during
the period were reinvested in shares of the Fund. Performance will vary based
upon, among other things, changes in market conditions and the level of the
Fund's expenses.
Fund organization
Scudder Pennsylvania Tax Free Fund is a non-diversified series of Scudder State
Tax Free Trust (the "Trust"), an open-end management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"). The Trust
was organized as a Massachusetts business trust in May 1983.
The Fund's activities are supervised by the Trust's Board of Trustees.
Shareholders have one vote for each share held on matters on which they are
entitled to vote. The Trust is not required to hold, and has no current
intention of holding annual shareholder meetings, although special meetings may
be called for purposes such as electing or removing Trustees, changing
fundamental investment policies or approving an investment management contract.
Shareholders will be assisted in communicating with other shareholders in
connection with removing a Trustee as if Section 16(c) of the 1940 Act were
applicable.
Investment adviser
The Fund retains the investment management firm of Scudder Kemper Investments,
Inc., a Delaware corporation formerly known as Scudder, Stevens & Clark, Inc.
("Scudder"), to manage its daily investment and business affairs subject to the
policies established by the Board of Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law.
Scudder and Zurich Insurance Company ("Zurich"), an international insurance and
financial services organization, have formed a new global investment
organization by combining Scudder's business with that of Zurich's subsidiary,
Zurich Kemper Investments, Inc. and Scudder has changed its name to Scudder
Kemper Investments, Inc. As a result of the transaction, Zurich owns
approximately 70% of the Adviser, with the balance owned by the Adviser's
officers and employees.
The Adviser receives monthly an investment management fee for its services,
which fee equals approximately 0.60% of the Fund's average daily net assets on
an annual basis. The Fund's fee is payable monthly, provided that the Fund will
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Fund and unpaid.
The Adviser has agreed to maintain the annualized expenses of the Fund at not
more than 0.60% of the average daily net assets of the Fund until January 31,
1999. For the year ended March 31, 1998, the Adviser received an investment
management fee of 0.21% of the Fund's average daily net assets on an annual
basis.
All of the Fund's expenses are paid out of gross investment income. Shareholders
pay no direct charges or fees for investment services.
Scudder Kemper Investments, Inc. is located at Two International Place, Boston,
Massachusetts.
13
<PAGE>
Like other mutual funds and financial and business organizations worldwide, the
Fund could be adversely affected if computer systems on which the Fund relies,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to correctly process date-related information on
and after January 1, 2000. This risk is commonly called the Year 2000 Issue.
Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the Fund's business and
operations. The Adviser has commenced a review of the Year 2000 Issue as it may
affect the Fund and is taking steps it believes are reasonably designed to
address the Year 2000 Issue, although there can be no assurances that these
steps will be sufficient. In addition, there can be no assurances that the Year
2000 Issue will not have an adverse effect on the companies whose securities are
held by the Fund or on global markets or economies generally.
Transfer agent
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, a
subsidiary of the Adviser is the transfer, shareholder servicing and
dividend-paying agent for the Fund.
Underwriter
Scudder Investor Services, Inc., a subsidiary of the Adviser, is the Fund's
principal underwriter. Scudder Investor Services, Inc. confirms, as agent, all
purchases of shares of the Fund. Scudder Investor Relations is a telephone
information service provided by Scudder Investor Services, Inc.
Fund accounting agent
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Fund.
Custodian
State Street Bank and Trust Company is the Fund's custodian.
Transaction information
Purchasing shares
Purchases are executed at the next calculated net asset value per share after
the Fund's transfer agent receives the purchase request in good order. Purchases
are made in full and fractional shares. (See "Share price.")
By check. If you purchase shares with a check that does not clear, your purchase
will be canceled and you will be subject to any losses or fees incurred in the
transaction. Checks must be drawn on or payable through a U.S. bank. If you
purchase shares by check and redeem them within seven business days of purchase,
the Fund may hold redemption proceeds until the purchase check has cleared. If
you purchase shares by federal funds wire, you may avoid this delay. Redemption
requests by telephone prior to the expiration of the seven-day period will not
be accepted.
By wire. To open a new account by wire, first call Scudder at 1-800-225-5163 to
obtain an account number. A representative will instruct you to send a
completed, signed application to the transfer agent. Accounts cannot be opened
without a completed, signed application and a Scudder fund account number.
Contact your bank to arrange a wire transfer to:
The Scudder Funds
State Street Bank and Trust Company
Boston, MA 02101
ABA Number 011000028
DDA Account 9903-5552
Your wire instructions must also include:
- -- the name of the fund in which the money is to be invested,
- -- the account number of the fund, and
- -- the name(s) of the account holder(s).
The account will be established once the application and money order are
received in good order.
14
<PAGE>
You may also make additional investments of $100 or more to your existing
account by wire.
By exchange. The Fund may be exchanged for shares of other funds in the Scudder
Family of Funds, unless otherwise determined by the Board of Trustees. 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 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 "QuickBuy." If you elected "QuickBuy" 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
"QuickBuy," call 1-800-225-5163 for more information.
To purchase additional shares, call 1-800-225-5163. Purchases may not be for
more than $250,000. Proceeds in the amount of your purchase will be transferred
from your bank checking account in two or three business days following your
call. For requests received by the close of regular trading on the Exchange,
shares will be purchased at the net asset value per share calculated at the
close of trading on the day of your call. "QuickBuy" requests received after the
close of regular trading on the Exchange will begin their processing and be
purchased at the net asset value calculated the following business day.
If you purchase shares by "QuickBuy" and redeem them within seven days of the
purchase, the Fund may hold the redemption proceeds for a period of up to seven
business days. If you purchase shares and there are insufficient funds in your
bank account, the purchase will be canceled and you will be subject to any
losses or fees incurred in the transaction. "QuickBuy" transactions are not
available for most retirement plan accounts. However, "QuickBuy" transactions
are available for Scudder IRA accounts.
Redeeming shares
The Fund allows you to redeem shares (i.e., sell them back to the Fund) without
redemption fees.
By telephone. This is the quickest and easiest way to sell Fund shares. If you
provided your banking information on your application, you can call to request
that federal funds be sent to your authorized bank account. If you did not
include your banking information on your application, call 1-800-225-5163 for
more information.
Redemption proceeds will be wired to your bank unless otherwise requested. If
your bank cannot receive federal reserve wires, redemption proceeds will be
mailed to your bank. There will be a $5 charge for all wire redemptions.
You can also make redemptions from your Scudder fund account on SAIL by calling
1-800-343-2890.
If you open an account by wire, you cannot redeem shares by telephone until the
Fund's transfer agent has received your completed and signed application.
Telephone redemption is not available for shares held in Scudder IRA accounts
and most other Scudder retirement plan accounts.
15
<PAGE>
In the event that you are unable to reach the Fund by telephone, you should
write to the Fund; see "How to contact Scudder" for the address.
By "QuickSell." If you elected "QuickSell" 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 "QuickSell,"
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. "QuickSell" requests received after the close of regular
trading on the Exchange will begin their processing and be redeemed at the net
asset value calculated the following business day.
"QuickSell" transactions are not available for Scudder IRA accounts and most
other retirement plan accounts.
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. (The Fund reserves the right, however, to require a
signature guarantee for all redemptions.) You can obtain a signature guarantee
from most banks, credit unions or savings associations, or from broker/dealers,
municipal securities broker/dealers, government securities broker/dealers,
national securities exchanges, registered securities associations or clearing
agencies deemed eligible by the SEC. 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. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording telephone calls, testing a caller's identity and sending written
confirmation of telephone transactions. If the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine.
Share price
Purchases and redemptions, including exchanges, are made at net asset value.
Scudder Fund Accounting Corporation determines net asset value per share as of
the close of regular trading on the New York Stock Exchange (the "Exchange"),
normally 4 p.m. eastern time, on each day the Exchange is open for trading. Net
asset value per share is calculated by dividing the value of total Fund assets,
less all liabilities, by the total number of shares outstanding.
Processing time
All purchase and redemption requests must be received in good order by the
Fund's transfer agent. Those requests received by the close of regular trading
on the Exchange are executed at the net asset value per share calculated at the
close of trading that day. Purchase and redemption requests received after the
close of regular trading on the Exchange will be executed the following business
day. Purchases made by federal funds wire before noon eastern time will begin
16
<PAGE>
earning income that day; all other purchases received before the close of
regular trading on the Exchange will begin earning income the next business day.
Redeemed shares will earn income on the day on which the redemption request is
executed.
If you wish to make a purchase of $500,000 or more, you should notify Scudder
Investor Relations by calling 1-800-225-5163.
The Fund will normally send redemption proceeds within one business day
following the redemption request, but may take up to seven business days (or
longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
Fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of Fund shares (including exchanges) for any reason including when a
pattern of frequent purchases and sales made in response to short-term
fluctuations in the Fund's share price appears evident.
Tax information
A redemption of shares, including an exchange into another Scudder fund, is a
sale of shares and may result in a gain or loss for income tax purposes.
Tax identification number
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and redemption
and exchange proceeds from accounts (other than those of certain exempt payees)
without a correct certified Social Security or tax identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required. The Fund reserves the right to reject new
account applications without a correct certified Social Security or tax
identification number. The Fund also reserves the right, following 30 days'
notice, to redeem all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
redemption by providing the Fund with a tax identification number during the
30-day notice period.
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.
17
<PAGE>
Redemption-in-kind
The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by the Fund
and valued as they are for purposes of computing the Fund's net asset value (a
redemption-in-kind). If payment is made in securities, a shareholder may incur
transaction expenses in converting these securities to cash.
Shareholder benefits
Experienced professional management
Scudder Kemper Investments, Inc., one of the nation's most experienced
investment management firms, actively manages your Scudder fund investment.
Professional management is an important advantage for investors who do not have
the time or expertise to invest directly in individual securities.
A team approach to investing
Scudder Pennsylvania Tax Free Fund is managed by a team of investment
professionals, who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by the Adviser'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 our extensive resources.
Lead Portfolio Manager Philip G. Condon assumed responsibility for the Fund's
day-to-day management in 1998 and became a member of the team in 1987. Mr.
Condon has been with the Adviser since 1983. Mr. Condon has 18 years of
experience in municipal investing and portfolio management. Rebecca L. Wilson,
Portfolio Manager, became a member of the team in 1998. Ms. Wilson, who joined
the Adviser in 1986, has 12 years of experience in municipal investing and
research.
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. (The exchange
privilege may not be available for certain Scudder funds or classes thereof. For
more information, please call 1-800-225-5163.) 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 CounselSM -- 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 Kemper Investments, Inc., combines the benefits of a
18
<PAGE>
customized portfolio of no-load mutual funds with ongoing portfolio monitoring
and individualized service, for an annual fee of generally 1.25% or less of
assets. In addition, it draws upon the Adviser'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 will receive a detailed statement summarizing account activity, including
dividend and capital gain reinvestment, purchases and redemptions. All of your
statements should be retained to help you keep track of account activity and the
cost of shares for tax purposes.
Shareholder reports
In addition to account statements, you receive periodic shareholder reports
highlighting relevant information, including investment results and a review of
portfolio changes.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call 1-800-225-5163 if you wish to receive additional
shareholder reports.
Newsletters
Four times a year, Scudder sends you Perspectives, an informative newsletter
covering economic and investment developments, service enhancements and other
topics of interest to Scudder fund investors.
Scudder Investor Centers
As a convenience to shareholders who like to conduct business in person, Scudder
Investor Services, Inc. maintains Investor 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.
19
<PAGE>
Purchases
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Opening
an account Minimum initial investment: $2,500; IRAs $1,000
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
o By Mail Send your completed and signed application and check
Make checks
payable to "The
Scudder Funds."
by regular mail or by express, registered,
to: or certified mail to:
The Scudder Funds The Scudder Funds
P.O. Box 2291 66 Brooks Drive
Boston, MA Braintree, MA 02184
02107-2291
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 Investor Centers to complete your application with the
help of a Scudder representative. Investor Center locations are listed
under Shareholder benefits.
-----------------------------------------------------------------------------------------------------------------------
Purchasing
additional shares Minimum additional investment: $100; IRAs $50
Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
See appropriate plan literature.
Make checks o By Mail Send a check with a Scudder investment slip, or with a letter of
payable to "The instruction including your account number and the complete Fund name, to
Scudder Funds." the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares-- By wire for details, including
the ABA wire transfer number.
o In Person Visit one of our Investor Centers to make an additional investment in your
Scudder fund account. Investor Center locations are listed under Shareholder
benefits.
o By Telephone Please see Transaction information--Purchasing shares-- By QuickBuy or By telephone
order for more details.
o By Automatic You may arrange to make investments on a regular basis through automatic
Investment Plan deductions from your bank checking account. Please call 1-800-225-5163
($50 minimum) for more information and an enrollment form.
20
<PAGE>
Exchanges and redemptions
Exchanging shares
Minimum investments: $2,500 to establish a new account;
$100 to exchange among existing accounts
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Scudder Funds 1-800-821-6234
P.O. Box 2291 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184
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 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. Call
Withdrawal Plan 1-800-225-5163 for more information and an enrollment form.
</TABLE>
21
<PAGE>
Scudder tax-advantaged retirement plans
Scudder offers a variety of tax-advantaged retirement plans for individuals,
businesses and non-profit organizations. These flexible plans are designed for
use with the Scudder Family of Funds (except Scudder tax-free funds, which are
inappropriate for such plans). Scudder Funds offer a broad range of investment
objectives and can be used to seek almost any investment goal. Using Scudder's
retirement plans can help shareholders save on current taxes while building
their retirement savings.
o Scudder No-Fee IRA
o Scudder Roth No-Fee IRA
o Keogh Plans
o 401(k) Plans
o Profit Sharing and Money Purchase Pension 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 and most 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.
Scudder Investor Relations is a service provided through Scudder Investor
Services, Inc., Distributor.
22
<PAGE>
Investment products and services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series--
Premium Shares*
Managed Shares*
Scudder Government Money Market Series--
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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 Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan **+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *A class of
shares of the Fund. **Not available in all states. ***Only the Scudder Shares of
the Fund are part of the Scudder Family of Funds. ++Only the International
Shares of the Fund are part of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New
York Stock Exchange and, in some cases, on various foreign stock exchanges.
23
<PAGE>
<TABLE>
<CAPTION>
How to contact Scudder
Account Service and Information:
<S> <C>
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 Investor Center:
Many shareholders enjoy the personal, one-on-one service of the Scudder
Investor Centers. Check for an Investor Center near you--they can be
found in the following cities:
Boca Raton Chicago San Francisco
Boston New York
Scudder Investor Relations and Scudder Investor Centers are services provided
through Scudder Investor Services, Inc., Distributor.
</TABLE>
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA
02061--Member NASD/SIPC.
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
and
SCUDDER MASSACHUSETTS TAX FREE FUND
Two Pure No-Load(TM) (No Sales Charges) Non-Diversified Mutual Funds
Specializing in the Management
of Massachusetts Municipal
Security Portfolios
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder
Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax Free Fund
dated August 1, 1998, as amended from time to time, a copy of which may be
obtained without charge by writing to Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
<CAPTION>
Page
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
Master/Feeder Structure.................................................................................... 3
Municipal Obligations....................................................................................... 4
Management Strategies....................................................................................... 7
Special Considerations...................................................................................... 8
Trustees' Power to Change Objective and Policies........................................................... 22
Investment Restrictions.....................................................................................22
PURCHASES...........................................................................................................23
Additional Information About Opening an Account.............................................................23
Checks..................................................................................................... 24
Wire Transfer of Federal Funds..............................................................................24
Additional Information About Making Subsequent Investments..................................................24
Additional Information About Making Subsequent Investments by QuickBuy......................................24
Checks......................................................................................................25
Share Price.................................................................................................25
Share Certificates..........................................................................................25
Other Information...........................................................................................25
EXCHANGES AND REDEMPTIONS............................................................................................26
Exchanges...................................................................................................26
Redemption by Telephone.....................................................................................26
Redemption By QuickSell.....................................................................................27
Redemption by Mail or Fax...................................................................................28
Redemption by Write-a-Check.................................................................................28
Redemption-in-Kind..........................................................................................28
Other Information...........................................................................................28
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................29
The Pure No-Load(TM) Concept................................................................................29
Internet access.............................................................................................30
Dividends and Capital Gains Distribution Options............................................................31
Scudder Investor Centers....................................................................................31
Reports to Shareholders.....................................................................................31
Transaction Summaries.......................................................................................31
THE SCUDDER FAMILY OF FUNDS..........................................................................................32
SPECIAL PLAN ACCOUNTS................................................................................................37
Automatic Withdrawal Plan...................................................................................37
Cash Management System--Group Sub-Accounting Plan...........................................................37
Automatic Investment Plan...................................................................................38
Uniform Transfers/Gifts to Minors Act.......................................................................38
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................38
PERFORMANCE INFORMATION..............................................................................................39
Average Annual Total Return.................................................................................39
Cumulative Total Return.....................................................................................39
Total Return................................................................................................40
SEC Yield...................................................................................................40
Tax-Equivalent Yield........................................................................................40
Comparison of Fund Performance..............................................................................41
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
ORGANIZATION OF THE FUNDS............................................................................................44
INVESTMENT ADVISER...................................................................................................45
Personal Investments by Employees of the Adviser............................................................48
TRUSTEES AND OFFICERS................................................................................................48
REMUNERATION.........................................................................................................50
Responsibilities of the Board -- Board and Committee Meetings..............................................50
Compensation of Officers and Trustees..................................................................... 51
DISTRIBUTOR........................................................................................................ 52
TAXES................................................................................................................52
Federal Taxation.......................................................................................... 53
State Taxation..............................................................................................55
PORTFOLIO TRANSACTIONS...............................................................................................56
Brokerage Commissions.......................................................................................56
Portfolio Turnover..........................................................................................57
NET ASSET VALUE......................................................................................................57
ADDITIONAL INFORMATION...............................................................................................58
Experts.....................................................................................................58
Shareholder Indemnification.................................................................................58
Ratings of Municipal Obligations............................................................................58
Commercial Paper Ratings....................................................................................59
Glossary....................................................................................................60
Other Information...........................................................................................60
FINANCIAL STATEMENTS.................................................................................................62
Massachusetts Limited Term Tax Free Fund....................................................................62
Massachusetts Tax Free Fund.................................................................................62
</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 each a
non-diversified 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 Corporation Ratings Services ("S&P"), or Fitch
Investors Service, Inc. ("Fitch"), or in securities considered to be of
equivalent quality. There can be no assurance that the objective of the Fund
will be achieved or that all income to shareholders which is exempt from regular
federal income taxes will be exempt from state income or local taxes or that
income exempt from regular federal income tax will be exempt from the federal
alternative minimum tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the Commonwealth of Massachusetts and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Massachusetts residents, would be exempt, in the
opinion of bond counsel rendered on the date of issuance, from Massachusetts
personal income as well as regular federal income taxes. Because the Fund is
intended for investors subject to Massachusetts personal income tax and federal
income tax it may not be appropriate for all investors and is not available in
all states. As described below in "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 Kemper Investments, 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. Normally, at least 75% of the
municipal securities purchased by the Fund will be investment-grade quality
which are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P
or Fitch, or if unrated, judged by the Adviser, to be of equivalent quality.
The Fund may invest up to 25% of its total assets in fixed-income
securities rated below investment-grade; that is, rated below Baa by Moody's or
below BBB by S&P or Fitch, or in unrated securities of equivalent quality as
determined by the Adviser. The Fund may not invest in fixed-income securities
rated below B by Moody's, S&P or Fitch, or their equivalent.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds") have
produced higher yields in the past than investment-grade bonds, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the
Adviser. Should the rating of a portfolio security be downgraded after being
purchased by the Fund, the Adviser will determine whether it is in the best
interest of that Fund to retain or dispose of the security.
It is a fundamental policy, which may not be changed without a vote of
shareholders, that each Fund normally invests at least 80% of its net assets in
municipal securities of issuers located in Massachusetts and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam). It is the
opinion of bond counsel, rendered on the date of issuance, that income from
these obligations is exempt from both Massachusetts personal income tax and
regular federal income tax ("Massachusetts municipal securities"). These
securities include municipal bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued. Municipal bonds
include general obligation bonds, which are secured by the issuer's pledge of
its faith, credit and taxing power for payment of principal and interest, and
revenue bonds, which may be issued to finance projects owned or used by either
private or public entities and which include bonds issued to finance industrial
enterprises and pollution control facilities.
The Fund may invest in other municipal securities such as variable rate
demand instruments, as well as municipal notes of issuers located in
Massachusetts and other qualifying issuers, which are generally used to provide
short-term capital needs and have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes. For federal income tax purposes,
the income earned from municipal securities may be entirely tax-free, taxable or
subject to only the alternative minimum tax.
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Under normal market conditions, the Fund expects 100% of its portfolio
securities to consist of Massachusetts municipal securities. However, if
defensive considerations or an unusual disparity between after-tax income on
taxable and municipal securities makes it advisable, up to 20% of the Fund's
assets may be held in cash or invested in short-term taxable investments,
including U.S. Government obligations and money market instruments and, in the
case of Scudder Massachusetts Tax Free Fund, repurchase agreements.
The Fund may temporarily invest more than 20% of its net assets in
taxable securities during periods which, in the Adviser's opinion, require a
defensive position. It is impossible to accurately predict how long such
alternative strategies may be utilized.
The Fund may also invest up to 20% of its total assets in municipal
securities the interest income from which is taxable or subject to the
alternative minimum tax ("AMT" bonds). Fund distributions from interest on
certain municipal securities subject to the alternative minimum tax, such as
private activity bonds, will be a preference item for purposes of calculating
individual and corporate alternative minimum taxes, depending upon investors'
particular situations. In addition, state and local taxes may apply, depending
upon your state and local tax laws.
The Fund may invest in third party puts, and when-issued or forward
delivery securities, which may involve certain expenses and risks, including
credit risks. The Funds may also enter into repurchase agreements, reverse
repurchase agreements and stand-by commitments which may involve certain
expenses and risks, including credit risks. None of these securities and
techniques is expected to comprise a major portion of the Funds' investments. In
addition, each Fund may purchase indexed securities and may engage in strategic
transactions.
The Fund purchases securities that it believes are attractive and
competitive values in terms of quality, yield and the relationship of current
price to maturity value. However, recognizing the dynamics of municipal
obligation prices in response to changes in general economic conditions, fiscal
and monetary policies, interest rate levels and market forces such as supply and
demand for various issues, the Adviser, subject to the Trustees' supervision,
performs credit analysis and manages the Fund's portfolio continuously,
attempting to take advantage of opportunities to improve total return, which is
a combination of income and principal performance over the long term.
Normally, at least 80% of the Fund's net assets will be invested in
securities whose interest income is not treated as a tax preference item under
the individual alternative minimum tax. Furthermore, all of the Fund's portfolio
obligations, including short-term obligations, will be (a) rated at the time of
purchase within the six highest grades assigned by Moody's, S&P or Fitch, (b) if
not rated, judged at the time of purchase by the Adviser, to be of a quality
comparable to the six highest ratings of Moody's, S&P or Fitch and to be readily
marketable, or (c) issued or guaranteed by the U.S. Government. Should the
rating of a portfolio security be downgraded, the Adviser will determine whether
it is in the best interest of the Fund to retain or dispose of the security.
During the fiscal year ended March 31, 1998, based upon the dollar-weighted
average ratings of the portfolio holdings at the end of each month during that
period, the Fund had the following percentage of its net assets invested in debt
securities rated below investment-grade (or if unrated, considered by the
Adviser to be equivalent to rated securities) : 0%.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Massachusetts municipal securities make it advisable to do so, up to
20% of the Fund's net assets may be held in cash or invested in short-term
taxable investments such as (1) U.S. Treasury notes, bills and bonds; (2)
obligations of agencies and instrumentalities of the U.S. Government; and (3)
money market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances. It is
impossible to accurately predict how long such alternative strategies may be
utilized.
Master/Feeder Structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure
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<PAGE>
permits the pooling of assets of two or more feeder funds, preserving separate
identities or distribution channels at the feeder fund level. Based on the
premise that certain of the expenses of operating an investment portfolio are
relatively fixed, a larger investment portfolio may eventually achieve a lower
ratio of operating expenses to average net assets. An existing investment
company is able to convert to a feeder fund by selling all of its investments,
which involves brokerage and other transaction costs and realization of a
taxable gain or loss, or by contributing its assets to the master fund and
avoiding transaction costs and, if proper procedures are followed, the
realization of taxable gain or loss.
Municipal Obligations
Municipal obligations are issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions, agencies
and instrumentalities to obtain funds for various public purposes. The interest
on most of these obligations is generally exempt from regular federal income tax
in the hands of most individual investors, although it may be subject to the
individual and corporate alternative minimum tax. Interest on municipal
obligations issued by Massachusetts issuers is generally exempt from
Massachusetts personal income tax. The two principal classifications of
municipal obligations are "notes" and "bonds."
1. Municipal Notes. Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: tax anticipation notes; revenue anticipation notes;
bond anticipation notes; and construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Tax anticipation notes and revenue anticipation
notes are generally issued in anticipation of various seasonal revenues such as
income, sales, use, and business taxes. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as federal revenues
available under the Federal Revenue Sharing Program. Bond anticipation notes are
sold to provide interim financing. These notes are generally issued in
anticipation of long-term financing in the market. In most cases, such financing
provides for the repayment of the notes. Construction loan notes are sold to
provide construction financing. After the projects are successfully completed
and accepted, many projects receive permanent financing through the Federal
Housing 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.
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<PAGE>
Industrial development and pollution control bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Under federal tax legislation, certain
types of Industrial Development Bonds and Pollution Control Bonds may no longer
be issued on a tax-exempt basis, although previously-issued bonds of these types
and certain refundings of such bonds are not affected. Each Fund may invest more
than 25% of its assets in industrial development or other private activity
bonds, subject to each Fund's fundamental investment policies, and also subject
to each Fund's current intention not to invest in municipal securities whose
investment income is taxable or subject to each Fund's 20% limitation on
investing in municipal securities the interest income from which is subject to
the alternative minimum tax ("AMT bonds"). For the purposes of each Fund's
investment limitation regarding concentration of investments in any one
industry, industrial development or other private activity bonds ultimately
payable by companies within the same industry will be considered as if they were
issued by issuers in the same industry.
3. Other Municipal Obligations. There is, in addition, a variety of
hybrid and special types of municipal obligations as well as numerous
differences in the security of municipal obligations both within and between the
two principal classifications above.
Each Fund may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. Each Fund intends to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to a Fund, or (3) to maintain an
investment grade investment portfolio. A bank that issues a repurchase
commitment may receive a fee from a Fund for this arrangement. The issuer of a
variable rate demand instrument may have a corresponding right to prepay in its
discretion the outstanding principal of the instrument plus accrued interest
upon notice comparable to that required for the holder to demand payment.
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.
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<PAGE>
4. General Considerations. An entire issue of municipal obligations may
be purchased by one or a small number of institutional investors such as either
Fund. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933 (the "1933 Act") prior
to offer and sale unless an exemption from such registration is available,
municipal obligations which are not publicly offered may nevertheless be readily
marketable. A secondary market exists for municipal obligations which were not
publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in a Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. In addition,
Stand-by Commitments and demand obligations also enhance marketability.
For the purpose of a Fund's investment restrictions, the identification
of the "issuer" of municipal obligations which are not general obligation bonds
is made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. Government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments, which might affect all
municipal obligations of a similar type. However, each Fund believes that the
most important consideration affecting risk is the quality of particular issues
of municipal obligations, rather than factors affecting all, or broad classes
of, municipal obligations.
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.
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Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely a Fund's net asset
value. In addition, a Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
During the fiscal year ended October 31, 1997 for Scudder Massachusetts
Limited Term Tax Free Fund, the average monthly dollar-weighted market value of
the bonds in the Fund's portfolio rated lower than BBB by Moody's, S&P or Fitch,
or their equivalent was 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:
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.
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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.
State Economy. Throughout much of the 1980s, the Commonwealth had a
strong economy which was evidenced by low unemployment and high personal income
growth as compared to national trends. Economic growth in the Commonwealth
slowed in the late 1980s and early 1990s. All sectors of the economy experienced
job losses, including the high technology, construction and financial
industries. In addition, the economy experienced shifts in employment from
labor-intensive manufacturing industries to technology and service-based
industries. Current economic indicators such as retail sales, housing permits,
construction, and employment levels suggest a strong and continued economic
recovery. The unemployment rate for the Commonwealth as of January 1998 was 4.0%
compared to a national average of 5.2%. The unemployment rate is expected to
remain steady at 3.7% to 3.9% through Calendar Year 2000. In addition, in 1997
employment in manufacturing increased by almost 2%, the largest annual increase
in manufacturing in over twelve years. Although the rate of growth for per
capita personal income has outpaced the national average since 1991 and still
remains among the highest in the nation, it is expected to fall from
approximately 5.7% in Fiscal Year 1998 to 4.3% to 4.5% in Fiscal Year 1999 and
remain at that level for a few years.
Major infrastructure projects are anticipated in the Commonwealth over
the next decade. It is currently anticipated that the federal government will
assume responsibility for approximately 60% of the estimated $10.8 billion cost
of projects which consist of the depression of the central artery which
traverses the City of Boston and the construction of a third harbor tunnel
linking downtown Boston to Logan Airport. The 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,
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group health insurance and transit subsidies) grew at rates in excess of the
rate of inflation for the comparable period. In addition, the Commonwealth's tax
revenues during this period repeatedly failed to meet official forecasts. For
the budgeted funds, operating losses in fiscal 1987 and 1988, of $349 million
and $370 million, respectively, were covered by surpluses carried forward from
prior years. The operating losses in fiscal 1989 and 1990, which totaled $672
million and $1.251 billion, respectively, were covered primarily through deficit
borrowings. During that period, operating fund balances declined from a budget
surplus of $1.072 billion in fiscal 1987 to a deficit of $1.104 billion for the
fiscal year ending 1990.
For the fiscal year ending June 30, 1991, total operating revenues of
the Commonwealth increased by 13.5% over the prior year, to $13.878 billion.
This increase was due chiefly to state tax increases enacted in July, 1990 and
to a substantial federal reimbursement for uncompensated patient care under the
Medicaid program. 1991 expenditures also increased over the prior year to
$13.899 billion resulting in an operating loss in the amount of $21.2 million.
However, after applying the opening fund balances created from proceeds of the
borrowing that financed the fiscal 1990 deficit, no deficit borrowing was
required to close-out fiscal 1991.
For the fiscal year ended June 30, 1992, the budgeted operating funds
ended with an excess of revenues and other sources over expenditures and other
uses of $312.3 million and with a surplus of $549.4 million, when such excess is
added to the fund balances carried forward from fiscal 1991.
The budgeted operating funds of the Commonwealth ended fiscal 1993 with
a surplus of revenues and other sources over expenditures and other uses of
$13.1 million and aggregate ending fund balances in the budgeted operating funds
of the Commonwealth of approximately $562.5 million. Budgeted revenues and other
sources for fiscal 1993 totaled approximately $14.710 billion, including tax
revenues of $9.930 billion. Total revenues and other sources increased by
approximately 6.9% from fiscal 1992 to 1993, while tax revenues increased by
4.7% for the same period. In July 1992, tax revenues had been estimated to be
approximately $9.685 billion for fiscal 1993. This amount was subsequently
revised during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other uses in fiscal 1993
totaled approximately $14.696 billion, which is $1.280 billion or approximately
9.6% higher than fiscal 1992 expenditures and other uses. Fiscal 1993 budgeted
expenditures were $23 million lower than the initial July 1992 estimates of
fiscal 1993 budgeted expenditures.
As of June 30, 1993, after payment of all Local Aid and retirement of
short-term debt, the Commonwealth showed a year-end cash position of
approximately $622.2 million, as compared to a projected position of $485.1
million.
The budgeted operating funds of the Commonwealth ended fiscal 1994 with
a surplus of revenues and other sources over expenditures and other uses of
$26.8 million and aggregate ending fund balances in the budgeted operating funds
of the Commonwealth of approximately $589.3 million. Budgeted revenues and other
sources for fiscal 1994 totaled approximately $15.550 billion, including tax
revenues of $10.607 billion, $87 million below the Department of Revenue's
fiscal 1994 tax revenue estimate of $10.694 billion. Total revenues and other
sources increased by approximately 5.7% from fiscal 1993 to fiscal 1994 while
tax revenues increased by 6.8% for the same period.
Commonwealth budgeted expenditures and other uses in fiscal 1994
totaled $15.523 billion, which is $826.5 million or approximately 5.6% higher
than fiscal 1993 budgeted expenditures and other uses.
As of June 30, 1994, the Commonwealth showed a year-end cash position
of approximately $757 million, as compared to a projected position of $599
million.
Fiscal 1995 tax revenue collections totaled $11.163 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $11.151 billion, and approximately $556 million, or
5.2%, above fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and
other sources, including non-tax revenues collected in fiscal 1995 totaled
$16.387 billion, approximately $837 million, or 5.4%, above fiscal 1994 budgeted
revenues of $15.550 billion. Budgeted expenditures and other uses of funds in
fiscal 1995 were approximately $16.251 billion, approximately $728 million, or
4.7%, above fiscal 1994 budgeted expenditures and uses of $15.523 billion.
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The Commonwealth ended fiscal 1995 with an operating gain of $137 million and an
ending fund balance of $726 million.
The Commonwealth ended fiscal 1996 with a surplus of revenues and other
sources over expenditures and other uses of $446.4 million resulting in
aggregate ending fund balances in the budgeted operating funds of the
Commonwealth of approximately $1.173 billion. Budgeted revenues and other
sources for fiscal 1996 totaled approximately $17.327 billion, including tax
revenues of approximately $12.049 billion, approximately $365 million higher
than prior official estimate in May, 1996. Budgeted revenues and other sources
increased by approximately 5.7% from fiscal 1995 to fiscal 1996, while tax
revenues increased by approximately 7.9% for the same period. Income tax
withholding payments increased by approximately 8.0% from fiscal 1995, and total
income tax collections by approximately 12.3%. Budgeted expenditures and other
uses in fiscal 1996 totaled approximately $16.896 billion, an increase of
approximately $645.7 million, or 4.0%, over fiscal 1995.
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $179.4 million, bringing the Stabilization Fund balance to
approximately $627.1 million, which exceeded the amount that can remain in the
Stabilization Fund by law, $543.3 million. In fiscal 1997, the statutory ceiling
on the Stabilization Fund was raised from 5% of total tax revenues to 5% of
total budgetary revenues. At the end of fiscal 1997, the Stabilization Fund's
balance was $799.3 million. Under state finance law, year-end surplus amounts
(as defined in the law) in excess of the amount that can remain in the
Stabilization Fund are transferred to the Tax Reduction Fund, to be applied,
subject to legislative appropriation, to the reduction of personal income taxes.
The budgeted operating funds of the Commonwealth ended fiscal 1997 with
a surplus of revenues and other sources over expenditures and other uses of
$221.0 million and aggregate ending fund balances in the budgeted operating
funds of the Commonwealth of approximately $1.394 billion. Budgeted revenues and
other sources for fiscal 1997 totaled approximately $18.170 billion, including
tax revenues of $12.864 billion, an increase of approximately 6.8% over fiscal
1996. Commonwealth budgeted expenditures and other uses in fiscal 1997 totaled
$19.949 billion. At the end of fiscal 1997, the Commonwealth showed a year-end
cash position of approximately $902.0 million, which did not include the
aforementioned Stabilization Fund ending balance of $799.3 million.
Beginning in 1989, S&P and Moody's lowered their ratings of the
Commonwealth's general obligation bonds from AA+ and Aa, respectively, to BBB
and Baa, respectively. In March 1992, S&P placed the Commonwealth's general
obligation and related guaranteed bond ratings on CreditWatch with positive
implications, citing such factors as continued progress towards balanced
financial operations and reduced short-term borrowing as the basis for the
positive forecast. As of the date hereof, the Commonwealth's general obligation
bonds are rated AA- by S&P and A1 by Moody's. From time to time, the rating
agencies may further change their ratings.
State Budget. On July 10, 1997, the Governor signed the budget for the
1998 fiscal year. When signed, the budget marked the eighth consecutive year in
which the Commonwealth's budget was balanced without new taxes or deficit
borrowing. The fiscal 1998 budget contained three tax cuts with an aggregate
fiscal cost of approximately $60.9 million. Budgeted revenues and other sources
to be collected in fiscal 1998 are estimated by the Executive Office for
Administration and Finance to be approximately $17.998 billion. This amount
includes estimated fiscal 1998 tax revenues of $12.667 billion. Collections
through December, 1997 totaled $6.147 billion, up 5.9% or $341 million, from the
same period in Fiscal Year 1997.
Fiscal 1998 non-tax revenues are projected to total approximately
$5.582 billion, approximately $276.5 million more than fiscal 1997 non-tax
revenues after adjusting for the shifts to and from certain non-budgeted items.
Federal reimbursements are projected to increase by approximately $300 million,
from approximately $3.019 billion in fiscal 1997 to $3.365 billion in fiscal
1998. The fiscal 1998 budget is based on numerous spending and revenue
estimates, the achievement of which cannot be assured.
On January 27, 1998 the Governor submitted the proposed budget for the
1999 fiscal year. The fiscal 1999 budget contains five tax cuts with an
aggregate fiscal cost of approximately $244.8 million. Budgeted revenues and
other sources to be collected in fiscal 1999 are estimated by the Executive
Office for Administration and Finance to be approximately $18.961 billion. This
amount includes estimated fiscal 1999 tax revenues of $13.665 billion. Total
Fiscal Year 1999 tax revenue collections are estimated to increase by a net 3.9%
over Fiscal Year 1998 levels.
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Fiscal 1999 non-tax revenues are projected to total approximately
$5.296 billion, approximately $10 million less than fiscal 1998 non-tax revenues
after adjusting for the shifts to and from certain non-budgeted items. Federal
reimbursements decrease by approximately $86 million, from approximately $3.302
billion in fiscal 1998 to $3.216 billion in fiscal 1999. The fiscal 1999 budget
is based on numerous spending and revenue estimates, the achievement of which
cannot be assured.
Debt Limits and Outstanding Debt. Growth of tax revenues in the
Commonwealth is limited by law. Tax revenues in each of fiscal years 1988 to
1992 were lower than the limits set by law. In addition, during each of the
fiscal years 1989 through 1991, the official tax revenue forecasts made at the
beginning of the year proved to be substantially more optimistic than the actual
results. The fiscal 1992 budget initially was based on the joint revenue
estimate of $8.292 billion, a 7% decrease from 1991, while actual tax revenues
were $9.484 billion, a 5.4% increase over fiscal 1991. The fiscal 1993 budget
initially was based on the joint revenue estimate of $9.685 billion, an increase
of 2.1% over 1992. The actual 1993 tax revenues were $9.930 billion, a 4.7%
increase over 1992. On May 13, 1993, the tax revenue forecast of the
Chairpersons of the House and Senate Ways and Means Committees and the Secretary
for Administration and Finance for fiscal 1994 was $10.540 billion, an increase
of 6.1% over 1993. Actual fiscal 1994 tax revenues were $10.607 billion, a 6.8%
increase over fiscal 1993.
In May 1994, the Chairpersons of the House and Senate Ways and Means
Committees and the Secretary for Administration and Finance jointly endorsed an
estimate of tax revenues for fiscal 1994 of $11.328 billion, an increase of $634
million, or 5.9%, from then expected tax revenues for fiscal 1994 of $10.694
billion. The fiscal 1995 budget was based upon this tax revenue estimate, less
$19.3 million of tax cuts signed by the Governor in the fiscal 1995 budget.
Fiscal 1995 tax revenue collections were approximately $11.163 billion. Fiscal
1996 tax revenue collections were $12.049 billion. Fiscal 1997 tax revenue
collections were $12.864 billion. Fiscal 1998 tax revenue collections are
projected to be approximately $13.154 billion. For Fiscal Year 1999, tax revenue
collections are projected to be approximately $13.665 billion.
Effective July 1, 1990, limitations were placed on the amount of direct
bonds the Commonwealth may have outstanding in a fiscal year, and the amount of
the total appropriation in any fiscal year that may be expended for payment of
principal of and interest on general obligation debt of the Commonwealth was
limited to 10 percent of such appropriation. Bonds in the aggregate principal
amount of $1.399 billion issued in October and December, 1990, under Chapter 151
of the Acts of 1990 to meet the fiscal 1990 deficit are excluded from the
computation of these limitations, and principal of and interest on such bonds
are to be repaid from up to 15% of the Commonwealth's income receipts and tax
receipts in each year that such principal or interest is payable.
Furthermore, certain of the Commonwealth's cities and towns have at
times experienced serious financial difficulties which have adversely affected
their credit standing. For example, due in large part to prior year cutbacks,
the City of Chelsea was forced into receivership in September 1991. The
recurrence of such financial difficulties, or financial difficulties of the
Commonwealth, could adversely affect the market values and marketability, or
result in default in payment on, outstanding obligations issued by the
Commonwealth or its public authorities or municipalities. In addition, recent
developments regarding the Massachusetts statutes which limit the taxing
authority of the Commonwealth or certain Massachusetts governmental entities may
impair the ability of issuers of some Massachusetts obligations to maintain debt
service on their obligations.
The Commonwealth currently has two types of bonds and notes
outstanding: general obligation debt and special obligation debt. Special
obligation revenue debt consists of special obligation revenue bonds ("Special
Obligation Bonds") issued under Section 20 of Chapter 29 of the Massachusetts
General Laws (the "Special Obligation Act") which may be secured by all or a
portion of the revenues credited to the Commonwealth's Highway Fund. The
Commonwealth has issued Special Obligation Bonds secured by a pledge of 6.86
cents of the Commonwealth's 21-cent gasoline tax. Certain independent
authorities and agencies within the Commonwealth are statutorily authorized to
issue debt for which the Commonwealth is either directly, in whole or in part,
or indirectly liable. The Commonwealth's liabilities with respect to these bonds
and notes are classified as either (a) Commonwealth-supported debt; (b)
Commonwealth-guaranteed debt; or (c) indirect obligations. Indirect obligations
consist of (i) obligations of the Commonwealth to fund capital reserve funds
pledged to certain Massachusetts Housing Finance Agency bonds, (ii) the
obligation of the Commonwealth, acting through the Higher Education Coordinating
Council ("HECC"), to fund debt service, solely from moneys otherwise
appropriated to HECC, on certain community college program bonds issued by the
Massachusetts Health and Educational Facilities Authority, (iii) the obligation
of the Commonwealth, acting
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through the Executive Office of Public Safety ("EOPS"), to fund debt service
from amounts appropriated by the Legislature to EOPS, on certificates of
participation issued to finance the new Plymouth County Correctional Facility,
and (iv) the obligation of the Commonwealth to make lease payments from amounts
appropriated by the Legislature with respect to the Massachusetts Information
Technology Center in the city of Chelsea, Massachusetts. In addition, the
Commonwealth has liabilities under certain tax-exempt capital leases.
Commonwealth-guaranteed debt consists of certain liabilities arising out of the
Commonwealth's guarantees of the bonds of the two higher education building
authorities and certain bond anticipation notes of the Massachusetts Turnpike
Authority. Commonwealth-supported debt arises from statutory requirements from
payments by the Commonwealth with respect to debt service of the Massachusetts
Bay Transportation Authority (including the Boston Metropolitan District), the
Massachusetts Convention Center Authority, the Massachusetts Government Land
Bank, the Steamship Authority and certain regional transit authorities. Hence,
the Commonwealth's fiscal condition could adversely affect the market values and
marketability of, or result in default in payment on, obligations of certain
authorities and agencies.
Local Governments. Proposition 2 1/2, an initiative petition adopted by
the voters of the Commonwealth of Massachusetts on November 4, 1980, constrains
levels of property taxation and limits the charges and fees imposed on cities
and towns by certain governmental entities, including county governments. At the
time Proposition 2 1/2 was enacted, many cities and towns had property tax
levels in excess of the limit and were therefore required to roll back property
taxes with a concurrent loss of revenues. While many communities have responded
to the limits of Proposition 2 1/2 through statutorily permitted overrides and
exclusions (such as exclusion of debt service on specific bonds and notes),
Proposition 2 1/2 has and will continue to restrain significantly the ability of
cities and towns to pay for local services, including certain debt service. To
mitigate the impact of Proposition 2 1/2 on local programs and services since
1980, the Commonwealth has increased payments to its cities, towns and regional
school districts.
A statute adopted by voter initiative petition in November, 1990,
regulates the distribution of Local Aid to cities and towns. Direct Local Aid
decreased from $2.937 billion in fiscal 1990 to $2.360 billion in fiscal 1992;
increased to $2.547 billion in fiscal 1993 and increased to $2.727 billion in
fiscal 1994. Fiscal 1995 expenditures for direct Local Aid were $2.976 billion.
Fiscal 1996 expenditures for direct Local Aid were $3.246 billion. Fiscal 1997
expenditures for direct Local Aid were $3.534 billion, which is approximately
8.87% above fiscal 1996 level. It is estimated that fiscal 1998 and fiscal 1999
expenditures for direct Local Aid will be $3.839 billion and $4.149 billion,
respectively. Under the November, 1990 law, new Local Aid distribution formulas
would have called for a substantial increase in direct Local Aid in fiscal 1992,
and would call for such an increase in fiscal 1993 and in subsequent years.
Local Aid payments explicitly remain subject to annual appropriation, and fiscal
1992, 1993, 1994, 1995 , 1996 and 1997 appropriations for Local Aid did not meet
the levels set forth in the initiative law. Reductions in, failure to fund or
delays in the payment of Local Aid may create financial difficulties for certain
municipalities or other local government entities.
Medicaid. The Medicaid program provides health care to low-income
children and families, the disabled and the elderly. The program, which is
administered by the Division of Medical Assistance (an agency within the
Executive Office of Health and Human Services), is 50% funded by federal
reimbursements.
During fiscal years 1993, 1994, 1995, 1996 , 1997 and 1998 Medicaid
expenditures were $3.151 billion, $3.313 billion, $3.398 billion, $3.416 billion
, $3.482 and $3.821 billion, respectively. The average annual growth rate from
fiscal 1992 to fiscal 1996 was 3.9%, compared to an average annual growth of
approximately 17% between fiscal 1987 and fiscal 1991. There was virtually no
growth from fiscal 1995 to fiscal 1996 and fiscal 1996 to fiscal 1997. There was
a 9.11% increase from fiscal 1997 to fiscal 1998. The Executive Office for
Administration and Finance estimates that fiscal 1999 Medicaid expenditures will
be approximately $3.688 billion. The decrease in the rate of growth after 1991
is due to a number of savings and cost control initiatives that the Division of
Medical Assistance continues to implement and refine, including managed care,
utilization review and the identification of third party liabilities.
Fiscal 1999 is projected by the Executive Office for Administration and
Finance to be the sixth year with no need for supplemental Medicaid
appropriations for current year expenses. Decreased reliance on supplemental
appropriations reflects an effective management of Medicaid expenditures by the
Commonwealth. Prior to fiscal 1994, substantial Medicaid expenditures were
provided through supplemental appropriations because program requirements
consistently exceeded initial appropriations. In addition, substantial amounts
have been required to cover retroactive settlement of provider payments.
Medicaid expenditures for fiscal 1992 of $2.818 billion included $50.0 million
for
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prior year provider settlements. Fiscal 1994 and fiscal 1995 Medicaid
expenditures included a total of approximately $123.0 million in retroactive
rate settlements funded through the final fiscal 1994 supplemental budget to pay
pre-1992 liabilities to hospitals and nursing homes. Fiscal 1996 expenditures
included $9.4 million for final settlement of these hospital and nursing home
liabilities. The Executive Office for Administration and Finance estimates that
all current Medicaid costs as well as all remaining prior year bills will be
covered within the current appropriation for fiscal 1999.
Pensions. The Commonwealth is responsible for the payment of pension
benefits for state employees and school teachers throughout the state and for
the cost-of-living increases payable to local government retirees. In 1988, the
Commonwealth adopted a funding schedule under which it is required to fund
future pension liabilities currently and to amortize the accumulated unfunded
liabilities over 40 years. Since the adoption of this schedule, the amount of
the unfunded liability has been reduced significantly. Total pension
expenditures have increased at an average annual rate of 8% per year, rising
from $751.5 million in fiscal 1992 to $1.005 billion in fiscal 1996. Total
pension expenses include the costs associated with an early retirement program
for elementary and secondary school teachers mandated by the 1993 education
reform legislation. In fiscal 1998, the anticipated pension expenditure is
$1.064 billion, a decrease of 4.0% over fiscal 1997 costs of $1.069 billion and
a further decrease of $93.88 million is expected in fiscal 1999. In fiscal 1996,
a number of reform measures affecting pensions were enacted into law. Among the
most notable were a measure consolidating the assets of the state employees' and
teachers' retirement systems into a single investment fund and another that will
reform the disability pension system.
When-Issued Securities. Each Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer and
no interest accrues to the purchaser. To the extent that assets of a Fund are
not invested prior to the settlement of a purchase of securities, a Fund will
earn no income; however, it is intended that a Fund will be fully invested to
the extent practicable and subject to the policies stated herein. When-issued or
forward delivery purchases are negotiated directly with the other party, and are
not traded on an exchange. While when-issued or forward delivery securities may
be sold prior to the settlement date, it is intended that a Fund will purchase
such securities with the purpose of actually acquiring them unless a sale
appears desirable for investment reasons. At the time a Fund makes the
commitment to purchase a security on a when-issued or forward delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. Each Fund does not believe that a Fund's net asset value or
income will be adversely affected by its purchase of securities on a when-issued
or forward delivery basis. Each Fund will not enter into such transactions for
leverage purposes.
Stand-by Commitments. Massachusetts Tax Free Fund, subject to the receipt of any
required regulatory authorization, may acquire "stand-by commitments," which
will enable the Fund to improve its portfolio liquidity by making available same
day settlements on portfolio sales (and thus facilitate the payment of same day
payments of redemption proceeds in federal funds). The Fund may enter into such
transactions subject to the limitations in the rules under the Investment
Company Act of 1940, as amended (the "1940 Act"). A stand-by commitment is a
right acquired by the Fund, when it purchases a municipal obligation from a
broker, dealer or other financial institution ("seller"), to sell up to the same
principal amount of such securities back to the seller, at 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
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the event that the amount receivable upon exercise of the stand-by commitment is
significantly greater than the then current market value of the underlying
municipal obligations, determined as described below under "Net Asset Value," in
order to avoid imposing a loss on a seller and thus jeopardizing the Fund's
business relationship with that seller.
The Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by the Fund in either manner for outstanding stand-by commitments will
not exceed 1/2 of 1% of the value of the total assets of the Fund calculated
immediately after any stand-by commitment is acquired. If the Fund pays
additional consideration for a stand-by commitment, the yield on the security to
which the stand-by commitment relates will, in effect, be lower than if the Fund
had not acquired such stand-by commitment.
It is difficult to evaluate the likelihood of use or the potential
benefit of a stand-by commitment. Therefore, it is expected that the Trustees
will determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where the Fund has paid for a stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held.
Management understands that the Internal Revenue Service (the "IRS")
has issued a revenue ruling to the effect that, under specified circumstances, a
registered investment company will be the owner of tax-exempt municipal
obligations acquired subject to a put option. The IRS has also issued private
letter rulings to certain taxpayers (which do not serve as precedent for other
taxpayers) to the effect that tax-exempt interest received by a regulated
investment company with respect to such obligations will be tax-exempt in the
hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Fund intends to take the position that it is the owner of any
municipal obligations acquired subject to a stand-by commitment and that
tax-exempt interest earned with respect to such municipal obligations will be
tax-exempt in its hands. There is no assurance that the IRS will agree with such
position in any particular case. There is no assurance that stand-by commitments
will be available to the Fund nor has the Fund assumed that such commitments
would continue to be available under all market conditions.
Third Party Puts. Each Fund may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals to tender (or "put") the bonds to the
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.
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Municipal Lease Obligations and Participation Interests. A municipal lease
obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover a Fund's original investment.
Participation interests represent undivided interests in municipal
leases, installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Adviser will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
Each Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. Each Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax and
Massachusetts state income tax.
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities" or "not readily
marketable," i.e., securities which cannot be sold to the public without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale.
Generally speaking, illiquid securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. A Fund may be deemed to be an "underwriter" for
purposes of the 1933 Act when selling restricted securities to the public, and
in such event the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading.
Repurchase Agreements. 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
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the creditworthiness has been determined by the Adviser to be at least equal to
that of issuers of commercial paper rated within the two highest quality ratings
categories assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for the Fund to earn taxable
income on funds for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Fund) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price on the date of repurchase. In either
case, the income to the Fund (which is taxable) is unrelated to the interest
rate on the Obligation itself. Obligations will be held by the Custodian or in
the Federal Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund may be required to return the Obligation to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, the
Fund would be at risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt obligation purchased for the
Fund, the Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
Obligation, in which case the Fund may incur a loss if the proceeds to the Fund
of the sale to a third party are less than the repurchase price. However, if the
market value of the Obligation subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. Each Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
will maintain a segregated account, as described under "Use of Segregated and
Other Special Accounts" in connection with outstanding reverse repurchase
agreements. Reverse repurchase agreements are deemed to be borrowings subject to
the Fund's investment restrictions applicable to that activity. The Fund will
enter into a reverse repurchase agreement only when the Adviser believes that
the interest income to be earned from the investment of the proceeds of the
transaction will be greater than the interest expense of the transaction. There
is no current intention to invest more than 5% of the Fund's net assets in
reverse repurchase agreements.
Indexed Securities. Each Fund 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).
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Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates and broad or specific market movements), to
manage the effective maturity or duration of a Fund's portfolio, or to enhance
potential gain. These strategies may be executed through the use of derivative
contracts. Such strategies are generally accepted as a part of modern portfolio
management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit (except to the extent that 80% of each Fund's net assets
are required to be invested in tax-exempt Massachusetts municipal securities,
and as limited by each Fund's other investment restrictions) to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets
fluctuations, to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of a Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of a Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of a
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. Each Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not to create leveraged exposure in the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of options and futures transactions entails certain other risks. In particular,
the variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of a Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of that Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, a Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.
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General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
Each Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
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
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terms of that option, a Fund will lose any premium it paid for the option as
well as any anticipated benefit of the transaction. Accordingly, the Adviser
must assess the creditworthiness of each such Counterparty or any guarantor or
credit enhancement of the Counterparty's credit to determine the likelihood that
the terms of the OTC option will be satisfied. A Fund will engage in OTC option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
other nationally recognized statistical rating organization ("NRSRO") or are
determined to be of equivalent credit quality by the Adviser. The staff of the
Securities and Exchange Commission ("SEC") currently takes the position that OTC
options purchased by a Fund, and portfolio securities "covering" the amount of a
Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
a Fund's limitation on investing.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by a Fund must be "covered" (i.e.,
a Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes a Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require a Fund to hold a
security or instrument which it might otherwise have sold.
Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. Each Fund will not sell put options if, as a result, more than 50%
of such Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. Each Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
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
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into an offsetting transaction but there can be no assurance that the position
can be offset prior to settlement at an advantageous price, nor that delivery
will occur.
Each Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of a Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
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.
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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 cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security or financial instrument.
In general, either the full amount of any obligation by the Fund to pay or
deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by a Fund will require that Fund to hold the
securities subject to the call or to segregate cash or liquid securities
sufficient to purchase and deliver the securities if the call is exercised. A
call option sold by a Fund on an index will require that Fund to own portfolio
securities which correlate with the index or to segregate cash or liquid assets
equal to the excess of the index value over the exercise price on a current
basis. A put option written by a Fund requires that Fund to segregate cash or
liquid assets equal to the exercise price.
OTC options entered into by a Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when a Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, and that Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade
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securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to a Fund's net obligation, if
any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by that Fund. Moreover, instead of segregating assets if a Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Each Fund's activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "TAXES.")
Trustees' Power to Change Objective and Policies
Except as specifically stated to the contrary, the objective and
policies stated above may be changed by the Trustees without a vote of the
shareholders.
Investment Restrictions
Unless specified to the contrary, the following restrictions may not be
changed without the approval of a majority of the outstanding voting securities
of that Fund which, under the 1940 Act and the rules thereunder and as used in
this Statement of Additional Information, means the lesser of (1) 67% of the
shares of a Fund present at a meeting if the holders of more than 50% of the
outstanding shares of a Fund are present in person or by proxy, or (2) more than
50% of the outstanding shares of the Fund. Any investment restrictions herein
which involve a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, Massachusetts Limited Term Tax Free
Fund and Massachusetts Tax Free Fund may not:
(1) borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts relating to
physical commodities; or
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(7) make loans to other persons, except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests
in indebtedness in accordance with the Fund's objective and
policies may be deemed to be loans.
In addition, as a matter of fundamental policy, each of Massachusetts
Tax Free Fund and Massachusetts Limited Term Tax Free Fund will:
(8) have at least 80% of its net assets invested in municipal
securities of issuers located in Massachusetts and other
qualifying issuers (including Puerto Rico, the U.S. Virgin
Islands and Guam) during periods of normal market conditions.
As a matter of non-fundamental policy, each of Massachusetts Limited
Term Tax Free Fund and Massachusetts Tax Free Fund may not:
(i) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(ii) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(iii) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(iv) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(v) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(vi) lend portfolio securities in an amount greater than 5% of its
total assets.
PURCHASES
(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
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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 obtain the net asset value determined as of the close of regular
trading on a selected day, your bank must forward federal funds by wire transfer
and provide the required account information so as to be available to the Fund
prior to the close of regular trading on the Exchange.
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more, and for an amount not
greater than four times the value of the shareholder's account, may be placed by
telephone, fax, etc. by members of the NASD, by banks and by established
shareholders except by Scudder Individual Retirement Account (IRA), Scudder
Profit Sharing and Money Purchase Pension Plans, Scudder 401(k) and Scudder
403(b) plan holders. Orders placed in this manner may be directed to any office
of the Distributor listed in the Funds' prospectus. A two-part invoice of the
purchase will be mailed out promptly following receipt of a request to buy.
Payment should be attached to a copy of the invoice for proper identification.
Federal regulations require that payment be received within seven business days.
If payment is not received within that time, the shares may be canceled. In the
event of such cancellation or cancellation at the purchaser's request, the
purchaser will be responsible for any loss incurred by a Fund or the principal
underwriter by reason of such cancellation. If the purchaser is a shareholder,
the Trust shall have the authority, as agent of the shareholder, to redeem
shares in the account in order to reimburse a Fund or the principal underwriter
for the loss incurred. Net losses on such transactions which are not recovered
from the purchaser will be absorbed by the principal underwriter. Any net profit
on the liquidation of unpaid shares will accrue to the relevant Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of a Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
Exchange, normally 4 p.m. eastern time. Proceeds in the amount of your purchase
will be transferred from your bank checking account two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, shares will be purchased at the net asset value per share
calculated at the close of trading on the day of your call. QuickBuy requests
received after the close of regular trading on the Exchange will begin their
processing and be purchased at the net asset value calculated the following
business day. If you purchase shares by QuickBuy and redeem them within seven
days of the purchase,
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the Fund may hold the redemption proceeds for a period of up to seven business
days. If you purchase shares and there are insufficient funds in your bank
account the purchase will be canceled and you will be subject to any losses or
fees incurred in the transaction. QuickBuy transactions are not available for
Scudder IRA accounts and most other retirement plan accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 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.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Fund or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the relevant 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.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the purchase order in good order. Net asset value
normally will be computed once a day, as of the close of regular trading on each
day when the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than a Fund,
to forward the purchase order to the Transfer Agent in Boston by the close of
regular trading on the Exchange.
Share Certificates
Due to the desire of the Corporation's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Funds.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
If purchases or redemptions of Fund shares are arranged and settlement
is made at the an investor's election through a member of the NASD other than
the Distributor, that member may, at its discretion, charge a fee for that
service. The Board of Trustees and the Distributor, the Trust's principal
underwriter, each has the right to limit the amount of purchases by, and to
refuse to sell to, any person. The Trustees and the Distributor each may suspend
or terminate the offering of shares of a Fund at any time for any reason.
The "Tax Identification Number" section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g., from exempt organizations certification of exempt status)
will be returned to the investor.
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The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of, the assets of any investment
company (or 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 and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds. For more information, please call
1-800-225-5163.
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Redemption by Telephone
Shareholders currently receive the right automatically, without having
to elect it, to redeem up to $100,000 to their address of record. Shareholders
may also request to have the proceeds mailed or wired to their pre-designated
bank account. In order to request redemptions by telephone, shareholders must
have completed and returned to the Transfer Agent the application, including the
designation of a bank account to which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
pre-designated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit Sharing, Scudder 401(k) and Scudder
403(b) Plan holders) who wish to establish telephone
redemption to a pre-designated bank account or who want to
change the bank account previously designated to receive
redemption payments should either return a Telephone
Redemption Option Form (available upon request) or send a
letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly
as the shareholder's name(s) appear on the account. An
original signature and an original signature guarantee are
required for each person in whose name the account is
registered.
Telephone redemption is not available with respect to shares held in
retirement accounts.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve Bank wire to the bank
account designated on the application unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for each wire redemption.
Note: Investors designating that a savings bank receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their banks and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
The Trust employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Trust does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Trust will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of a Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
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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
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within five days after receipt by the Transfer Agent of a request for
redemption that complies with the above requirements. Delays in payment of more
than seven business days of payment for shares tendered for repurchase or
redemption may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those of
regular accounts. For more information call 1-800-225-5163.
Redemption by 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.
Redemption-in-Kind
Each Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by a
Fund and valued as they are for purposes of computing a Fund's net asset value
(a redemption-in-kind). If payment is made in securities, a shareholder may
incur transaction expenses in converting these securities into cash.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive, in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed or repurchased may be more or less than the shareholder's cost
depending on the net asset value at the time of redemption or repurchase. The
Fund does not impose a redemption or repurchase charge although a wire charge
will be charged for redemption proceeds wired to an investor's bank account.
Redemption of shares, including an exchange into another Scudder fund, may
result in tax consequences (gain or loss) to the shareholder and the proceeds of
such redemptions may be subject to backup withholding. (See "Taxes.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
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The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment may be suspended at
times during which (a) the Exchange is closed, other than customary weekend and
holiday closings, (b) trading on the Exchange is restricted for any reason, (c)
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) the SEC may
by order permit such a suspension for the 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.
Shareholders should maintain a share balance worth at least $2,500
($1,000 for IRAs, Uniform Gift to Minors Act ("UGMA"), and Uniform Trust to
Minors Act ("UTMA") accounts), which amount may be changed by the Board of
Trustees. Scudder retirement plans have similar or lower minimum balance
requirements. A shareholder may open an account with at least $1,000 ($500 for
an UGMA, UTMA, IRA and other retirement accounts), if an automatic investment
plan (AIP) of $100/month ($50/month for an UGMA, UTMA, IRA and other retirement
accounts) is established.
Shareholders who maintain a non-fiduciary account balance of less than
$2,500 in the Fund, without establishing an AIP, will be assessed an annual
$10.00 per fund charge with the fee to be reinvested in 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 at the address
of record. Reductions in value that result solely from market activity will not
trigger an involuntary redemption. UGMA, UTMA, IRA and other retirement accounts
will not be assessed the $10.00 charge or be subject to automatic liquidation.
FEATURES AND SERVICES OFFERED BY THE FUNDS
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its funds from the
vast majority of mutual funds available today. The primary distinction is
between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
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.
29
<PAGE>
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart show the value
of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
<TABLE>
<S> <C> <C> <C> <C> <C>
<CAPTION>
====================================================================================================================
YEARS ScudderPure No-Load(TM) 8.50% Load Fund Load Fund with 0.75% No-Load Fund with
Fund 12b-1 Fee 0.25% 12b-1 Fee
- --------------------------------------------------------------------------------------------------------------------
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Investors are encouraged to review the fee tables on page 2 of the
Fund's 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.
30
<PAGE>
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See "How to
contact Scudder" in the Funds' prospectuses for the address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "How to contact Scudder" in the prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Funds.
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.
31
<PAGE>
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' prospectuses.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
- --------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
32
<PAGE>
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
- --------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
33
<PAGE>
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
34
<PAGE>
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
SCUDDER CHOICE SERIES
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
- -------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
35
<PAGE>
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
- -------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
36
<PAGE>
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By Automatic
Investment Plan" and "Exchanges and redemptions--By
Automatic Withdrawal Plan" in the Fund's 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. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plans. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Automatic Withdrawal Plan
Non-retirement plan shareholders who currently own or purchase $10,000
or more of shares of a Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information--Redeeming shares--Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Trust or its agent on written notice, and will be terminated
when all shares of the Fund under the Plan have been liquidated or upon receipt
by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Cash Management System--Group Sub-Accounting Plan
for Trust Accounts, Nominees and Corporations
To minimize record-keeping by fiduciaries and corporations,
arrangements have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund.
In its discretion, a Fund may accept minimum initial investments of
less than $2,500 as part of a continuous group purchase plan by fiduciaries and
others (e.g., brokers, bank trust departments, employee benefit plans) provided
that the average single account in any one Fund in the group purchase plan will
be $2,500 or more. A Fund may also wire all redemption proceeds where the group
maintains a single designated bank account.
Shareholders who withdraw from the group purchase plan through which
they were permitted to initiate accounts under $2,500 will be subject to the
minimum account restrictions described under "EXCHANGES AND REDEMPTIONS--Other
Information."
37
<PAGE>
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of investment program may be suitable for
various investment goals such as, but not limited to, college planning or saving
for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and performance information--Dividends and capital gains
distributions" in the Funds' 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.
38
<PAGE>
PERFORMANCE INFORMATION
(See "Distribution and performance information--Performance
information" in the Funds' prospectus.)
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for one year, five years and for the life of a Fund, ended on the last
day of a recent calendar quarter. Average annual total return quotations reflect
changes in the price of a Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment, over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
The average annual total return of Scudder Massachusetts Limited Term
Tax Free Fund for the one year period ended October 31, 1997, and life of the
Fund(1) are 5.44% and 4.68%, since inception.
The average annual total return of Scudder Massachusetts Tax Free Fund
for the one , five and ten year periods ended March 31, 1998 are 9.82%, 6.82%
and 8.49%, respectively.
(1) For the period beginning February 15, 1994.
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, 1997 the cumulative total return of Massachusetts
Limited Term Tax Free Fund for the one year period and life of the Fund(1) were
5.44% and 18.49% respectively. If the Adviser had not maintained
39
<PAGE>
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,
five and ten year periods ended March 31, 1998 were 9.82%, 39.08% and 125.87%,
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.
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
SEC Yield
Yield is the net annualized SEC yield based on a specified 30-day (or
one month) period assuming a semiannual compounding of income. Yield, sometimes
referred to as the Fund's "SEC yield," is calculated by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD = 2[((a-b)/cd + 1)6-1]
Where:
a = dividends and interest earned during the
period including the amortization of market
premium or accretion of market discount.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the
last day of the period.
The 30-day net-annualized SEC yield of Massachusetts Limited Term Tax
Free Fund for the period ended October 31, 1997 was 3.90%.
The 30-day net-annualized SEC yield of Massachusetts Tax Free Fund for
the period ended March 31, 1998 was 4.19%.
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 6.09% to receive after-tax income equal to the 6.92%
tax-free yield of Massachusetts Limited Term Tax Free Fund for the 30-day period
ended October 31, 1997. Taxpayers with a federal tax rate of 36% and an
effective combined marginal tax rate of 46.85% would need to earn a taxable
yield of 7.88% to receive after-tax income equal to the 4.19% tax-free yield of
Massachusetts Tax Free Fund for the 30-day period ended on March 31, 1998.
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.
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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, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond
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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.
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.
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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.
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.
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Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectus.)
Each Fund is a non-diversified series of Scudder State Tax Free Trust.
The Trust is a Massachusetts business trust established under a Declaration of
Trust dated May 25, 1983. 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
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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 Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc.,
Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway
Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder Tax Free
Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund, Scudder
Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil Fund, Inc.,
The Korea Fund, Inc. , The Japan Fund, Inc. and Scudder Spain and Portugal Fund,
Inc. Some of the foregoing companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLinkSM Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLinkSM Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLinkSM
is a service mark of AMA Solutions, Inc.
In selecting the securities in which each Fund may invest, the
conclusions and investment decisions of the Adviser with respect to a Fund are
based primarily on the analyses of its own research department. The Adviser
receives published reports and statistical compilations of the issuers
themselves, as well as analyses from brokers and
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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 agreements between each Fund and Scudder were
last approved by the Trustees on August 12, 1997. Because the transaction
between Scudder and Zurich resulted in the assignment of the Funds' investment
management agreements with Scudder, those Agreements were deemed to be
automatically terminated at the consummation of the transaction. In anticipation
of the transaction, however, new investment management agreements (the
"Agreements") between each Fund and the Adviser were approved by the Funds'
Trustees. At a special meeting of the Funds' shareholders held on October 24,
1997, the shareholders also approved the new investment management agreements.
The new Agreements became effective on December 31, 1997, and will be in effect
for an initial term ending on September 30, 1998. The Agreements are in all
material respects on the same terms as the previous investment management
agreements it supersedes. The Agreements incorporate conforming changes which
promote consistency among all of the Funds advised by the Adviser and which
permit ease of administration. The Agreements will continue in effect 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 Agreement or interested
persons of the Adviser or the Fund, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Funds' Trustees
or of a majority of the outstanding voting securities of the 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
their assignment.
Under each Agreement, the Adviser regularly provides a Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the Fund's investment objectives and
policies. The Adviser determines what securities shall be purchased for the
Fund's portfolio, what securities shall be held or sold by the Fund, and what
portion of the Fund's assets shall be held uninvested, subject always to the
provisions of the Trust's Declaration of Trust and By-Laws, the 1940 Act, the
Internal Revenue Code of 1986 and to the Fund's investment objective, policies
and restrictions, and subject further to such policies and instructions as the
Trustees of the Trust may from time to time establish. The Adviser also advises
and assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of each Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Trust and makes available, without
expense to the Trust, the services of such Advisers, Directors, Officers, and
employees as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities and provides investment
advisory, research and statistical facilities and all clerical services relating
to research, statistical and investment work.
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 fiscal
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years ended October 31, 1995, 1996 and 1997 pursuant to these agreements, the
investment management fees incurred by Massachusetts Limited Term Tax Free Fund
were $25,208, $231,096 and $302,455, respectively. Had the Adviser imposed a
full investment management fee for the fiscal years ended October 31, 1995, 1996
and 1997, the investment management fee would have equaled $297,710, $370,008
and $424,432, respectively.
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 February 28, 1999.
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, 1996, 1997 and 1998, pursuant to these agreements, the
investment management fees incurred by Massachusetts Tax Free Fund were
$1,826,799, $1,933,810 and $2,110,713, respectively, of which $186,239 was
unpaid at March 31, 1998.
Under the Agreements each Fund is responsible for all of its other
expenses, including organization expenses; clerical salaries; fees and expenses
incurred in connection with membership in investment company organizations;
brokers' commissions; payment for portfolio pricing services to a pricing agent,
if any; legal, auditing or accounting expenses; taxes or governmental fees; the
fees and expenses of the Transfer Agent; the cost of preparing share
certificates and any other expenses, including clerical expense, of issuance,
redemption or repurchase of shares of beneficial interest; the expenses of and
fees for registering or qualifying securities for sale; the fees and expenses of
the Trustees of the Trust who are not affiliated with the Adviser; the cost of
preparing and distributing reports and notices to shareholders; and the fees or
disbursements of custodians. The Trust is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto.
Each Agreement further provides that as between each Fund and the
Adviser each Fund will be responsible for all expenses, including clerical
expense, of offer, sale, underwriting and distribution of a Fund's shares only
so long as a Fund employs a principal underwriter to act as the distributor of a
Fund's shares pursuant to an underwriting agreement which provides that the
underwriter will assume such expenses. The Trust's underwriting agreement
provides that the principal underwriter shall pay all expenses of offer and sale
of a Fund's shares except the expenses of preparation and filing of registration
statements under the Securities Act of 1933 and under state securities laws,
issue and transfer taxes, if any, and a portion of the prospectuses used by a
Fund. In the event that a Fund ceases to employ a principal underwriter to act
as the distributor of a Fund's shares, the expenses of distributing a Fund's
shares will be borne by the Adviser unless a Fund shall have adopted a plan
pursuant to Rule 12b-1 under the 1940 Act providing that a Fund shall be
responsible for some or all of such distribution expenses.
Each Agreement requires the Adviser to return to a Fund all or a
portion of advances of its management fee to the extent annual expenses of a
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which a Fund's shares are offered for sale. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitations. Any such fee advance required to be
returned to a Fund will be returned as promptly as practicable after the end of
each Fund's fiscal year. However, no fee payment will be made to the Adviser
during any fiscal year which will cause year-to-date expenses to exceed the
cumulative pro rata expense limitation at the time of such payment. The
amortization of organizational costs is described herein under "ADDITIONAL
INFORMATION--Other Information."
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning the Agreement, Trustees who are not "interested persons" of
the Adviser are represented by independent counsel at that Fund's expense.
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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.
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the Trustees or officers of the Trust may have dealings with
either Fund as principals in the purchase or sale of securities, except as
individual subscribers to or holders of shares of such Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain 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.
TRUSTEES AND OFFICERS
<TABLE>
<S> ` <C> <C> <C>
<CAPTION>
Position with
Underwriter,
Name, Date of Birth Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
Daniel Pierce (3/18/34)*+@ President and Managing Director of Scudder Vice President,
Trustee Kemper Investments, Inc. Director and Assistant
Treasurer
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<PAGE>
Position with
Underwriter,
Name, Date of Birth Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
Henry P. Becton, Jr. (10/16/43) Trustee President and General Manager, --
WGBH WGBH Educational Foundation
125 Western Avenue
Allston, MA 02134
Dawn-Marie Driscoll (11/5/46) Trustee Executive Fellow, Center for --
5760 Flamingo Drive Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates
Peter B. Freeman (8/4/32)@ Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
George M. Lovejoy, Jr. (4/15/30) Trustee President and Director, Fifty --
160 Federal Street Associates (real estate
Boston, MA 02110 investment trust)
Wesley W. Marple, Jr. Trustee Professor of Business --
(2/22/32)@ Administration, Northeastern
413 Hayden Hall University College of Business
360 Huntington Avenue Administration
Boston, MA 02115
Kathryn L. Quirk (12/3/52)#@ Trustee, Vice Managing Director of Scudder Senior Vice President,
President, Kemper Investments, Inc. Director and Clerk
Assistant Secretary
Jean C. Tempel (3/24/43) Trustee Managing Partner, Technology --
Ten Post Office Square Equity Partners; Special Limited
Suite 1325 Partner, TL Ventures (a venture
Boston, MA 02109 capital fund)
Donald C. Carleton (-/-/-)+ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Philip G. Condon (8/15/50)+ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Jerard K. Hartman (3/1/33)# Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas W. Joseph (4/22/39)+ Vice President Senior Vice President of Scudder Director, Vice
Kemper Investments, Inc. President, Treasurer
and Assistant Clerk
Jeremy L. Ragus (5/24/52)+ Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
49
<PAGE>
Position with
Underwriter,
Name, Date of Birth Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
Rebecca Wilson (2/23/62)+ Vice President Vice President of Scudder Kemper --
Investments, Inc.
Thomas F. McDonough Vice President, Senior Vice President of Scudder Assistant Clerk
(1/20/47)+ Treasurer and Kemper Investments, Inc.
Secretary
John R. Hebble (6/27/58)+ Assistant Treasurer Senior Vice President of --
Scudder Kemper Investments, Inc.
Caroline Pearson (4/1/62)+ Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm) 1989-1997
</TABLE>
* Mr. Pierce and Ms. Quirk are considered by the Trust and its counsel to
be Trustees who are "interested persons" of the Adviser or of each Fund
within the meaning of the Investment Company Act of 1940, as amended.
** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
@ Messrs. Freeman, Marple, Pierce and Ms. Quirk are members of the
Executive Committee of the Trust, which has the power to declare
dividends from ordinary income and distributions of realized capital
gains to the same extent as the Board is so empowered.
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of June 30, 1998 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 outstanding shares on such
date.
As of June 30, 1998, 2,201,717 shares in the aggregate or 8.17% of the
outstanding shares of Massachusetts Tax Free Fund were held in the nominees of
Fiduciary Trust Company. Fiduciary Trust Company may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the best of the Trust's knowledge, as of June 30, 1998 no person
owned beneficially more than 5% of the 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 Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that each Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory
50
<PAGE>
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 Fund's investment performance, the quality and efficiency of
the various other services provided, costs incurred by the Adviser and its
affiliates and comparative information regarding fees and expenses of
competitive funds. They are assisted in this process by each Fund's independent
public accountants and by independent legal counsel selected by the Independent
Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Funds of Scudder State Tax Free Trust: an annual trustee's fee of $1,800 for a
Fund in which total net assets do not exceed $100 million and $3,600 for a Fund
in which total net assets exceed $100 million; a fee of $100 for attendance at
all other meetings;] and reimbursement of expenses incurred for travel to and
from Board Meetings. The Independent Trustee who serves as lead or liaison
trustee receives an additional annual retainer fee of $500 from each Fund. 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 or service on special trustee task forces or subcommittees .
Independent Trustees do not receive any employee benefits such as pension or
retirement benefits or health insurance. Notwithstanding the schedule of fees,
the Independent Trustees have in the past and may in the future waive a portion
of their compensation.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1997 from the Trust and from all of the Scudder funds as a group.
<TABLE>
<S> <C> <C> <C> <C> <C>
<CAPTION>
Scudder State Tax Free Trust All Scudder Funds
---------------------------- -----------------
Paid by the Paid by the Paid by the Paid by the
Name Trust Adviser(2) Funds Adviser(2)
---- ----- ---------- ----- ----------
Henry P. Becton, $19,550 $2,400 $114,554 $9,500 (24 funds)
Trustee
Dawn-Marie Driscoll, $19,750 $2,400 $107,722 $8,800 (24 funds)
Trustee
Peter B. Freeman, $19,550 $2,400 $137,011 $14,625 (42 funds)
Trustee
George M. Lovejoy, Jr., $1,500 $0 $139,113 $10,700 (22 funds)
Trustee
Wesley W. Marple, Jr., $19,550 $2,400 $121,129 $10,100 (23 funds)
Trustee
Jean C. Tempel, $19,750 $2,400 $122,504 $10,100 (23 funds)
Trustee
</TABLE>
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<PAGE>
(1) Scudder State Tax Free Trust consists of six funds: Scudder
Massachusetts Limited Term Tax Free Fund, Scudder
Massachusetts Tax Free Fund, Scudder New York Tax Free Money
Fund, Scudder New York Tax Free Fund, Scudder Ohio Tax Free
and Scudder Pennsylvania Tax Free Fund.
(2) Meetings associated with the Adviser's alliance with Zurich
Insurance Company. See "Investment Adviser" for additional
information.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a Massachusetts corporation, which is a subsidiary of
the Adviser, a Delaware corporation. The Trust's underwriting agreement dated
June 1, 1987 will remain in effect until September 30, 1998, 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
12, 1997.
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
52
<PAGE>
performance information--Dividends and capital gains
distributions" in the Funds' prospectus.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situation.
Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in either Fund.
Federal Taxation
Each fund within the Trust will be separate for investment and
accounting purposes, and will be treated as a separate taxable entity for
federal income tax purposes. Each Fund has elected to be treated as a separate
regulated investment company under Subchapter M of the Internal Revenue Code of
1986 as amended (the "Code") and has qualified as such. Each Fund intends to
continue to qualify in each taxable year as required under the Code in order to
avoid payment of federal income tax at the fund level.
In order to qualify as a regulated investment company, each Fund must
meet certain requirements regarding the source of its income and the
diversification of its assets.
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, 1997, 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. At October 31, 1997, the
Fund had a net tax basis capital loss carryforward of approximately $136,000
which may be applied against any realized net taxable capital gains of each
succeeding year until fully utilized or until October 31, 2002, ($21,000) and
October 31, 2004 ($115,000), the respective expiration dates, whichever occurs
first.
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<PAGE>
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations the interest on which is excluded from gross
income under Section 103(a) of the Code. Each Fund intends to satisfy this 50%
requirement in order to permit its distributions of tax-exempt interest to be
treated as such for federal income tax purposes in the hands of its
shareholders. Distributions to shareholders of tax-exempt interest earned by a
Fund for the taxable year are therefore not expected to be subject to regular
federal income tax, although they may be subject to the individual and corporate
alternative minimum taxes described below. Discount from certain stripped
tax-exempt obligations or their coupons, however, may be taxable.
Market discount recognized on a tax-exempt bond is taxable as ordinary
income. A market discount bond is a bond acquired in the secondary market at a
price below its redemption value. Gain on the disposition of a tax-exempt
obligation will be treated as ordinary income (instead of capital gain) to the
extent of accrued market discount.
Since no portion of either Fund's income will be comprised of dividends
from domestic corporations, none of the income distributions of a Fund will be
eligible for the dividends-received deduction available for certain taxable
dividends received by corporations.
Any short-term capital loss realized upon the redemption of shares
within six months of the date of their purchase will be disallowed to the extent
of any tax-exempt dividends received with respect to such shares, although the
period may be reduced under Treasury regulations to be prescribed. All or a
portion of a loss realized upon the redemption of shares may be disallowed to
the extent shares are repurchased (including shares acquired by means of
reinvested dividends) within 30 days before or after such redemption.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of a Fund
have been held by such shareholders. Such distributions to corporate
shareholders of a Fund are not eligible for the dividends-received deduction.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain during such
six-month period with respect to such shares.
Distributions derived from interest which is exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the corporate alternative minimum tax. A portion of such
distributions may constitute a tax preference item for individual shareholders
and may subject them to, or increase their liability under the 26% and 28%
individual alternative minimum tax, but normally no more than 20% of a Fund's
net assets will be invested in securities the interest on which is such a tax
preference item for individuals.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the Federal income tax status of all distributions.
All distributions of taxable or tax-exempt net investment income and net
realized capital gain, whether received in shares or in cash, must be reported
by each shareholder on his or her federal income tax return. Dividends or
capital gains distributions declared and payable to shareholders of record on a
specified date in October, November or December, if any, will be deemed to have
been received by shareholders in December if paid during January of the
following year. Shareholders are also required to report tax-exempt interest.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
54
<PAGE>
Interest which is tax-exempt for federal income tax purposes is
included as income for purposes of determining the amount of social security or
railroad retirement benefits subject to tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Fund will not be deductible for federal income tax purposes. Under
rules used by the IRS to determine when borrowed funds are used for the purpose
of purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain governmental obligations to persons who are "substantial
users" (or persons related thereto) of facilities financed by such obligations.
Neither Fund has undertaken any investigation as to the users of the facilities
financed by bonds in such Fund's portfolio.
Distributions by each Fund result in a reduction in the net asset value
of a Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder, to the extent it is derived from other than tax-exempt interest, as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which, to the extent it is derived from other than tax-exempt
interest, will nevertheless be taxable to them.
All futures contracts entered into by a Fund and all listed nonequity
options written or purchased by a Fund (including options on futures contracts
and options on securities indices) will be governed by Section 1256 of the Code.
Absent a tax election to the contrary, gain or loss attributable to the lapse,
exercise or closing out of any such position generally will be treated as 60%
long-term and 40% short-term, and on the last trading day of a Fund's fiscal
year, all outstanding Section 1256 positions will be marked to market (i.e.
treated as if such positions were closed out at their closing price on such
day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term.
Positions of each Fund which consist of at least one debt security not
governed by Section 1256 and at least one futures contract or nonequity option
governed by Section 1256 which substantially diminishes a Fund's risk of loss
with respect to such debt security will be treated as a "mixed straddle." Mixed
straddles are subject to the straddle rules of Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments in the holding
periods of securities and conversion of short-term capital losses into long-term
capital losses. Certain tax elections, however, exist for them which reduce or
eliminate the operation of these rules. Each Fund will monitor its transactions
in options and futures and may make certain tax elections in order to mitigate
the operation of these rules and prevent disqualification of a Fund as a
regulated investment company for federal income tax purposes.
Under the federal income tax law, each Fund will be required to report
to the IRS all distributions of taxable income and capital gains as well as
gross proceeds from the redemption or exchange of Fund shares, except in the
case of certain exempt shareholders. Under the backup withholding provisions of
Section 3406 of the Code, distributions of taxable income and capital gains and
proceeds from the redemption or exchange of the shares of a regulated investment
company are generally subject to withholding of federal income tax at the rate
of 31% in the case of nonexempt shareholders who fail to furnish the investment
company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law. Under a
special exception, distributions of taxable income and capital gains of a Fund
will not be subject to backup withholding if a Fund reasonably estimates that at
least 95% of all of its distributions will consist of tax-exempt interest.
However, in this case, the proceeds from the redemption or exchange of shares
may be subject to backup withholding. Withholding may also be required if a Fund
is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of 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
56
<PAGE>
in, purchasing or selling securities; the availability of securities or
purchasers or sellers of securities; and analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The Adviser is authorized when placing
portfolio transactions for a Fund to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
executing the same transaction on account of the receipt of research, market or
statistical information, although it may do so in seeking to obtain the most
favorable net results with respect to a particular transaction. The Adviser will
not place orders with brokers or dealers on the basis that a broker or dealer
has or has not sold shares of a Fund. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to a Fund and to the Adviser, it is the
opinion of the Adviser that such information will only supplement the Adviser's
own research effort, since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than a Fund and not all such information
is used by the Adviser in connection with a Fund. Conversely, such information
provided to the Adviser by brokers and dealers through whom other clients of the
Adviser effect securities transactions may be useful to the Adviser in providing
services to a Fund.
The Trustees intend to review from time to time whether the recapture
for the benefit of a Fund of some portion of the brokerage commissions or
similar fees paid by a Fund on portfolio transactions is legally permissible and
advisable.
Portfolio Turnover
Each Fund's average annual portfolio turnover rate is the ratio of the
lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration date at the time of acquisition of one year or less. A higher rate
involves greater brokerage transaction expenses to a Fund and may result in the
realization of net capital gains, which would be taxable to shareholders when
distributed. Massachusetts Limited Term Tax Free Fund's annualized portfolio
turnover rate for the fiscal year ended October 31, 1995, 1996 and 1997 were
27.4%, 12.4% and 9.77% respectively. Massachusetts Tax Free Fund's portfolio
turnover rate for the fiscal periods ended March 31, 1996, 1997 and 1998 were
10.2%, 11.51% and 8.4%, 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 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, Dr. Martin Luther King Jr. 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 Nasdaq
Stock Market ("Nasdaq") valued at its most recent sale price. Lacking any sales,
the security is valued at the most recent 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
purchased with remaining maturities of sixty days or less shall be valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If
57
<PAGE>
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 PricewaterhouseCoopers LLP, 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. PricewaterhouseCoopers LLP is responsible for performing annual audits
of the financial statements and financial highlights of each Fund in accordance
with Generally Accepted Auditing Standards and the preparation of Federal tax
returns.
Shareholder Indemnification
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
58
<PAGE>
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future. Securities rated
Baa are considered medium grade, with factors giving security to principal and
interest adequate at present but may be unreliable over any period of time. Such
bonds have speculative elements as well as investment-grade characteristics.
Securities rated Ba or below by Moody's are considered below investment grade,
with factors giving security to principal and interest inadequate and
potentially unreliable over any period of time. Bonds which are rated B
generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Such securities are commonly referred
to as "junk" bonds and as such they carry a high margin of risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG-1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG-2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest quality ratings categories of S&P for municipal bonds
are AAA (Prime), AA (High-grade), A (Good-grade), BBB (Investment-grade) and BB
or B (Below investment-grade). Bonds rated AAA have the highest rating assigned
by S&P to a municipal obligation. Capacity to pay interest and repay principal
is extremely strong. Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only in a small
degree. Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. Bonds rated BBB have an adequate capacity
to pay interest and to repay principal. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds of this category than for bonds of higher rated
categories. Securities rated BB or below by S&P are considered below investment
grade, with factors 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
59
<PAGE>
allowed; the issuer has access to at least two additional channels of borrowing;
and basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
The rating F-1+ is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1+.
Relative strength or weakness of the above factors determine how the
issuer's commercial paper is rated within the above categories.
Glossary
1. Bond
A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity
date) and to pay a stated rate of interest until maturity. Interest is
generally paid semi-annually in amounts equal to one half the annual
interest rate.
2. Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.
3. Discount and Premium
A discount (premium) bond is a bond selling in the market at a price
lower (higher) than its face value. The amount of the market discount
(premium) is the difference between market price and face value.
4. Maturity
The date on which the principal amount of a debt obligation comes due
by the terms of the instrument.
5. Municipal Obligation
Obligations issued by or on behalf of states, territories and
possessions of the United States, their political subdivisions,
agencies and instrumentalities and the District of Columbia and other
issuers, the interest from which is, at the time of issuance in the
opinion of bond counsel for the issuers, exempt from federal income
tax.
6. Net Asset Value Per Share
The value of each share of the Fund for purposes of sales and
redemptions.
7. Net Investment Income
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<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.
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, 1995 was $24,000, for the fiscal year ended October 31, 1996 was
$36,000 and for the fiscal year ended October 31, 1997 was $36,000. For the
fiscal years ended March 31, 1996, 1997 and 1998, the amount charged to Scudder
Massachusetts Tax Free Fund by SFAC amounted to $58,015, $59,760 and $63,206,
respectively, of which $4,904, $5,145 and $5,531, respectively, was unpaid at
March 31, 1996, 1997 and 1998.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer
and dividend-paying agent. Service Corporation also serves as shareholder
service agent. Each Fund pays Service Corporation an annual fee of $25.00 for
each account maintained for a shareholder. The fee incurred by Massachusetts
Limited Term Tax Free Fund to Service Corporation for the fiscal year ended
October 31, 1995 was $23,065, October 31, 1996 was $36,098, and for the fiscal
year ended October 31, 1997 was $41,127. The fee incurred by Massachusetts Tax
Free Fund to Service Corporation for the years ended March 31, 1996, 1997 and
1998, amounted to $184,353, $188,646 and $194,865, respectively, of which
$15,222, $16,386 and $16,255, respectively, was unpaid at March 31, 1996, 1997
and 1998.
The Funds, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
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The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Trust has
filed with the SEC under the 1933 Act and reference is hereby made to the
Registration Statement for further information with respect to each Fund and the
securities offered hereby. This Registration Statement is available for
inspection by the public at the SEC in Washington, D.C.
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 in the Annual Report to the Shareholders of the
Fund dated October 31, 1997, are incorporated herein by reference 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 in the Annual Report to the Shareholders of the Fund dated
March 31, 1998, are incorporated herein by reference and are hereby deemed to be
a part of this Statement of Additional Information.
62
<PAGE>
Scudder
Massachusetts
Tax Free Fund
Annual Report
March 31, 1998
Pure No-Load(TM) Funds
For investors seeking double tax-free income, exempt from both Massachusetts
state personal income tax and regular federal income tax.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Massachusetts Tax Free Fund
- --------------------------------------------------------------------------------
Date of Inception: 5/28/87 Total Net Assets as of Ticker Symbol: SCMAX
3/31/98: $373.9 million
- --------------------------------------------------------------------------------
o As of March 31, 1998, Scudder Massachusetts Tax Free Fund's 30-day net
annualized SEC yield was 4.19%, equivalent to a 7.88% taxable yield for
Massachusetts investors subject to the 46.85% combined federal and state income
tax rate.
o For its most recent fiscal year ended March 31, 1998, Scudder Massachusetts
Tax Free Fund posted a total return of 9.82%, compared with the 9.98% average
return of 56 similar funds tracked by Lipper Analytical Services. The Fund
continues to hold the number one ranking for total return over the ten-year
period ended March 31 as compiled by Lipper. Please see page 6 for additional
information on the Fund's rankings.
o Scudder Massachusetts Tax Free Fund received a four-star rating from
Morningstar, reflecting "above average" risk-adjusted performance through March
31, 1998.*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
30-Day SEC Yield on March 31, 1998
BAR CHART DATA:
Scudder Taxable yield
Massachusetts needed to equal
Tax Free Fund the Fund's yield
-----------------------------------------------
4.19% 7.88%
-----------------------------------------------
Table of Contents
3 Letter from the Fund's President 20 Notes to Financial Statements
4 Performance Update 23 Report of Independent Accountants
5 Portfolio Summary 24 Tax Information
6 Portfolio Management Discussion 25 Shareholder Meeting Results
10 Glossary of Investment Terms 28 Officers and Trustees
11 Investment Portfolio 29 Investment Products and Services
16 Financial Statements 30 Scudder Solutions
19 Financial Highlights
* 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. The Fund received four
stars for three-year performance, four stars for five-year performance, and
three stars for ten-year performance, and was rated among 1525, 782, and 345
municipal funds for the respective periods. Of the funds rated, 10% received
five stars, 22.5% received four stars, and 35% received three stars. Past
performance is no guarantee of future returns.
2 - Scudder Massachusetts Tax Free Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
We are pleased to report to you concerning Scudder Massachusetts Tax Free
Fund's performance over its most recent fiscal year ended March 31, 1998. In
addition to the Fund's four-star Morningstar rating as of March 31 (see page 2),
the Fund continues to hold the number one ranking for total return among
Massachusetts tax-free funds over the ten-year period ended March 31, 1998.
Please read the portfolio management discussion beginning on page 6 for more
information about the Fund's performance, investment environment, and outlook.
More good news -- Massachusetts' economic revival continues unabated. The
Commonwealth's unemployment level is at a nine-year low, per capita income is
significantly higher than the national average, and officials project a large
budget surplus for the 1998 fiscal year. Please read the "Massachusetts Update"
on page 6 for additional details.
For those of you interested in new Scudder products, we recently introduced
three industry sector funds as a part of our Choice Series: Scudder Financial
Services Fund, which seeks long-term growth by investing in financial services
companies in the U.S. and abroad; Scudder Health Care Fund, which seeks
long-term growth from health care companies located around the world; and
Scudder Technology Fund, which pursues long-term growth by investing in
companies that develop, produce, or distribute technology. In addition, April 6,
1998, marked the debut of our newest entrant in the growth and income category:
Scudder Real Estate Investment Fund, investing in equity securities of companies
in the real estate industry. Please see page 28 for more information on Scudder
products and services.
Lastly, at the start of 1998 the Fund's investment adviser changed its name
to Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc.,
pursuant to the acquisition of a majority interest in Scudder, Stevens & Clark
by Zurich Insurance Company, and the combining of Scudder's business with that
of Zurich Kemper Investments, Inc.
As always, please call a Scudder Investor Information representative at
1-800-225-2470 if you have questions about your Fund. Page 29 provides more
information on how to contact Scudder. Thank you for choosing Scudder
Massachusetts Tax Free Fund to help meet your investment needs.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President
Scudder Massachusetts Tax Free Fund
3 - Scudder Massachusetts Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of March 31, 1998
- -------------------------------------------
Fund Index Comparisons
- -------------------------------------------
Total Return
- -------------------------------------------
Period Ended Growth of Average
3/31/98 $10,000 Cumulative Annual
- -------------------------------------------
Scudder Massachusetts Tax Free Fund
- -------------------------------------------
1 Year $10,982 9.82% 9.82%
5 Year $13,908 39.08% 6.82%
10 Year $22,587 125.87% 8.49%
- -------------------------------------------
Lehman Brothers Municipal Bond Index
- -------------------------------------------
1 Year $11,073 10.73% 10.73%
5 Year $13,911 39.11% 6.82%
10 Year $22,289 122.89% 8.34%
- -------------------------------------------
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 March 31
Scudder Massachusetts
Tax Free Fund
Year Amount
- ---------------------
'88 $10,000
'89 $10,949
'90 $11,813
'91 $12,829
'92 $14,172
'93 $16,240
'94 $16,788
'95 $18,024
'96 $19,516
'97 $20,567
'98 $22,587
Lehman Brothers Municipal
Bond Index
Year Amount
- ---------------------
'88 $10,000
'89 $10,719
'90 $11,851
'91 $12,943
'92 $14,238
'93 $16,022
'94 $16,393
'95 $17,611
'96 $19,088
'97 $20,129
'98 $22,289
The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of municipal bonds issued across the United States. Index issues have
a credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended March 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
--------------------------------------------------------------------------------
Net Asset Value $12.23 $12.25 $12.44 $12.81 $13.61 $13.16 $13.33 $13.70 $13.72 $14.34
Income Dividends $ .88 $ .82 $ .83 $ .81 $ .84 $ .81 $ .74 $ .72 $ .70 $ .70
Capital Gains and
Other Distributions $ .20 $ .11 $ -- $ .09 $ .16 $ .12 $ .01 $ -- $ -- $ --
Fund Total
Return (%) 9.50 7.89 8.60 10.46 14.59 3.37 7.37 8.28 5.39 9.82
Index Total
Return (%) 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38 5.45 10.73
</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 five year, and ten year
periods would have been lower.
4 - Scudder Massachusetts Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of March 31, 1998
- ---------------------------------
Diversification
- ---------------------------------
Hospital/Health 21%
General Obligation 18%
Higher Education 12%
Water/Sewer Revenue 11%
Housing Finance Authority 10%
Electric Utility Revenue 8%
Other Gneral Obligation/Lease 5%
Port/Airport Revenue 4%
Miscellaneous Municipal 11%
- ---------------------------------
100%
- ---------------------------------
The Fund continues to invest in a
broad selection of Massachusetts
municipal bonds.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- ------------------------------
Quality
- ------------------------------
AAA 40%
AA 4%
A 42%
BBB 9%
BB 2%
Not Rated 3%
- ------------------------------
100%
- ------------------------------
Weighted average quality: AA
Overall portfolio quality remains
high, with over 80% of portfolio
securities rated A or better as of
March 31.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- ------------------------------
Effective Maturity
- ------------------------------
Less than 1 year 1%
1-5 years 26%
5-10 years 30%
10-15 years 33%
15 years or greater 10%
- ------------------------------
100%
- ------------------------------
Weighted average effective maturity: 8.95 years
Our continuing goal is to have an
average effective maturity similar
to that of the Lehman Brothers
Municipal Bond Index, the Fund's
benchmark, but with a superior,
call-protected structure.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
For more complete details about the Fund's investment portfolio, see page 11.
5 - Scudder Massachusetts Tax Free Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
For its most recent fiscal year ended March 31, 1998, Scudder Massachusetts Tax
Free Fund posted a solid total return as interest rates continued a slow and
steady decline against a backdrop of low inflation and healthy economic growth.
The Fund's 9.82% total return for the period consisted of a $0.62 increase in
net asset value to $14.34 and income distributions of $0.70 per share. This
return was in keeping with the 9.98% average of 56 similar funds tracked by
Lipper over the 12-month period. In addition, the Fund ranked number one in
total return among its peers for the ten-year period ended March 31, 1998.
Massachusetts Update
Massachusetts is maximizing the benefits of the steady growth the national
economy is experiencing. The Commonwealth's economic indicators are positive,
revenues continue to exceed projections, and unemployment is at its lowest level
since 1989. The Commonwealth projects that it will finish its 1998 fiscal year
with an operating surplus of $800 million, or 7% of revenues. Massachusetts'
personal income tax, which represents 30% of General Fund revenues, is the
primary revenue source funding the surplus.
At the root of the Commonwealth's fiscal health is a strong job market. Job
growth in the services sector was the principal factor in bringing the
unemployment rate down to 3.3% versus the national average of 4.6% in February
1998. Massachusetts' per capita income in 1996 was $29,439 -- 22% higher than
the national average. The Commonwealth's debt levels are high, but manageable,
given its high wealth levels. Overall, we continue to view Massachusetts' credit
trend as improving.
Scudder Massachusetts Tax Free Fund:
Superior Long-Term Performance
(Average annual returns for periods ended March 31, 1998)
---------------------------------------------------------
Scudder
Massachusetts Number
Tax Free Lipper of
Period Fund return average Rank Funds
------ ----------- ------- ---- -----
1 Year 9.82% 9.98% 33 of 56
3 Years 7.81 7.34 8 of 49
5 Years 6.82 6.14 2 of 26
10 Years 8.49 7.85 1 of 16
Past performance does not guarantee future results.
Steady Growth and Low Inflation
The long-running U.S. economic scenario of moderate growth and low inflation
forges on. Asia, expected by many to export its way out of economic crisis and
in doing so derail U.S. growth, has so far increased exports only modestly. At
the same time, the U.S. bond market has benefited from Federal Reserve inaction
on interest rates, falling commodity prices, mixed economic statistics, and
portfolio rebalancing by investors who have acted to reduce the overweighting of
stocks in their portfolios. Moreover, the municipal bond market has enjoyed its
first significant increase in investor interest in four years. During the Fund's
6 - Scudder Massachusetts Tax Free Fund
<PAGE>
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
Municipal Yields Compared with Inflation
March 31, 1995 - March 31, 1998
LINE CHART DATA:
10-year
CPI municipal bonds
----------------------------------------------
3/95 2.73 4.65
2.90 5.00
2.95 5.15
1/96 2.99 5.00
3.04 4.85
2.50 5.10
2.23 4.75
1/97 2.08 4.50
1.84 4.60
1.60 4.20
1.40 4.30
3/98 1.40 4.50
----------------------------------------------
(Chart indicates a 3.10% spread between the 10-year municipal bonds at 4.50%
(3/98) and the CPI at 1.40% (3/98).)
Municipal yields represented by 10-year, AAA-rated municipal bonds.
Inflation represented by CPI (Consumer Price Index).
Sources: Salomon Brothers; Datastream
- ----------
most recent fiscal year, yields of 10-year Treasury bonds declined 1.3
percentage points and their prices rose 9.3%, while yields of comparable
municipal bonds declined almost three quarters of a percentage point and their
prices increased 5.2%.
It's important to note that in the current environment of lower municipal bond
yields, "real" interest rates -- interest rates minus increases in the CPI, a
recognized barometer of inflation -- have rarely been higher. Real interest
rates depict the level of income bondholders actually earn, taking into account
the erosion in value of their principal from inflation. The chart above
illustrates the widening gap between yield levels and inflation since March
1995.
Noncallable Bonds Remain a Focus
As a means of locking in a substantial income stream for Scudder Massachusetts
Tax Free Fund over time, we continue to emphasize 10- to 20-year noncallable
bonds. As of March 31, over 40% of the Fund's securities had maturities in this
range. During the Fund's most recent fiscal year, we sold bonds with weaker call
protection and purchased additional noncallable bonds that were attractively
priced. We also continue to look for opportunities to add high-yielding
BBB-rated and non-rated bonds to the portfolio. Higher yielding bonds, while
carrying some additional credit risk, generally exhibit less interest rate
sensitivity than municipal bonds rated A or above. Overall, the Fund held 16% of
bonds in the BBB-rated and nonrated categories as of the end of March. (For a
summary of the Fund's quality, diversification, and maturity structure, see page
5.) Lastly, our continuing goal is to have an average effective maturity similar
to that of the Lehman Brothers Municipal Bond Index, the Fund's benchmark, but
with a superior, call-protected structure. As of March 31, the Fund's average
effective maturity was approximately 9 years.
Overall portfolio quality remains high, with 83% of portfolio securities rated A
or better at the close of the period. We continue to invest in a broad selection
of Massachusetts municipal bonds, including hospital/health, general obligation,
and higher education bonds.
Over the long term, we seek to provide a competitive level of federal and state
7 - Scudder Massachusetts Tax Free Fund
<PAGE>
tax-exempt income for Fund investors -- with total return as an additional
objective -- 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 existing "callable" 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.
As of March 31, 46% 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.
Outlook
In the words of Federal Reserve Chairman Greenspan, the U.S. economy delivered
"exemplary performance" in 1997, with real GNP growth of 3.8%. We believe this
level of growth will be difficult to maintain in 1998 because of two current
drags on the economy -- burdensome consumer debt, and a high level of corporate
write-offs -- and one that still looms -- possible economic fallout from Asia's
troubles. Any slowdown from current levels of growth would provide a basis for a
sustained decline in interest rates and favorable bond market performance. At
8 - Scudder Massachusetts Tax Free Fund
<PAGE>
the same time, we believe that the Fed will stand ready to raise interest rates
at the first sign of runaway growth.
We will continue our focus on 10-20 year noncallable municipal bonds as we seek
to boost yield and achieve attractive long-term returns for our investors. At
the same time, we will attempt to limit volatility by maintaining a neutral
average maturity and high overall 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
Scudder Massachusetts
Tax Free Fund:
A Team Approach to Investing
Scudder Massachusetts Tax Free Fund is managed by a team of Scudder Kemper
Investments, Inc. ("the Adviser") 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 the Adviser's large staff of economists, research analysts, traders, and
other investment specialists who work in our offices across the United States
and abroad. We believe our team approach benefits Fund investors by bringing
together many disciplines and leveraging our extensive resources.
Philip G. Condon, Lead Portfolio Manager of the Fund, joined the Adviser in
1983 and has 18 years of experience in municipal investing and portfolio
management. Mr. Condon has had responsibility for Scudder Massachusetts Tax
Free Fund since 1989. Kathleen A. Meany, Portfolio Manager of the Fund, has
worked on Scudder Massachusetts Tax Free Fund since 1988. Ms. Meany joined the
Adviser in 1988 and has 21 years of municipal investment and portfolio
management experience.
9 - Scudder Massachusetts Tax Free Fund
<PAGE>
Glossary of Investment Terms
BOND An interest-bearing security issued by the
federal, state, or local government or a
corporation that obligates the issuer to pay
the bondholder a specified amount of interest
for a stated period -- usually a number of
years -- and to repay the face amount of the
bond at its maturity date.
GENERAL OBLIGATION BOND A municipal bond backed by the "full faith
and credit" (including the taxing and further
borrowing power) of the city, state, or
agency that issues the bond. A general
obligation bond is repaid with the issuer's
general revenue and borrowings.
INFLATION An overall increase in the prices of goods
and services, as happens when business and
consumer spending increases relative to the
supply of goods available in the marketplace
-- in other words, when too much money is
chasing too few goods. High inflation has a
negative impact on the prices of fixed-income
securities.
MUNICIPAL BOND An interest-bearing debt security issued by a
state or local government entity.
NET ASSET VALUE (NAV) The price per share of a mutual fund based on
the sum of the market value of all the
securities owned by the fund divided by the
number of outstanding shares.
TAXABLE EQUIVALENT YIELD The level of yield a fully taxable instrument
would have to provide to equal that of a
tax-free municipal bond on an after-tax
basis.
30-DAY SEC YIELD The standard yield reference for bond funds,
based on a formula prescribed by the SEC.
This annualized yield calculation reflects
the 30-day average of the income earnings of
every holding in a given fund's portfolio,
net of expenses, assuming each is held to
maturity.
TOTAL RETURN The most common yardstick to measure the
performance of a fund. Total return --
annualized or compound -- is based on a
combination of share price changes plus
income and capital gain distributions, if
any, expressed as a percentage gain or loss
in value.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance
and Investment Terms)
10 - Scudder Massachusetts Tax Free Fund
<PAGE>
Investment Portfolio as of March 31, 1998
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Municipal Investments 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts
Boston, MA, General Obligation, Series A, 6.5%, 7/1/12 (c) .................... 2,320,000 AAA 2,540,609
Boston, MA, Industrial Development Authority, Springhouse Project, 9.25%,
7/1/25 ...................................................................... 2,000,000 NR 2,499,600
Chicopee, MA, Electric Revenue, ETM, 7.125%, 1/1/17** ......................... 1,210,000 AAA 1,473,974
Easton, MA, General Obligation, Series 1997, 5%, 10/1/17 (c) .................. 1,205,000 AAA 1,185,841
Haverhill, MA, Unlimited Tax, General Obligation, Series A, 7%, 6/15/12 (c) ... 600,000 AAA 675,414
Holyoke, MA, General Obligation, Series 1996A, 6%, 6/15/09 (c) ................ 1,560,000 AAA 1,698,388
Mashpee, MA, General Obligation:
Series 1997, 5.125%, 2/1/11 (c) ............................................. 1,025,000 AAA 1,053,905
Series 1997, 5.35%, 2/1/12 (c) .............................................. 1,525,000 AAA 1,590,697
Massachusetts Bay Transportation Authority:
Certificates of Participation, 7.75%, 1/15/06 ............................... 1,000,000 A 1,169,880
General Transportation System:
Series A, 5.4%, 3/1/07 ..................................................... 8,325,000 A 8,863,711
Series A, 5.5%, 3/1/09 ..................................................... 1,000,000 A 1,072,970
Series A, 5.5%, 3/1/12 ..................................................... 3,000,000 A 3,211,260
Series B, 6.2%, 3/1/16 ..................................................... 2,100,000 A 2,406,663
Series C, 6.1%, 3/1/13 ..................................................... 1,250,000 A 1,403,125
Massachusetts General Obligation:
Consolidated Loan, Series A, 7.5%, 6/1/04 ................................... 12,400,000 A 14,244,004
Hynes Convention Center, Zero Coupon, 9/1/04 ................................ 2,000,000 A 1,516,480
Series 96A, 6%, 11/1/10 ..................................................... 10,000,000 A 11,234,000
Series A, ETM, 6.5%, 6/1/08** ............................................... 3,170,000 AAA 3,481,389
Series A, 6.5%, 6/1/08 ...................................................... 330,000 A 361,885
Series B, 6.5%, 8/1/08 ...................................................... 5,400,000 A 6,313,464
Series C, Zero Coupon, 12/1/04 .............................................. 8,415,000 A 6,312,092
Massachusetts Health & Educational Facilities Authority:
Anna Jaques Hospital, Series B, 6.875%, 10/1/12 ............................. 2,000,000 BBB 2,163,380
Berkshire Health System, Series D, 5.6%, 10/1/08 (c) ........................ 1,760,000 AAA 1,904,954
Boston College, Series 1993K, 5.25%, 6/1/09 ................................. 2,880,000 A 3,031,574
Charlton Memorial Hospital, Series B, 7.25%, 7/1/07 ......................... 10,000,000 A 11,114,000
Community College Program, Series A, 6.5%, 10/1/09 (c) ...................... 1,000,000 AAA 1,113,060
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cooley Dickenson Hospital Inc.:
Series B, 5.25%, 11/15/10 (c) ........................................ 2,005,000 AAA 2,078,463
Prerefunded 5/15/03, 7.125%, 11/15/18* ............................... 2,035,000 AAA 2,287,767
Deaconess Hospital, Series B, 6.625%, 4/1/12 (c) ...................... 2,000,000 AAA 2,213,100
Hallmark Health System, Series 1997A, 5%, 7/1/11 (c) .................. 1,750,000 AAA 1,751,453
Lowell General Hospital, Series 1996B, 5.2%, 6/1/10 (c) ............... 1,180,000 AAA 1,226,150
Massachusetts General Hospital, Series F, 6.25%, 7/1/12 (c) ........... 5,000,000 AAA 5,670,000
Medical Academic & Scientific, Series B, 6.5%, 1/1/09 ................. 5,000,000 AAA 5,484,300
Medical Center of Central Massachusetts, Series A, 7%, 7/1/12 (c) ..... 3,600,000 AAA 3,925,548
Melrose-Wakefield, Series 1996C, 6%, 7/1/12 ........................... 1,000,000 NR 1,080,000
Milford-Whitinsville Regional, Series 1998C, 5.75%, 7/15/13 ........... 1,750,000 BBB 1,830,780
Newton-Wellesley Hospital:
Series E, 5.9%, 7/1/11 (c) ........................................... 3,015,000 AAA 3,266,662
Series 1997G, 6%, 7/1/12 (c) ......................................... 1,000,000 AAA 1,093,720
North Adams Regional Hospital, Series C, 6.625%, 7/1/18 ............... 1,560,000 BBB 1,690,572
Northeastern University:
Series E, 6.4%, 10/1/07 (c) .......................................... 1,000,000 AAA 1,100,740
Series E, 6.5%, 10/1/12 (c) .......................................... 450,000 AAA 494,631
Partners Healthcare, Series 1997A, 5.25%, 7/1/13 (c) .................. 2,000,000 AAA 2,021,860
South Shore Hospital, 6.5%, 7/1/10 (c) ................................ 2,500,000 AAA 2,722,475
Southcoast Health System:
Series 1998A, 5.5%, 7/1/10 (c) ....................................... 1,570,000 AAA 1,664,797
Series 1998A, 5%, 7/1/18 (c) ......................................... 3,725,000 AAA 3,609,413
St. Luke's Hospital New Bedford, Series C, Yield Curve Notes, 7.32%,
8/15/10 (c)*** ..................................................... 3,400,000 AAA 3,829,250
Stonehill College, Series E, 6.55%, 7/1/12 (c) ........................ 5,000,000 AAA 5,485,050
Suffolk University, Series 1996C, 5.65%, 7/1/11 (c) ................... 1,045,000 AAA 1,107,825
Tufts University, Series C, 7.4%, 8/1/18 .............................. 530,000 A 547,013
Massachusetts Housing Finance Project Refunding Revenue:
Residential Development, Series C, 6.875%, 11/15/11 ................. 15,250,000 AAA 16,598,704
Series A, 6.3%, 10/1/13 ............................................. 7,000,000 A 7,430,150
Series A, 6.375%, 4/1/21 ............................................ 3,905,000 A 4,138,480
Series B, 6.05%, 12/1/09 (c) ........................................ 3,000,000 AAA 3,092,880
Single-Family Housing Revenue, Series 44, 5.9%, 12/1/13 ............. 3,000,000 AA 3,126,900
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts Industrial Finance Agency:
Assisted Living Facilities Revenue, TNG Marina Bay LLC Project, Series 1997,
7.5%, 12/1/27 ............................................................ 1,000,000 NR 1,012,080
Babson College, Series 1997A, 5.375%, 10/1/17 ............................... 1,700,000 A 1,728,458
College of the Holy Cross:
Issue II, 6.375%, 11/1/09 .................................................. 1,000,000 AAA 1,105,870
Series 1996, 5.25%, 3/1/09 (c) ............................................. 1,190,000 AAA 1,247,132
Series 1996, 5.5%, 3/1/16 (c) .............................................. 5,000,000 AAA 5,189,400
Concord Academy, Series 1997, 5.45%, 9/1/17 ................................. 1,205,000 BBB 1,204,940
Dana Hall School, Series 1997A, 5.7%, 7/1/13 ................................ 1,000,000 BBB 1,048,520
Deerfield Academy, 5.125%, 10/1/17 .......................................... 1,520,000 AAA 1,511,655
Dexter School Project, Series 1997, 5.4%, 5/1/13 (c) ........................ 1,000,000 AAA 1,034,540
East Boston Neighborhood, Series 1996, 7.625%, 7/1/26 ....................... 2,750,000 BB 2,869,295
Edgewood Retirement Community, Series A, 9%, 11/15/25 ....................... 1,650,000 NR 2,038,262
First Mortgage, Evanswood Bethzatha, Series A, 7.875%, 1/15/20 .............. 1,000,000 NR 1,076,180
Massachusetts Biomedical Research Corp.:
Series A, Zero Coupon, 8/1/00 .............................................. 2,860,000 A 2,600,398
Series A, Zero Coupon, 8/1/01 .............................................. 3,650,000 A 3,170,500
Series A, Zero Coupon, 8/1/02 .............................................. 3,650,000 A 3,026,471
Merrimack College:
Series 1997, 5%, 7/1/11 (c) ................................................ 1,490,000 AAA 1,509,087
Series 1997, 5%, 7/1/12 (c) ................................................ 1,560,000 AAA 1,566,552
Series 1997, 5%, 7/1/17 (c) ................................................ 1,000,000 AAA 981,740
Nantucket Electric AMT:
Series 1996A, 5.75%, 7/1/08 (c) ............................................ 1,400,000 AAA 1,516,004
Series 1996A, 5.75%, 7/1/09 (c) ............................................ 1,400,000 AAA 1,501,878
Series 1996A, 5.875%, 7/1/17 (c) ........................................... 2,000,000 AAA 2,118,260
Pollution Control Revenue:
Boston Edison Company, Series A, 5.75%, 2/1/14 ............................. 2,000,000 BBB 2,069,880
Eastern Edison Company Project, 5.875%, 8/1/08 ............................. 4,750,000 BBB 4,921,095
Provider Lease Program, Series A-1, 8.4%, 7/15/08 ........................... 1,805,000 NR 1,818,014
Resource Recovery, North Andover Solid Waste, Series A, 6.3%, 7/1/05 ........ 6,500,000 BBB 7,039,955
Solid Waste Disposal, Peabody Monofil Project, 9%, 9/1/05 ................... 2,905,000 NR 3,193,263
Sturdy Memorial Hospital, 7.9%, 6/1/09 ...................................... 1,735,000 BBB 1,828,985
Worcester Polytechnical Institute:
Series 1997, 5%, 9/1/10 (c) ................................................ 1,645,000 AAA 1,682,309
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1997 II, 5.125%, 9/1/11 (c) .......................................... 1,300,000 AAA 1,331,122
Series 1997 II, 5.125%, 9/1/16 (c) .......................................... 2,600,000 AAA 2,595,580
Massachusetts Municipal Wholesale Electric Company, Power Supply System Revenue:
Series A, 6.75%, 7/1/06 ...................................................... 2,855,000 BBB 3,111,979
Series A, 5.1%, 7/1/08 (c) ................................................... 840,000 AAA 876,750
Series B, 6.75%, 7/1/08 ...................................................... 9,000,000 BBB 9,824,670
Series B, 4.95%, 7/1/09 (c) .................................................. 1,575,000 AAA 1,593,050
Series C, 6.625%, 7/1/10 ..................................................... 1,000,000 BBB 1,079,240
Series C, 6.625%, 7/1/10 (c) ................................................. 3,500,000 AAA 3,849,580
Massachusetts Port Authority Revenue:
Series 1997A, 5.125%, 7/1/16 ................................................. 3,500,000 AA 3,493,945
Series 1998A, 5.75%, 7/1/10 .................................................. 2,000,000 AA 2,195,680
Series 1998A, 5.75%, 7/1/12 .................................................. 2,350,000 AA 2,578,303
Series 1998A, 5.5%, 7/1/15 ................................................... 2,670,000 AA 2,788,468
Series 1998A, 5.5%, 7/1/16 ................................................... 1,650,000 AA 1,718,607
Special Facilities USAir Project, Series 1996A, 5.75%, 9/1/16 (c) 1,000,000 AAA 1,051,150
Tax Exempt Receipts, ETM, Zero Coupon until 7/1/03 then 13%, 7/1/13** 1,000,000 AAA 1,047,950
Massachusetts Special Obligation Revenue, Series 1996A, 5.5%, 6/1/11 (c) 5,000,000 AAA 5,278,150
Massachusetts Turnpike Authority, Metropolitan Highway System:
Series 1997A, 5%, 1/1/10 ..................................................... 2,000,000 A 2,023,080
Series 1997A, 5%, 1/1/11 ..................................................... 3,000,000 A 3,009,690
Massachusetts Water Pollution Abatement Trust, Pooled Loan Program:
Series 2, 5.625%, 2/1/10 ..................................................... 2,820,000 AAA 3,010,801
Series 2, 5.7%, 2/1/15 ....................................................... 1,150,000 AAA 1,213,549
Massachusetts Water Resource Authority:
Series A, 6.5%, 7/15/09 ...................................................... 15,000,000 A 17,573,250
Series A, 6.5%, 7/15/19 ...................................................... 3,000,000 A 3,558,810
Series B, 6%, 11/1/08 ........................................................ 5,785,000 A 6,217,429
General Revenue, Series A, 5.5%, 8/1/13 (c) .................................. 1,445,000 AAA 1,548,924
General Revenue, Series A, 5.5%, 8/1/14 (c) .................................. 1,745,000 AAA 1,865,702
General Revenue, Series C, 5.25%, 12/1/08 .................................... 2,705,000 A 2,847,067
General Revenue, Series C, 5.25%, 12/1/15 .................................... 4,030,000 A 4,146,991
Nantucket, MA, General Obligation:
6.8%, 12/1/11 ................................................................ 1,000,000 AAA 1,107,490
Series 1997, 5%, 7/15/17 (c) ................................................. 2,710,000 AAA 2,660,461
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New England Educational Loan Marketing Corporation, Massachusetts Student Loan
Revenue, 5.7%, 7/1/05 ........................................................ 6,250,000 A 6,563,188
North Attleboro, MA, General Obligation, Series 1997, 5%, 3/1/11 (c) ........... 1,120,000 AAA 1,136,038
Somerville, MA, General Obligation, Series 1997, 5.25%, 2/15/12 (c) ............ 1,180,000 AAA 1,215,424
Springfield, MA, General Obligation:
5%, 9/1/09 ................................................................... 1,000,000 AAA 1,028,010
Series 1996, 5.3%, 8/1/11 (c) ................................................ 1,250,000 AAA 1,295,000
University of Massachusetts, Building Authority Revenue:
Series B, 6.625%, 5/1/09 ..................................................... 2,415,000 A 2,832,336
Series B, 6.625%, 5/1/10 ..................................................... 2,575,000 A 3,037,032
Series B, 6.75%, 5/1/11 ...................................................... 2,745,000 A 3,284,200
Series B, 6.875%, 5/1/14 ..................................................... 1,300,000 A 1,567,124
Worcester, MA, General Obligation:
Prerefunded 5/15/02, 6.9%, 5/15/05 (c)* ...................................... 1,850,000 AAA 2,072,666
Prerefunded 5/15/06, 6.9%, 5/15/06 (c)* ...................................... 1,500,000 AAA 1,680,540
Puerto Rico
Puerto Rico Highway and Transportation Authority, Highway Revenue, Series 1996 Y,
6.25%, 7/1/14 ................................................................ 2,000,000 A 2,278,120
- ------------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $341,585,927) 369,002,871
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $341,585,927) (a) 369,002,871
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $341,585,927. At March 31,
1998, net unrealized appreciation for all securities based on tax cost
was $27,416,944. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $27,649,806 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $232,862.
(b) All of the securities held have been determined by the Adviser to be of
appropriate credit quality as required by the Fund's investment
objectives. Credit ratings shown are assigned by either Standard & Poor's
Ratings Group, Moody's Investors Service, Inc. or Fitch Investors Service,
Inc. Unrated securities (NR) have been determined to be of comparable
quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, FSA or MBIA.
* Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest on the tax-exempt issue and to retire the bonds in full at
the earliest refunding date.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.
*** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of March 31, 1998.
The accompanying notes are an integral part of the financial statements.
15 - Scudder Massachusetts Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of March 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $341,585,927) ............. $ 369,002,871
Cash .............................................................. 149,970
Interest receivable ............................................... 5,603,698
Receivable for Fund shares sold ................................... 217,649
Other assets ...................................................... 4,969
----------------
Total assets ...................................................... 374,979,157
Liabilities
----------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed .................................. 177,662
Dividends payable ................................................. 619,137
Accrued management fee ............................................ 186,239
Other payables and accrued expenses ............................... 90,293
----------------
Total liabilities ................................................. 1,073,331
-------------------------------------------------------------------------------------------
Net assets, at market value $ 373,905,826
-------------------------------------------------------------------------------------------
Net Assets
----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation (depreciation) on investments ......... 27,416,944
Accumulated net realized loss ..................................... (2,165,561)
Paid-in capital ................................................... 348,654,443
-------------------------------------------------------------------------------------------
Net assets, at market value $ 373,905,826
-------------------------------------------------------------------------------------------
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($373,905,826 / 26,075,571 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) $14.34
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
year ended March 31, 1998
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Income:
Interest .......................................................... $ 20,136,913
----------------
Expenses:
Management fee .................................................... 2,110,713
Services to shareholders .......................................... 271,743
Custodian and accounting fees ..................................... 113,710
Trustees' fees and expenses ....................................... 24,368
Reports to shareholders ........................................... 43,721
Auditing .......................................................... 42,407
Legal ............................................................. 18,135
Other ............................................................. 48,212
----------------
2,673,009
-------------------------------------------------------------------------------------------
Net investment income 17,463,904
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ....................................................... 1,468,337
Futures ........................................................... (29,483)
----------------
1,438,854
----------------
Net unrealized appreciation (depreciation) during the period on:
Investments ....................................................... 13,674,586
Futures ........................................................... 48,023
----------------
13,722,609
-------------------------------------------------------------------------------------------
Net gain (loss) on investments transactions 15,161,463
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 32,625,367
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Massachusetts Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended March 31,
Increase (Decrease) in Net Assets 1998 1997
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ...................................... $ 17,463,904 $ 16,486,395
Net realized gain (loss) from investment transactions ...... 1,438,854 66,607
Net unrealized appreciation (depreciation) on investment
transactions during the period ........................... 13,722,609 213,202
---------------- ---------------
Net increase (decrease) in net assets resulting from
operations ............................................... 32,625,367 16,766,204
---------------- ---------------
Distributions to shareholders from net investment income ... (17,463,904) (16,486,395)
---------------- ---------------
Fund share transactions:
Proceeds from shares sold .................................. 80,795,273 61,413,587
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................ 10,415,340 9,637,952
Cost of shares redeemed .................................... (62,308,419) (55,774,105)
---------------- ---------------
Net increase (decrease) in net assets from Fund share
transactions ............................................. 28,902,194 15,277,434
---------------- ---------------
Increase (decrease) in net assets .......................... 44,063,657 15,557,243
Net assets at beginning of period .......................... 329,842,169 314,284,926
---------------- ---------------
Net assets at end of period ................................ $373,905,826 $329,842,169
---------------- ---------------
Other Information
---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................. 24,047,228 22,942,284
---------------- ---------------
Shares sold ................................................ 5,700,172 4,465,949
Shares issued to shareholders in reinvestment of
distributions ............................................ 735,264 700,390
Shares redeemed ............................................ (4,407,093) (4,061,395)
---------------- ---------------
Net increase (decrease) in Fund shares ..................... 2,028,343 1,104,944
---------------- ---------------
Shares outstanding at end of period ........................ 26,075,571 24,047,228
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder Massachusetts 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>
Years Ended March 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of ---------------------------------------------------
period ......................... $ 13.72 $ 13.70 $ 13.33 $ 13.16 $ 13.61
---------------------------------------------------
Income from investment operations:
Net investment income ............. .70 .70 .72 .74 .81
Net realized and unrealized gain
(loss) on investment
transactions ................... .62 .02 .37 .18 (.33)
---------------------------------------------------
Total from investment operations .. 1.32 .72 1.09 .92 .48
---------------------------------------------------
Less distributions:
From net investment income ........ (.70) (.70) (.72) (.74) (.81)
From net realized gains on
investment transactions ........ -- -- -- -- (.08)
In excess of net realized gains ... -- -- -- (.01) (.04)
---------------------------------------------------
Total distributions ............... (.70) (.70) (.72) (.75) (.93)
---------------------------------------------------
Net asset value, end of ---------------------------------------------------
period ......................... $ 14.34 $ 13.72 $ 13.70 $ 13.33 $ 13.16
- -----------------------------------------------------------------------------------------
Total Return (%) (b) .............. 9.82 5.39 8.28 7.37 3.37
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 374 330 314 296 332
Ratio of operating expenses, net to
average daily net assets (%) ... .76 .76 .75 .47 .07
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... .76 .76 .76 .77 .77
Ratio of net investment income to
average daily net assets (%) .. 4.97 5.12 5.23 5.73 5.80
Portfolio turnover rate (%) ....... 8.4 11.5 20.9 10.2 17.0
<CAPTION>
Years Ended March 31,
1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of ----------------------------------------------------
period ......................... $ 12.81 $ 12.44 $ 12.25 $ 12.23 $ 12.28
----------------------------------------------------
Income from investment operations:
Net investment income ............. .84 .81 .83 .82 .81
Net realized and unrealized gain
(loss) on investment
transactions ................... .96 .46 .19 .13 .22
----------------------------------------------------
Total from investment operations .. 1.80 1.27 1.02 .95 1.03
----------------------------------------------------
Less distributions:
From net investment income ........ (.84) (.81) (.83) (.82) (.88)
From net realized gains on
investment transactions ........ (.16) (.09) -- (.11)(a) (.20)
In excess of net realized gains ... -- -- -- -- --
----------------------------------------------------
Total distributions ............... (1.00) (.90) (.83) (.93) (1.08)
----------------------------------------------------
Net asset value, end of ----------------------------------------------------
period ......................... $ 13.61 $ 12.81 $ 12.44 $ 12.25 $ 12.23
- ------------------------------------------------------------------------------------------
Total Return (%) (b) .............. 14.59 10.46 8.60 7.89 9.50
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 267 120 67 46 31
Ratio of operating expenses, net to
average daily net assets (%) ... -- .48 .60 .60 .51
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... .83 .93 1.05 1.16 1.20
Ratio of net investment income to
average daily net assets (%) .. 6.36 6.38 6.72 6.60 7.23
Portfolio turnover rate (%) ....... 29.6 23.2 27.1 45.5 110.5
</TABLE>
(a) Includes $.01 per share distributions in excess of realized gains pursuant
to Internal Revenue Code Section 4982.
(b) Total returns would have been lower had certain expenses not been reduced
through March 31, 1996.
19 - Scudder Massachusetts Tax Free Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Massachusetts Tax Free Fund (the "Fund") is a non-diversified series of
Scudder State Tax Free Trust (the "Trust"). The Trust is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. There are
currently six series in the Trust.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio debt securities other than money market securities
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.
Money market instruments purchased with an original maturity of sixty days or
less are valued at amortized cost.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date).
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
Amortization and Accretion. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, 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, 1998, the Fund had a net tax basis capital loss carryforward of
approximately $66,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until March 31,
2005, the expiration date.
20 - Scudder Massachusetts Tax Free Fund
<PAGE>
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to investments in futures contracts. As a result,
net investment income and net realized gain (loss) on investment transactions
for a reporting period may differ significantly from distributions during such
period. Accordingly, the Fund may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
Other. Investment security transactions are accounted for on a trade date basis.
Distributions of net gains to shareholders are recorded on the ex-dividend date.
Interest income is accrued pro rata to the earlier of the call or maturity date.
B. Purchases and Sales of Securities
During the year ended March 31, 1998, purchases and sales of municipal
securities (excluding short-term investments) aggregated $60,276,400 and
$29,046,068, respectively.
The aggregate face value of future contracts closed during the year ended March
31, 1998 was $3,396,773.
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, the Fund agrees to pay the
Adviser a fee equal to an annual rate of approximately 0.60% of the Fund's
average daily net assets, computed and accrued daily and payable monthly. The
Adviser determines the securities, instruments, and other contracts relating to
investments to be purchased, sold or entered into by the Fund. In addition to
portfolio management services, the Adviser provides certain administrative
services in accordance with the Management Agreement. For the year ended March
31, 1998, the fees pursuant to these agreements amounted to $2,110,713, of which
$186,239 was unpaid at March 31, 1998.
21 - 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
year ended March 31, 1998, the amount charged to the Fund by SSC aggregated
$194,865, of which $16,255 was unpaid at March 31, 1998.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
March 31, 1998, the amount charged to the Fund by SFAC aggregated $63,206, of
which $5,531 was unpaid at March 31, 1998.
The Trust pays each Trustee not affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1998,
Trustees' fees and expenses charged to the Fund aggregated $24,368.
22 - Scudder Massachusetts Tax Free Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder State Tax Free Trust and the Shareholders of Scudder
Massachusetts Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Scudder
Massachusetts Tax Free Fund, including the investment portfolio, as of March 31,
1998, 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 ten years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Massachusetts Tax Free Fund as of March 31, 1998, 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 ten years in the period then ended, in conformity with generally accepted
accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P
May 4, 1998
23 - Scudder Massachusetts Tax Free Fund
<PAGE>
Tax Information
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 1998, 100% constituted exempt interest dividends for regular federal
income tax and Massachusetts personal income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
24 - Scudder Massachusetts Tax Free Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Massachusetts Tax
Free Fund (the "Fund") was held on October 24, 1997, at the office of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. At the Meeting, as adjourned
and reconvened, the following matters were voted upon by the shareholders (the
resulting votes for each matter are presented below). With regard to certain
proposals, it was recommended that the Meeting be reconvened in order to provide
shareholders with an additional opportunity to return their proxies. The date of
the reconvened meeting at which the matters were decided is noted after the
proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
17,061,825 645,121 506,611 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 17,581,462 632,095
Dawn-Marie Driscoll 17,623,454 590,104
Peter B. Freeman 17,589,052 624,506
George M. Lovejoy, Jr. 17,611,240 602,318
Wesley W. Marple, Jr. 17,620,566 592,992
Daniel Pierce 17,602,883 610,675
Kathryn L. Quirk 17,598,178 615,380
Jean C. Tempel 17,628,187 585,371
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
15,370,943 1,093,227 883,130 866,257
25 - Scudder Massachusetts Tax Free Fund
<PAGE>
4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
15,873,763 809,014 880,687 766,530
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<S> <C> <C> <C> <C>
5.1 Diversification 15,671,815 777,498 897,987 866,257
5.2 Borrowing 15,614,909 830,202 902,188 866,257
5.3 Senior securities 15,654,296 791,276 901,728 866,257
5.4 Concentration 15,651,955 793,617 901,728 866,257
5.5 Loans 15,649,449 796,123 901,728 866,257
5.6 Underwriting of securities 15,665,478 780,094 901,728 866,257
5.7 Investment in real estate 15,643,074 802,498 901,728 866,257
5.8 Purchase of physical 15,648,938 800,375 897,987 866,257
commodities
5.9 Investment in Massachusetts 15,677,580 768,216 901,504 866,257
municipal securities
5.10 Tax diversification 15,678,257 763,798 905,245 866,257
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
17,319,602 383,796 510,159
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
26 - Scudder Massachusetts Tax Free Fund
<PAGE>
This Page
intentionally
left blank.
27 - Scudder Massachusetts Tax Free Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow;
President, Driscoll Associates
Peter B. Freeman
Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Professor of Business
Administration, Northeastern
University, College of Business
Administration
Kathryn L. Quirk*
Trustee; Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
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, Secretary and
Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
28 - Scudder Massachusetts 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
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and Income 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
29 - Scudder Massachusetts Tax Free Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
30 - Scudder Massachusetts Tax Free Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
31 - Scudder Massachusetts Tax Free Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a
current prospectus.
Portfolio changes should not be considered recommendations
for action by individual investors.
SCUDDER
[LOGO]
<PAGE>
Scudder
Massachusetts
Limited Term
Tax Free Fund
Semiannual Report
April 30, 1998
Pure No-Load(TM) Funds
A fund seeking 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.
A pure no-load(TM) fund with no
commissions to buy, sell, or exchange
shares.
SCUDDER [logo]
<PAGE>
Scudder Massachusetts Limited Term Tax Free Fund
- --------------------------------------------------------------------------------
Total Net Assets as of
Date of Inception: 2/15/94 4/30/98: $93.0 million Ticker Symbol: SMLFX
- --------------------------------------------------------------------------------
o As of April 30, 1998, Scudder Massachusetts Limited Term Tax Free Fund's
30-day net annualized SEC yield was 3.62%, equivalent to a 6.81% taxable
yield for Massachusetts investors subject to the 46.85% combined federal
and state income tax rate.
o For the semiannual period ended April 30, 1998, Scudder Massachusetts
Limited Term Tax Free Fund posted a total return of 1.76%. The Fund's
return outpaced the average performance of the Fund's peers over six-month,
one-year, and three-year periods, according to Lipper Analytical Services.
o Scudder Massachusetts Limited Term Tax Free Fund received a four-star
rating from Morningstar, reflecting an "above-average" rating for
risk-adjusted performance through April 30, 1998.*
Table of Contents
3 Letter from the Fund's President 12 Financial Statements
4 Performance Update 15 Financial Highlights
5 Portfolio Summary 16 Notes to Financial Statements
6 Portfolio Management Discussion 20 Officers and Trustees
8 Glossary of Investment Terms 21 Investment Products and Services
9 Investment Portfolio 22 Scudder Solutions
* For your information, these ratings are subject to change every month and are
calculated from a Fund's average semiannual 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. The Fund received four stars
for three-year performance, and was rated among 1,547 funds for the period. Of
the funds rated, 10% received five stars, and 22.5% received four stars. Past
performance is no guarantee of future returns.
2-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
We are pleased to report to you concerning Scudder Massachusetts Limited
Term Tax Free Fund's performance over its most recent semiannual period ended
April 30, 1998. As of this date, the Fund provided a 6.81% tax equivalent yield
based on the maximum federal and state tax rates. In addition, the Fund earned a
four-star Morningstar rating as of April 30. Please read the portfolio
management discussion beginning on page 6 for more information about the Fund's
performance.
More good news -- Massachusetts' economic revival continues unabated. The
Commonwealth's unemployment level is at a nine-year low, per capita income is
significantly higher than the national average, and officials project a large
budget surplus for the 1998 fiscal year. Please read the "Massachusetts Update"
on page 6 for additional details.
For those of you interested in new Scudder products, we recently introduced
an addition to Scudder's series of growth and income offerings: Scudder Real
Estate Investment Fund invests primarily in Real Estate Investment Trusts
(REITs), and is designed to allow investors to participate in the impressive
long-term growth potential of the U.S. real estate industry. Please see page 21
for more information on Scudder products and services.
Lastly, at the start of 1998 the Fund's investment adviser changed its name
to Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc.,
pursuant to the acquisition of a majority interest in Scudder by Zurich
Insurance Company, and the combining of Scudder's business with that of Zurich
Kemper Investments, Inc.
As always, please call a Scudder Investor Information representative at
1-800-225-2470 if you have questions about your Fund. Page 22 provides more
information on how to contact Scudder. Thank you for choosing Scudder
Massachusetts Limited Term Tax Free Fund to help meet your investment needs.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Massachusetts Limited Term Tax Free Fund
3-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of April 30, 1998
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------
Total Return
- ------------------------------------------------
Period Ended Growth of Average
4/30/98 $10,000 Cumulative Annual
- ------------------------------------------------
SCUDDER MASSACHUSETTS LIMITED TERM
TAX FREE FUND
- ------------------------------------------------
1 Year $ 10,586 5.86% 5.86%
Life of Fund* $ 12,058 20.58% 4.55%
- ------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX
(3 YEAR)
- ------------------------------------------------
1 Year $ 10,556 5.56% 5.56%
Life of Fund* $ 12,204 22.04% 4.89%
- ------------------------------------------------
*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
4/97 $11,425
10/97 $11,885
4/98 $12,094
LEHMAN BROTHERS MUNICIPAL BOND INDEX
(3 year)
Year Amount
- ----------------------
2/94* $10,000
4/94 $ 9,938
10/94 $10,058
4/95 $10,401
10/95 $10,862
4/96 $11,051
10/96 $11,352
4/97 $11,561
10/97 $11,978
4/98 $12,204
The 3-year Lehman Brothers Municipal Bond Index is an unmanaged,
market-value-weighted measure of the short-term municipal bond market and
includes bonds with maturities of two to three years. Index returns assume
reinvested dividends and, unlike Fund returns, do not reflect fees or expenses.
- ----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- ----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended April 30
<TABLE>
<S> <C> <C> <C> <C> <C>
1994* 1995 1996 1997 1998
----------------------------------------------
NET ASSET VALUE......... $ 11.76 $ 11.81 $ 11.94 $ 11.89 $ 12.06
INCOME DIVIDENDS........ $ .10 $ .53 $ .52 $ .51 $ .52
FUND TOTAL RETURN (%)... -1.18 5.07 5.60 3.89 5.86
INDEX TOTAL RETURN (%).. -.62 4.64 6.26 4.62 5.56
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may be
worth more or less than when purchased. If the Adviser had not maintained the
Fund's expenses, the total return for the one year and life of Fund periods
would have been lower.
4 -- SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
<PAGE>
PORTFOLIO SUMMARY as of April 30, 1998
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Hospital/Health 32%
Other General Obligation/
Lease 23%
State General Obligation 9%
Toll Revenue/Transportation 7%
Higher Education 6%
Water/Sewer Revenue 5%
Student Loans 4%
Electric Utility Revenue 4%
Pollution Control/Industrial
Development 3%
Miscellaneous Municipal 7%
- --------------------------------------
100%
- --------------------------------------
Scudder Massachusetts Limited
Term Tax Free Fund is broadly
diversified, and holds a large
percentage of pre-refunded bonds
which offer the highest quality
available in the municipal bond
marketplace.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 78%
AA 5%
A 7%
BBB 8%
BB 1%
Not Rated 1%
- --------------------------------------
100%
- --------------------------------------
Weighted average quality: AA
The Fund's overall quality
remains high, with over 80% of
its portfolio rated AAA or AA.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
EFFECTIVE MATURITY
- --------------------------------------------------------------------------
Less than 1 year 9%
1 - 5 years 55%
5 - 10 years 36%
- ----------------------------------------------
100%
- ----------------------------------------------
Weighted average effective maturity:
4.06 years
We continued to maintain a
longer-than-neutral average
maturity to capitalize on the
favorable performance trend for
the five- to 10-year segment of
the municipal bond market.
For more complete details about the Fund's investment portfolio, see page 9.
5 -- SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
During Scudder Massachusetts Limited Term Tax Free Fund's most recent semiannual
period ended April 30, 1998, the supply of municipal bonds increased
dramatically. Despite the flood of supply -- including a 70% increase in the
first quarter of 1998 compared with the first quarter of 1997 -- Scudder
Massachusetts Limited Term Tax Free Fund posted a positive total return of 1.76%
for the six-month period. The Fund has outpaced the Lipper average return for
similar funds over six-month, one-year, and three-year periods, and the Fund
placed in the top 25% of similar funds over these three time periods. On April
30, 1998, the Fund's 30-day net annualized SEC yield was 3.62%, equivalent to a
taxable yield of 6.81% for shareholders subject to the 46.85% maximum combined
state and federal income tax rate.
Massachusetts Update
Massachusetts is maximizing the benefits of the steady growth the national
economy is experiencing. The Commonwealth's economic indicators are positive,
revenues continue to exceed projections, and unemployment is at its lowest level
since 1989. The Commonwealth projects that it will finish its 1998 fiscal year
with an operating surplus of $800 million, or 7% of revenues. Massachusetts'
personal income tax, which represents 30% of General Fund revenues, is the
primary revenue source funding the surplus.
At the root of the Commonwealth's fiscal health is a strong job market. Job
growth in the services sector was the principal factor in bringing the
unemployment rate down to 3.3% versus the national average of 4.6% in February
1998. Massachusetts' per capita income in 1996 was $29,439, 22% higher than the
national average. The Commonwealth's debt levels are high, but manageable, given
its high wealth levels. Overall, we continue to view Massachusetts' credit trend
as improving.
Scudder Massachusetts Limited Term Tax Free
Fund: Top Quartile Performance
(Returns for periods ended April 30, 1998)
Scudder Number
MALTTFF Lipper Percentile of Funds
Period return return Ranking tracked
- -----------------------------------------------------------
6 mos. 1.76% 1.45% Top 21% 28
1 year 5.86 5.35 Top 21% 28
3 years* 5.11 4.52 Top 14% 22
========================================================
*Average annual returns; past performance does not guarantee future results.
Steady Growth and
Low Inflation
The long-running U.S. economic scenario of moderate growth and low inflation
forges on. Asia, expected by many to export its way out of economic crisis and
in doing so derail U.S. growth, has so far increased exports only modestly. At
the same time, the U.S. bond market has benefited from Federal Reserve inaction
on interest rates, falling commodity prices, mixed economic statistics, and
portfolio rebalancing by investors who have acted to reduce the overweighting of
stocks in their portfolios. Moreover, the municipal bond market has enjoyed its
6-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
first significant increase in investor interest in four years. During the Fund's
most recent semiannual period, yields of 10-year Treasury bonds declined
slightly and their prices rose 1.02%, while yields of comparable municipal bonds
increased slightly and their prices declined 0.38%.
Seeking Double-Tax-Free Income
Scudder Massachusetts Limited Term Tax Free Fund is designed to deliver double
tax-free income with below-average price risk through investments primarily in
municipal bonds with effective maturities between one and five years. The Fund
seeks higher income than is typically available from tax-free money market
investments and less share price fluctuation than is found in intermediate- and
long-term tax free bonds. The Fund's professional management, economies of
scale, liquidity, and ability to diversify its assets continue to offer
advantages compared with the holding of individual municipal bonds.
Over the Fund's most recent semiannual period the Fund continued to maintain a
longer-than-neutral average maturity of approximately 4 years to capitalize on
the favorable performance trend for the five-to 10-year segment of the municipal
bond market. The Fund also continued to emphasize premium noncallable bonds,
which generally exhibit less interest rate sensitivity than bonds priced at par.
In addition, we hold a large percentage (29% as of April 30) of pre-refunded
bonds in the Fund's portfolio. Bonds are pre-refunded when issuers sell new debt
at lower prevailing rates and use the proceeds to establish an escrow account 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
over 80% of the bonds in the Fund's portfolio rated AAA or AA.
Outlook
The recent heavy influx of municipal bond supply has caused municipal bond
performance to lag that of Treasuries. Though heavier-than-normal municipal
supply is expected for some time to come, we are optimistic about near-term
municipal market performance for two reasons: First, we expect to find
attractive value in many municipal bonds available in the marketplace; second,
we believe income investors will find municipals especially attractive given the
current narrow yield differential between Treasury and municipal bond yields.
In the months to come, the Fund will continue to maintain a conservative
investment strategy, including holding premium coupon bonds, diversifying
broadly, and keeping credit quality at a high level. We will also search for
value by weighing the maturity characteristics, call features, credit quality,
and income potential of each bond we consider adding to the Fund's portfolio.
Thank you for investing with Scudder Massachusetts Limited Term Tax Free Fund.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Kathleen A. Meany
Philip G. Condon Kathleen A. Meany
7-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Glossary of Investment Terms
BOND An interest-bearing security issued by
the federal, state, or local government
or a corporation that obligates the
issuer to pay the bondholder a specified
amount of interest for a stated period
-- usually a number of years -- and to
repay the face amount of the bond at its
maturity date.
GENERAL OBLIGATION BOND A municipal bond backed by the "full
faith and credit" (including the taxing
and further borrowing power) of the
city, state, or agency that issues the
bond. A general obligation bond is
repaid with the issuer's general revenue
and borrowings.
INFLATION An overall increase in the prices of
goods and services, as happens when
business and consumer spending increases
relative to the supply of goods
available in the marketplace -- in other
words, when too much money is chasing
too few goods. High inflation has a
negative impact on the prices of
fixed-income securities.
MUNICIPAL BOND An interest-bearing debt security issued
by a state or local government entity.
NET ASSET VALUE (NAV) The price per share of a mutual fund
based on the sum of the market value of
all the securities owned by the fund
divided by the number of outstanding
shares.
TAXABLE EQUIVALENT YIELD The level of yield a fully taxable
instrument would have to provide to
equal that of a tax-free municipal bond
on an after-tax basis.
30-DAY SEC YIELD The standard yield reference for bond
funds, based on a formula prescribed by
the SEC. This annualized yield
calculation reflects the 30-day average
of the income earnings of every holding
in a given fund's portfolio, net of
expenses, assuming each is held to
maturity.
TOTAL RETURN The most common yardstick to measure the
performance of a fund. Total return --
annualized or compound -- is based on a
combination of share price changes plus
income and capital gain distributions,
if any, expressed as a percentage gain
or loss in value.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
8-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Investment Portfolio as of April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Municipal Investments 8.6%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts
Massachusetts General Obligation, Refunding, Series 1993 B, 4.4%, 11/1/98 ...... 950,000 AA 953,097
Massachusetts Health & Educational Facilities Authority:
Series C, Daily Demand Note, 4.15%, 7/1/05 (c)* .............................. 3,300,000 A1+ 3,300,000
Series D, Daily Demand Note, 4.15%, 1/1/35 (c)* .............................. 1,600,000 A1+ 1,600,000
Puerto Rico
Puerto Rico, Series 1996, 180 Day Auction Reset, 3.55%, 7/1/11 (c) (d)* ........ 2,000,000 AAA 2,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Investments (Cost $7,852,329) 7,853,097
- ------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term Municipal Investments 91.4%
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts
Lowell, MA, General Obligation:
Prerefunded 2/15/01, 8.3%, 2/15/05** ......................................... 1,635,000 AAA 1,852,668
Series 1992, 6.375%, 8/15/01 ................................................. 1,000,000 A 1,056,056
Series 1997, 6%, 12/15/04 (c) ................................................ 2,025,000 AAA 2,196,011
Malden, MA, Government Obligation, Series 1997, 5.5%, 8/1/05 (c) ............... 1,570,000 AAA 1,659,160
Massachusetts Bay Transportation Authority:
General Obligation, Series 1997C, 5%, 3/1/04 ................................. 500,000 A 513,195
System Revenue, Series 1992 C, Prerefunded 3/1/02, 6.1%, 3/1/23** ............ 5,000,000 AAA 5,384,450
Massachusetts Educational Loan Authority, Issue E, Series A, 6.7%, 1/1/02 (c) .. 415,000 AAA 439,630
Massachusetts General Obligation:
Series A, 5.25%, 2/1/01 (c) .................................................. 3,000,000 AAA 3,080,880
Series A, 5.2%, 6/1/04 ....................................................... 1,000,000 AA 1,038,480
Series A, Prerefunded 8/1/01, 6.5%, 8/1/11** ................................. 2,000,000 AAA 2,171,360
Series C, Prerefunded 12/1/00, 7.5%, 12/1/07** ............................... 750,000 AAA 825,338
Series C, Prerefunded 12/1/00, 7%, 12/1/10** ................................. 775,000 AAA 829,483
Massachusetts Health & Educational Facilities Authority:
Berkshire Health System, Series C, 5.9%, 10/1/11 ............................. 1,000,000 BBB 1,034,100
Berkshire Health System, Series D, 5.3%, 10/1/03 (c) ......................... 1,350,000 AAA 1,404,662
Central Massachusetts Medical Center, Series B, 6%, 7/1/02 (c) ............... 500,000 AAA 529,940
Daughters of Charity, Carney Hospital, Prerefunded 7/1/00, 7.5%, 7/1/05** .... 1,000,000 AAA 1,087,900
Daughters of Charity, Series D, 4.9%, 7/1/00 ................................. 550,000 AA 557,645
Fairview Extended Care, Series 1997B, 4.55%, 1/1/21 (c) ...................... 1,750,000 AAA 1,761,218
Hallmark Health System, Series 1997A, 5.25%, 7/1/06 (c) ...................... 1,000,000 AAA 1,034,150
Massachusetts Eye and Ear Infirmary, Series A, 7%, 7/1/01 .................... 2,120,000 BBB 2,192,462
</TABLE>
The accompanying notes are an integral part of the financial statements.
9 - SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical, Academic & Scientific:
Series A, 5.9%, 1/1/00 ...................................................... 500,000 A 511,345
Series A, 6%, 1/1/01 ........................................................ 1,000,000 A 1,033,200
Series A, 6.1%, 1/1/02 ...................................................... 500,000 A 522,620
Newton-Wellesley Hospital, Series D, Prerefunded 7/1/01, 7%, 7/1/15 (c)** .... 1,500,000 AAA 1,645,845
St. Joseph's Hospital, Series C, Prerefunded 10/1/99, 9.5%, 10/1/20** ........ 3,375,000 AAA 3,696,233
Valley Regional Health System, Series C, 5.3%, 7/1/00 ........................ 1,500,000 AAA 1,532,220
Wheaton College, Series B, Prerefunded 7/1/99, 7.2%, 7/1/09** ................ 590,000 AAA 623,772
Massachusetts Housing Finance Agency:
Housing Project Revenue, Series A, 5.2%, 10/1/00 ............................. 575,000 A 587,069
Multi-Family Housing Project, Series A, 8.8%, 8/1/21 ......................... 665,000 A 678,386
Massachusetts Industrial Finance Agency:
Boston Museum of Fine Arts, Series 1996, 5.125%, 1/1/04 (c) .................. 1,000,000 AAA 1,034,950
Cape Cod Health Systems, Series 1990, Prerefunded 11/15/00, 8.5%, 11/15/20**.. 2,150,000 AAA 2,413,074
College of the Holy Cross, Series 1996, 5.5%, 3/1/06 (c) ..................... 1,000,000 AAA 1,057,240
East Boston Neighborhood Project, 7.25%, 7/1/06 .............................. 930,000 BB 965,210
Leominster Hospital, Series 1989A, Prerefunded 8/1/99, 8.625%, 8/1/09** ...... 2,000,000 AAA 2,150,620
Merrimack College, Series 1997, 5.5%, 7/1/06 (c) ............................. 1,055,000 AAA 1,117,509
Milton Academy, Revenue Refunding, Series A, Prerefunded 9/1/99, 7.25%,
9/1/19 (c)** .............................................................. 700,000 AAA 743,988
Resource Recovery, North Andover Solid Waste, Series A, 6.15%, 7/1/02 ........ 750,000 BBB 785,280
Resource Recovery, North Andover Solid Waste, Series A, 6.3%, 7/1/05 ......... 2,750,000 BBB 2,963,015
Worcester Polytechnic, Series 1997II, 5.25%, 9/1/04 (c) ...................... 1,065,000 AAA 1,110,326
Massachusetts Municipal Wholesale Electric Company, Power Supply System Revenue:
Prerefunded 7/1/02, 6.75%, 7/1/17** .......................................... 1,720,000 AAA 1,905,863
Series B, 6.3%, 7/1/00 ....................................................... 345,000 A 359,107
Series B, 6.375%, 7/1/01 ..................................................... 1,000,000 A 1,056,700
Massachusetts Port Authority Revenue:
Series 1997A, 6%, 7/1/04 ..................................................... 1,140,000 AA 1,232,420
USAir Project, Series 1996A, 5.5%, 9/1/06 (c) ................................ 640,000 AAA 671,334
Massachusetts Turnpike Authority:
Series 1996A, Refunded, 5%, 6/1/99 ........................................... 785,000 NR 794,907
Series 1996A, Unrefunded, 5%, 6/1/99 ......................................... 215,000 NR 217,393
Massachusetts Water Resource Authority Revenue, Series 1998 A, 5%, 8/1/04 (c) .. 1,260,000 AAA 1,295,998
Massachusetts Water Resource Authority:
Series 1991A, Prerefunded 12/1/01 6.875%, 12/1/11** .......................... 1,000,000 AAA 1,103,970
Series A, Prerefunded 7/15/02, 6.75%, 7/15/12** .............................. 1,000,000 AAA 1,108,770
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts, Special Obligation, Series 1997A, 5.5%, 6/1/05 .................. 1,000,000 AA 1,055,710
Nantucket, MA, General Obligation, Prerefunded 12/1/01, 6.25%, 12/1/02** ....... 250,000 AAA 269,353
New England Education Loan Marketing Corp., Massachusetts Student Loan Revenue
Refunding, Issue A, 5.8%, 3/1/02 ............................................. 3,150,000 AAA 3,285,608
North Andover, MA, General Obligation, Series 1998, 5.375%, 1/15/07 (c) ........ 1,275,000 AAA 1,338,623
North Attleboro, MA, General Obligation, Series 1997, 6%, 3/1/07 (c) ........... 1,000,000 AAA 1,098,360
South Essex, MA, Sewer District, Series B, Prerefunded 6/1/04, 6.75%,
6/1/13 (c)** ................................................................. 1,000,000 AAA 1,137,280
Southeastern Masssachusetts University Building, Series A, 5.5%, 5/1/04 (c) .... 1,010,000 AAA 1,064,247
Springfield, MA, General Obligation, Series 1996, 6.375%, 8/1/03 (c) ........... 2,035,000 AAA 2,215,525
Springfield, MA, Municipal Purpose Loan, General Obligation, Series 1996,
6.25%, 8/1/06 (c) ............................................................ 1,000,000 AAA 1,107,820
Worcester, MA, General Obligation, Revenue Refunding, Series G, 6%, 7/1/01 (c).. 2,000,000 AAA 2,100,800
Worcester, MA, Government Obligation, Series 1997, 5.75%, 8/1/07 (c) ........... 1,000,000 AAA 1,080,310
Puerto Rico
Puerto Rico Public Building Authority, 6.75%, 7/1/04 (c) ....................... 2,250,000 AAA 2,532,803
- ------------------------------------------------------------------------------------------------------------------------------
Total Intermediate-Term Municipal Investments (Cost $82,503,011) 83,853,591
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $90,355,340) (a) 91,706,688
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $90,366,947. At April 30,
1998, net unrealized appreciation for all securities was $1,339,741. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $1,523,554 and
aggregate gross unrealized depreciation for all investment securities in
which there was an excess of tax cost over market value of $183,813.
(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. 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, FSA, FGIC, or MBIA.
(d) Auction rate securities carry a short term coupon that is reset on a
periodic basis, usually every 35 days. The reset occurs through a
marketplace auction process where all bidders receive the highest yield
necessary to sell all the securities. For maturity purposes the securities
are said to have the same maturity as the time remaining to the next
auction.
* 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.
11 - SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of April 30, 1998 (Unaudited)
<TABLE>
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $90,355,340) ................. $ 91,706,688
Cash ................................................................. 130,928
Interest receivable .................................................. 1,479,764
Receivable for Fund shares sold ...................................... 16,853
Deferred organization expenses ....................................... 4,461
Other assets ......................................................... 726
----------------
Total assets ......................................................... 93,339,420
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Dividends payable .................................................... 96,563
Payable for Fund shares redeemed ..................................... 203,606
Accrued management fee ............................................... 40,743
Other payables and accrued expenses .................................. 38,001
----------------
Total liabilities .................................................... 378,913
-------------------------------------------------------------------------------------------
Net assets, at market value $ 92,960,507
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Unrealized appreciation on investments ............................... 1,351,348
Accumulated net realized loss ........................................ (148,737)
Paid-in capital ...................................................... 91,757,896
-------------------------------------------------------------------------------------------
Net assets, at market value $ 92,960,507
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($92,960,507 / 7,707,010 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ........................................................ $12.06
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
<PAGE>
Statement of Operations
six months ended April 30, 1998
<TABLE>
<S> <C> <C>
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
Interest ............................................................. $ 2,191,384
----------------
Expenses:
Management fee ....................................................... 266,090
Custodian and accounting fees ........................................ 28,236
Services to shareholders ............................................. 31,856
Trustees' fees and expenses .......................................... 8,326
Auditing ............................................................. 15,747
Legal ................................................................ 3,077
Reports to shareholders .............................................. 8,869
Registration fees .................................................... 7,243
Amortization of organization expenses ................................ 2,789
Other ................................................................ 4,788
----------------
Total expenses before reductions ..................................... 377,021
Expense reductions ................................................... (44,409)
----------------
Expenses, net ........................................................ 332,612
-------------------------------------------------------------------------------------------
Net investment income 1,858,772
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from investments ............................ (1,200)
Net unrealized appreciation (depreciation) on investments
during the period .................................................. (375,545)
-------------------------------------------------------------------------------------------
Net gain (loss) on investments (376,745)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 1,482,027
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended Year
April 30, Ended
Increase (Decrease) in Net Assets 1998 October 31,
(Unaudited) 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ...................................... $ 1,858,772 $ 3,039,006
Net realized gain (loss) on investments .................... (1,200) 8,891
Net unrealized appreciation (depreciation) on
investments during the period ............................ (375,545) 676,307
---------------- ----------------
Net increase in net assets resulting from operations ....... 1,482,027 3,724,204
---------------- ----------------
Distributions to shareholders from net investment
income ................................................... (1,858,772) (3,039,006)
---------------- ----------------
Fund share transactions:
Proceeds from shares sold .................................. 33,110,515 34,983,831
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................ 1,295,003 1,974,195
Cost of shares redeemed .................................... (20,594,922) (23,621,656)
---------------- ----------------
Net increase in net assets from Fund share
transactions ............................................. 13,810,596 13,336,370
---------------- ----------------
Increase in net assets ..................................... 13,433,851 14,021,568
Net assets at beginning of period .......................... 79,526,656 65,505,088
---------------- ----------------
Net assets at end of period ................................ $ 92,960,507 $ 79,526,656
---------------- ----------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................. 6,573,339 5,463,378
---------------- ----------------
Shares sold ................................................ 2,722,942 2,911,596
Shares issued to shareholders in reinvestment of
distributions ............................................ 106,692 164,273
Shares redeemed ............................................ (1,695,963) (1,965,908)
---------------- ----------------
Net increase in Fund shares ................................ 1,133,671 1,109,961
---------------- ----------------
Shares outstanding at end of period ........................ 7,707,010 6,573,339
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - 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,
Six Months 1994
Ended (commencement
April 30, Years Ended October 31, of operations)
1998 to October 31,
(Unaudited) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------
Net asset value, beginning of period ........................ $12.10 $11.99 $12.02 $11.64 $12.00
Income from investment operations: -------------------------------------------------------------------
Net investment income ....................................... .25 .53 .50 .54 .36
Net realized and unrealized gain (loss) on investment
transactions ............................................. (.04) .11 (.03) .38 (.36)
-------------------------------------------------------------------
Total from investment operations ............................ .21 .64 .47 .92 .00
-------------------------------------------------------------------
Less distributions from net investment income ............... (.25) (.53) (.50) (.54) (.36)
-------------------------------------------------------------------
Net asset value, end of period .............................. $12.06 $12.10 $11.99 $12.02 $11.64
-------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ........................................ 1.76** 5.44 3.98 8.08 0.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ...................... 93 80 66 55 36
Ratio of operating expenses, net to average daily net
assets (%) ............................................... .75* .75 .67 .24 --
Ratio of operating expenses before expense reductions,
to average daily net assets (%) .......................... .85* .93 .90 .92 1.44*
Ratio of net investment income to average daily net
assets (%) ............................................... 4.17* 4.40 4.16 4.56 4.45*
Portfolio turnover rate (%) ................................. 13.2* 9.8 12.4 27.4 26.3*
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
15 - 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 Board of Trustees.
Money market instruments purchased with an original 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, as amended, 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, 1997, the Fund had a net tax basis capital loss carryforward of
approximately $136,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until October 31,
2002, ($21,000) 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.
16 - 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 six months ended April 30, 1998, purchases and sales of investments
(excluding short-term) aggregated $13,655,830 and $5,531,700, respectively.
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which was effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, the Fund agrees to pay the
Adviser a fee equal to an annual rate of approximately 0.60% of the Fund's
average daily net assets, computed and accrued daily and payable monthly. The
Adviser determines the securities, instruments, and other contracts relating to
investments to be purchased, sold or entered into by the Fund. In addition to
portfolio management services, the Adviser provides certain administrative
services in accordance with the Management Agreement. The Adviser agreed to
maintain the annualized expenses at 0.75% of average daily net assets until
February 28, 1999. For the six months ended April 30, 1998, the Adviser imposed
fees amounting to $266,090 and the portion not imposed amounted to $44,409.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
six months ended April 30, 1998, the amount charged to the Fund by SSC
aggregated $22,098 of which $3,631 was unpaid at April 30, 1998.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the six months
ended April 30, 1998, the amount charged to the Fund by SFAC aggregated $16,000,
of which $3,000 was unpaid at April 30, 1998.
The Trust pays each Trustee not affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the six months ended April 30, 1998,
Trustees' fees aggregated $8,326.
17 - SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
<PAGE>
This Page
intentionally
left blank.
18-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
This Page
intentionally
left blank.
19-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; President, Driscoll Associates; Executive Fellow, Bentley College
Peter B. Freeman
Trustee; Corporate Director and Trustee
George M. Lovejoy, Jr.
Trustee; President and Director, Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Kathryn L. Quirk*
Trustee, Vice President and Assistant Secretary
Jean C. Tempel
Trustee; Managing 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, Secretary and Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
20-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
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Growth and Income 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
21-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
22-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
23-Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a
current prospectus.
Portfolio changes should not be considered recommendations
for action by individual investors.
SCUDDER
[LOGO]
<PAGE>
SCUDDER NEW YORK TAX FREE MONEY FUND
and
SCUDDER NEW YORK TAX FREE FUND
Two Pure No-Load(TM) (No Sales Charges) Mutual Funds
Specializing in the Management
of New York State Municipal
Security Portfolios
and
SCUDDER OHIO TAX FREE FUND
A Pure No-Load(TM) (No Sales Charges)
Mutual Fund Specializing in the
Management of an Ohio
Municipal Securities
Portfolio
and
SCUDDER PENNSYLVANIA TAX FREE FUND
A Pure No-Load(TM) (No Sales Charges)
Mutual Fund Specializing in the Management
of a Pennsylvania Municipal
Securities Portfolio
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder New
York Tax Free Money Fund and Scudder New York Tax Free Fund and the prospectuses
of Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund dated
August 1, 1998, 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>
<S> ` <C>
<CAPTION>
TABLE OF CONTENTS
Page
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................1
General Investment Objectives and Policies of Scudder New York Tax Free Money Fund...........................1
General Investment Objective and Policies of Scudder New York Tax Free Fund..................................3
General Investment Objective and Policies of Scudder Ohio Tax Free Fund......................................5
General Investment Objective and Policies of Scudder Pennsylvania Tax Free Fund..............................6
Master/Feeder Structure......................................................................................8
Management Strategies for Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund
and Scudder Pennsylvania Tax Free Fund.................................................................13
Special Considerations......................................................................................15
Investing in New York.......................................................................................15
Investing in Ohio...........................................................................................24
Investing in Pennsylvania...................................................................................27
Investments, Investment Techniques and Considerations Common to the Funds...................................32
Trustees' Power to Change Objectives and Policies...........................................................38
Investment Restrictions.....................................................................................38
PURCHASES............................................................................................................39
Additional Information About Opening An Account.............................................................39
Checks......................................................................................................39
Wire Transfer of Federal Funds..............................................................................40
Additional Information About Making Subsequent Investments by QuickBuy......................................40
Share Price.................................................................................................41
Share Certificates..........................................................................................41
Other Information...........................................................................................41
EXCHANGES AND REDEMPTIONS............................................................................................41
Exchanges...................................................................................................41
Redemption by Telephone.....................................................................................42
Redemption by QuickSell.....................................................................................43
Redemption by Mail or Fax...................................................................................43
Redemption by Write-A-Check.................................................................................44
Redemption-In-Kind..........................................................................................44
Other Information...........................................................................................44
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................45
The Pure No-Load(TM) Concept................................................................................45
Internet access.............................................................................................46
Dividends and Capital Gains Distribution Options............................................................46
Scudder Investor Centers....................................................................................47
Reports to Shareholders.....................................................................................47
Transaction Summaries.......................................................................................47
THE SCUDDER FAMILY OF FUNDS..........................................................................................47
SPECIAL PLAN ACCOUNTS................................................................................................52
Automatic Withdrawal Plan...................................................................................52
Cash Management System--Group Sub-Accounting Plan for Trust Accounts, Nominees
and Corporations.......................................................................................53
Automatic Investment Plan...................................................................................53
Uniform Transfers/Gifts to Minors Act.......................................................................53
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................53
PERFORMANCE INFORMATION..............................................................................................54
Average Annual Total Return.................................................................................54
Cumulative Total Return.....................................................................................54
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
Total Return................................................................................................55
SEC Yield...................................................................................................55
Effective Yield.............................................................................................56
Tax-Equivalent Yield........................................................................................56
Comparison of Fund Performance..............................................................................57
ORGANIZATION OF THE FUNDS............................................................................................60
INVESTMENT ADVISER...................................................................................................61
Scudder New York Tax Free Fund..............................................................................62
Scudder New York Tax Free Money Fund........................................................................63
Scudder Ohio Tax Free Fund..................................................................................64
Scudder Pennsylvania Tax Free Fund..........................................................................65
Personal Investments by Employees of the Adviser............................................................67
TRUSTEES AND OFFICERS................................................................................................67
REMUNERATION.........................................................................................................69
Responsibilities of the Board--Board and Committee Meetings.................................................69
Compensation of Officers and Trustees.......................................................................70
DISTRIBUTOR..........................................................................................................71
TAXES................................................................................................................71
Federal Taxation............................................................................................72
State Taxation..............................................................................................75
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund.....................................75
Scudder Ohio Tax Free Fund..................................................................................75
Scudder Pennsylvania Tax Free Fund..........................................................................76
PORTFOLIO TRANSACTIONS...............................................................................................76
Brokerage Commissions.......................................................................................76
Portfolio Turnover..........................................................................................77
NET ASSET VALUE......................................................................................................77
ADDITIONAL INFORMATION...............................................................................................79
Experts.....................................................................................................79
Shareholder Indemnification.................................................................................79
Ratings of Municipal Obligations............................................................................79
Commercial Paper Ratings....................................................................................80
Glossary....................................................................................................80
Other Information...........................................................................................81
FINANCIAL STATEMENTS.................................................................................................82
</TABLE>
ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See"Investment objectives and policies" and "Additional information about
policies and investments" in the Funds' prospectuses.)
Scudder New York Tax Free Money Fund, Scudder New York Tax Free Fund,
Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund (each a
"Fund," collectively the "Funds") are each non-diversified series of Scudder
State Tax Free Trust (the "Trust"). The Trust is a pure no-load(TM), open-end
management investment company (or mutual fund), presently consisting of six
series.
General Investment Objectives and Policies of Scudder New York Tax Free Money
Fund
The investment objectives of Scudder New York Tax Free Money Fund are
stability of capital and the maintenance of a constant net asset value of $1.00
per share, while providing New York taxpayers income exempt from New York State
and New York City personal income taxes and regular federal income tax. The Fund
pursues these objectives through the professional and efficient management of a
high quality portfolio consisting primarily of short-term municipal obligations
(as defined below under "Investments and Investment Techniques -- Municipal
Obligations") having remaining maturities of 397 calendar days or less with a
dollar-weighted average portfolio maturity of 90 days or less. The Fund seeks to
maintain a constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible. There can be no assurance that the
Fund's objectives will be met or that income to shareholders which is exempt
from regular federal income tax will be exempt from state and local taxes and
the federal alternative minimum tax. Because of its focus on New York tax-exempt
investments, the Scudder New York Tax Free Money Fund will have a more limited
number of investment options available to it than a fund that does not focus on
investments from a single state. Consequently, the Fund may need to invest a
significant percentage of its assets in single issuer. Changes in the financial
condition or market assessment of such an issuer could have a significant
adverse impact on the Fund. Therefore an investment in this Fund may be riskier
than an investment in a money market fund that does not focus on investments
from a single state.
Scudder New York Tax Free Money Fund's portfolio consists primarily of
obligations issued by municipalities located in New York State and other
qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and Guam)
whose interest payments, if distributed to New York residents, would be exempt,
in the opinion of bond counsel rendered on the date of issuance, from New York
State and New York City personal income taxes as well as regular federal income
tax. Because the Fund is intended for investors subject to New York personal
income taxes and federal income tax, it may not be appropriate for all investors
and is not available in all states. The Fund may also invest in taxable
obligations for temporary defensive purposes. It is impossible to accurately
predict how long such alternative strategies will be utilized.
Scudder New York Tax Free Money Fund's Investments. The Fund seeks to provide
New York taxpayers with income exempt from New York State and New York City
personal income taxes and regular federal income tax through a portfolio of high
quality municipal securities. As a matter of fundamental policy which cannot be
changed without the approval of a majority of the Fund's outstanding voting
securities (as defined below under "Investment Restrictions"), at least 80% of
the net assets of the Fund will be invested in municipal obligations the income
from which is exempt from regular federal income tax, and New York State and New
York City personal income taxes ("New York municipal securities") except that
when the Fund's investment adviser, Scudder Kemper Investments, Inc. (the
"Adviser") determines that market conditions warrant, the Fund may, for
temporary defensive purposes, invest more than 20% of its net assets in
securities the income from which may be subject to regular federal income tax
and New York State and New York City personal income taxes. The Scudder New York
Tax Free Money Fund is concentrated in securities issued by New York governments
and related entities. Changes in the financial condition or market assessment of
the financial condition of these entities could have a significant adverse
impact on the Fund. Consequently, an investment in the Fund may be riskier than
an investment in a money market fund that does not concentrate in securities
issued by, or within, a single state.
Under normal market conditions, the Fund's portfolio securities will
consist of New York municipal securities. In addition, the Fund may make
temporary taxable investments as described below, and may hold cash. Generally,
the Fund may purchase only securities which are rated, or issued by an issuer
rated, within the two highest quality ratings of two or more of the following
rating agencies: Moody's Investors Service, Inc. ("Moody's") (Aaa and Aa, MIG-1
<PAGE>
and MIG-2, and P1 and P2), Standard & Poor's Corporation ("S&P") (AAA and AA,
SP1+ and SP1, A1+ and A1 and A2) and Fitch Investors Service, Inc. ("Fitch")
(AAA and AA, F1+, F1 and F2). The Fund may invest its assets in these securities
to the extent permitted by Rule 2a-7 of the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund may invest up to 20% of its assets in
securities subject to the alternative minimum tax ("AMT bonds"). The Fund's
distributions from interest on AMT bonds may be taxable depending upon an
investor's particular situation. Where only one rating agency has rated a
security (or its issuer), the Fund may purchase that security as long as the
rating falls within the categories described above. Where a security (or its
issuer) is unrated, the Fund may purchase that security if, in the judgment of
the Adviser, it is comparable in quality to securities described above. All of
the securities in which the Fund may invest are dollar-denominated and must meet
credit standards applied by the Adviser pursuant to procedures established by
the Trustees. Should an issue of municipal securities cease to be rated or if
its rating is reduced below the minimum required for purchase by a money market
fund, the Adviser will dispose of any such security unless the Trustees of the
Fund determine that such disposal would not be in the best interests of the
Fund.
Subsequent to its purchase by the Fund, an issue of municipal
obligations may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. The Adviser will dispose of such security
unless the Board of Trustees of the Trust determines that such disposal would
not be in the best interest of the Fund. To the extent that the ratings accorded
by Moody's, S&P or Fitch for municipal obligations may change as a result of
changes in these rating systems, the Adviser will attempt to use comparable
ratings as standards for its investment in municipal obligations in accordance
with the investment policies contained herein.
From time to time on a temporary basis or for temporary defensive
purposes, the Fund may, subject to its investment restrictions, hold cash and
invest in taxable investments which mature in 397 calendar days or less at the
time of purchase, consisting of (1) other obligations issued by or on behalf of
municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and bankers' acceptances; and (5)
repurchase agreements (see below) with respect to any of the obligations which
the Fund is permitted to purchase. The Fund will not invest in instruments
issued by banks or savings and loan associations unless at the time of
investment such issuers have total assets in excess of $1 billion (as of the
date of their most recently published financial statements). Commercial paper
investments will be limited to commercial paper rated A-1 by S&P, Prime 1 by
Moody's or F-1 by Fitch. The Fund may hold cash or invest in temporary taxable
investments due, for example, to market conditions or pending investment of
proceeds of subscriptions for shares of the Fund or proceeds from the sale of
portfolio securities or in anticipation of redemptions. However, the Adviser
expects to invest such proceeds in municipal obligations as soon as practicable.
Interest income from temporary investments may be taxable to shareholders as
ordinary income. It is impossible to accurately predict how long such
alternative strategies may be utilized.
Amortized Cost Valuation of Portfolio Securities. Pursuant to Rule 2a-7 of the
Securities and Exchange Commission (the "SEC"), Scudder New York Tax Free Money
Fund uses the amortized cost method of valuing its investments, which
facilitates the maintenance of the Fund's per share net asset value at $1.00.
The amortized cost method, which is used to value all of the Fund's portfolio
securities, involves initially valuing a security at its cost and thereafter
amortizing to maturity any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
Consistent with the provisions of the Rule, the Fund maintains a dollar
weighted average portfolio maturity of 90 days or less, purchases only
instruments having remaining maturities of 397 calendar days or less, and
invests only in securities determined by the Trustees to be of high quality with
minimal credit risks, or as directed by the Trustees.
The Trustees have also established procedures designed to stabilize, to
the extent reasonably possible, the Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of the
Fund's portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Fund's net asset value calculated by using available
market quotations or market equivalents (i.e., determination of value by
reference to interest rate levels, quotations of comparable securities and other
factors) deviates from $1.00 per share based on amortized cost. Market
quotations and market equivalents used in such review may be obtained from an
independent pricing service approved by the Trustees.
2
<PAGE>
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Trustees. If such deviation
exceeds l/2 of l%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00 the
Trustees have the authority (1) to reduce or increase the number of shares
outstanding on a pro rata basis, and (2) to offset each shareholder's pro rata
portion of the deviation between net asset value per share and $1.00 from the
shareholder's accrued dividend account or from future dividends. The Fund may
hold cash for the purpose of stabilizing its net asset value per share. Holdings
of cash, on which no return is earned, would tend to lower the yield of the
Fund.
Securities Backed by Guarantees. Scudder New York Tax Free Money Fund invests in
securities backed by guarantees from banks, insurance companies and other
financial institutions. The Fund's ability to maintain a stable share price may
depend upon such guarantees, which are not supported by federal deposit
insurance. Consequently, changes in the credit quality of these institutions
could have an adverse impact on securities they have guaranteed or backed, which
could cause losses to the Fund and affect its share price.
General Investment Objective and Policies of Scudder New York Tax Free Fund
The investment objective of the Fund is to provide income that is
exempt from New York State and New York City personal income taxes and regular
federal income tax when distributed to New York residents through the
professional and efficient management of a portfolio consisting principally of
New York municipal securities. In pursuit of its objective, the Fund will invest
principally in New York municipal securities that are rated Aa or A by Moody's
or AA or A by S&P or by Fitch, or are of equivalent quality as determined by the
Adviser. There can be no assurance that the objective of the Fund will be met or
that all income to shareholders which is exempt from regular federal income
taxes will be exempt from state or city taxes, or from the federal alternative
minimum tax.
Scudder New York Tax Free Fund's portfolio consists primarily of
obligations issued by municipalities located in New York State and other
qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and Guam)
whose interest payments, if distributed to New York residents, would be exempt,
in the opinion of bond counsel rendered on the date of issuance, from New York
State and New York City as well as regular federal income taxes. The Fund may
also invest in taxable obligations for temporary or defensive purposes. It is
impossible to accurately predict how long such alternative strategies will be
utilized.
Scudder New York Tax Free Fund's Investments. Normally, at least 75% of the
intermediate- and long-term securities purchased by the Fund will be
investment-grade municipal securities which are those rated Aaa, Aa, A or Baa by
Moody's or AAA, AA, A or BBB by S&P or Fitch, or unrated securities judged by
the Adviser to be of equivalent quality, or securities issued or guaranteed by
the U.S. Government. The Fund may also invest up to 25% of its total assets in
fixed-income securities rated below investment-grade, that is, rated below Baa
by Moody's or below BBB by S&P or Fitch, or in unrated securities of equivalent
quality as determined by the Adviser. The Fund may not invest in fixed-income
securities rated below B by Moody's, S&P or Fitch, or their equivalent. The Fund
expects to invest principally in securities rated A or better by Moody's, S&P or
Fitch or unrated securities judged by the Adviser to be of equivalent quality at
the time of purchase. Securities in these three rating categories are judged by
the Adviser to have an adequate if not strong capacity to repay principal and
pay interest.
During the fiscal year ended March 31, 1998, based upon the
dollar-weighted average ratings of the Fund portfolio holdings at the end of
each month during that period, the Fund had the following percentage of its net
assets invested in debt securities rated below investment-grade (or if unrated,
considered by the Adviser to be equivalent to rated securities) in the category
indicated: 1.94% unrated.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are
3
<PAGE>
considered to have speculative characteristics. While some lower-grade bonds
(so-called "junk bonds") have produced higher yields in the past than
investment-grade bonds, they are considered to be predominantly speculative and,
therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the
Adviser. Should the rating of a portfolio security be downgraded after being
purchased by the Fund, the Adviser will determine whether it is in the best
interest of the Fund to retain or dispose of the security.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in New York state and other qualifying issuers (including
Puerto Rico, the U.S. Virgin Islands and Guam). It is the opinion of bond
counsel, rendered on the date of issuance, that income from these obligations is
exempt from regular federal, as well as New York state and New York City
personal income tax ("New York municipal securities"). The Fund may invest in
municipal bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued. These securities include general
obligation and revenue bonds and notes of issuers located in New York and of
other qualifying issuers. The Fund may invest in municipal notes, which are
generally used to provide short-term capital needs, and have maturities of one
year or less. Municipal notes include tax anticipation notes, revenue
anticipation notes, bond anticipation notes and construction loan notes. General
obligation bonds and notes are secured by the issuer's pledge of its full faith,
credit and taxing power for payment of principal and interest. Revenue bonds and
notes are generally paid from the revenues of a particular facility or a
specific excise tax or other revenue source.
Under normal market conditions, the Fund expects to invest principally
in New York municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in New York municipal
securities with short- and medium-term maturities as well.
The Fund may also invest up to 20% of its total assets in AMT bonds.
Fund distributions from interest on certain municipal securities subject to the
alternative minimum tax such as private activity bonds, will be a preference
item for purposes of calculating individual and corporate alternative minimum
taxes, depending upon investors' particular situations. In addition, state and
local taxes may apply, depending upon state and local tax laws.
Ordinarily, the Fund expects that 100% of its portfolio securities will
be New York municipal securities. The Fund may also, for temporary defensive
purposes, hold cash or invest its assets in short-term taxable securities. It is
impossible to accurately predict how long such alternative strategies may be
utilized.
The Fund may invest in stand-by commitments, third party puts,
when-issued securities, and enter into repurchase agreements and reverse
repurchase agreements, which may involve certain expenses and risks, including
credit risks. The Fund may also invest in variable rate demand instruments.
These securities and techniques are not expected to comprise a major portion of
the Fund's investments. The Fund may also utilize various other strategic
transactions. See "Additional information about policies and investments" for
more information about these investment techniques.
A portion of the Fund's income may be subject to federal, state and
local income taxes.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term taxable
investments such as (1) U.S. Treasury notes, bills and bonds; (2) obligations of
agencies and instrumentalities of the U.S. Government; and (3) money market
instruments, such as domestic bank certificates of deposit, finance company and
corporate commercial paper, and banker's acceptances. Notwithstanding the
foregoing, the Fund may invest more than 20% of its net assets in securities the
income from which may be subject to regular federal tax and New York State and
City personal income taxes during periods which, in the opinion of the Adviser,
require a defensive position for the protection of shareholders. Investors
should be aware that shares of the Fund do not represent a complete investment
program.
Junk bonds involve greater price volatility and higher degrees of
speculation with respect to the payment of principal and interest than
higher-quality fixed-income securities. In addition, the trading market for
these securities is generally less liquid than for higher-rated securities and
the Fund may have difficulty disposing of these securities at the time they wish
to do so. The lack of a liquid secondary market for certain securities may also
make it more difficult
4
<PAGE>
for the Fund to obtain accurate market quotations for purposes of valuing their
portfolios and calculating their net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
the Fund will be purchased upon issuance, which may involve special risks
because the securities so acquired are new issues. In such instances the Fund
may be a substantial purchaser of the issue and therefore have the opportunity
to participate in structuring the terms of the offering. Although this may
enable the Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
General Investment Objective and Policies of Scudder Ohio Tax Free Fund
The Fund seeks to provide Ohio taxpayers with income exempt from Ohio
personal income tax and regular federal income tax through a professionally
managed portfolio consisting primarily of investment-grade municipal securities.
In pursuit of its objective, the Fund expects to invest principally in Ohio
municipal securities that are rated A or better by Moody's, S&P or Fitch. There
can be no assurance that the objective of the Fund will be achieved or that all
income to shareholders which is exempt from regular federal income taxes will be
exempt from state income or local taxes or that income exempt from regular
federal income tax will be exempt from the federal alternative minimum tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the State of Ohio and other qualifying issuers
(including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Ohio residents, would be exempt, in the opinion of
bond counsel rendered on the date of issuance thereof, from Ohio personal income
tax as well as regular federal income tax. Because the Fund is intended for
investors subject to Ohio and federal income taxes, it may not be appropriate
for all investors and is not available in all states. As described below in the
"Scudder Ohio Tax Free Fund's Investments," the Fund may also invest in taxable
obligations.
Scudder Ohio Tax Free Fund's Investments. As a matter of fundamental policy,
which cannot be changed without the approval of a majority of the Fund's
outstanding voting securities (as defined below under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be invested in
municipal obligations the income from which is exempt from regular federal and
Ohio personal income taxes ("Ohio municipal securities") except that the Fund
may temporarily invest more than 20% of its net assets in securities the income
from which may be subject to regular federal and Ohio personal income taxes
during periods which, in the opinion of the Adviser, require a temporary
defensive position for the protection of the shareholders. It is impossible to
accurately predict how long such alternative strategies will be utilized.
Normally, at least 75% of the intermediate- and long-term securities
purchased by the Fund will be investment-grade municipal securities which are
those rated Aaa, Aa, A, or Baa by Moody's or AAA, AA, A, or BBB by S&P or Fitch,
or unrated securities judged by the Adviser to be of equivalent quality, or
securities issued or
5
<PAGE>
guaranteed by the U.S. Government. The Fund may also invest up to 25% of its
total assets in fixed-income securities rated below investment-grade, that is,
rated below Baa by Moody's or below BBB by S&P or Fitch, or in unrated
securities of equivalent quality as determined by the Adviser. The Fund may not
invest in fixed-income securities rated below B by Moody's, S&P or Fitch, or
their equivalent.
The Fund expects to invest principally in securities rated A or better
by Moody's, S&P or Fitch or unrated securities judged by the Adviser to be of
equivalent quality at the time of purchase. Securities in these three rating
categories are judged by the Adviser to have an adequate if not strong capacity
to repay principal and pay interest.
During the fiscal year ended March 31, 1998, based upon the
dollar-weighted average ratings of the Fund's portfolio holdings at the end of
each month during that period, the Fund had the following percentage of its net
assets invested in debt securities rated below investment-grade (or if unrated,
considered by the Adviser to be equivalent to rated securities) in the category
indicated: 1.22% BBB-.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds") have
produced higher yields in the past than investment-grade bonds, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the
Adviser. Should the rating of a portfolio security be downgraded after being
purchased by the Fund, the Adviser will determine whether it is in the best
interest of the Fund to retain or dispose of the security.
The Fund invests in municipal securities of issuers located in Ohio and
other qualifying issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam). It is the opinion of bond counsel, rendered on the date of issuance, that
interest on these obligations is exempt from both Ohio personal income tax and
regular federal income tax ("Ohio municipal securities"). These securities
include municipal bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued. Municipal bonds include general
obligation bonds, which are secured by the issuer's pledge of its faith, credit
and taxing power for payment of principal and interest, and revenue bonds, which
may be issued to finance projects owned or used by either private or public
entities and which include bonds issued to finance industrial enterprises and
pollution control facilities. The Fund may invest in other municipal securities
such as variable rate demand instruments. The Fund may also invest in municipal
notes of issuers located in Ohio and other qualifying issuers. They are
generally used to provide capital needs and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes and
bond anticipation notes. For federal income tax purposes, the income earned from
municipal securities may be entirely tax-free, taxable or subject to only the
alternative minimum tax.
Under normal market conditions, the Fund expects to invest principally
in Ohio municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in Ohio municipal
securities with short- and medium-term maturities as well.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Ohio municipal securities make it advisable to do so, up to 20% of
the Fund's net assets may be held in cash or invested in short-term taxable
investments such as (1) U.S. Treasury notes, bills and bonds; (2) obligations of
agencies and instrumentalities of the U.S. Government; and (3) money market
instruments, such as domestic bank certificates of deposit, finance company and
corporate commercial paper, and banker's acceptances. The Fund may also invest
in when-issued or forward delivery securities and enter into repurchase
agreements, reverse repurchase agreements, and strategic transactions (as
defined below). Investors should be aware that shares of the Fund do not
represent a complete investment program.
General Investment Objective and Policies of Scudder Pennsylvania Tax Free Fund
The Fund seeks to provide Pennsylvania taxpayers with income exempt
from Pennsylvania personal income tax and regular federal income tax through a
portfolio consisting primarily of investment-grade municipal securities.
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In pursuit of its objective, the Fund expects to invest principally in
Pennsylvania municipal securities that are rated A or better by Moody's, S&P or
Fitch. There can be no assurance that the objective of the Fund will be achieved
or that all income to shareholders which is exempt from regular federal income
taxes will be exempt from state income or local taxes or that income exempt from
regular federal income tax will be exempt from the federal alternative minimum
tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the Commonwealth of Pennsylvania and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Pennsylvania residents, would be exempt, in the
opinion of bond counsel rendered on the date of issuance, from Pennsylvania
personal income tax as well as regular federal income tax. Because the Fund is
intended for investors subject to Pennsylvania and federal income taxes, it may
not be appropriate for all investors and is not available in all states. As
described below in "Scudder Pennsylvania Tax Free Fund's Investments," the Fund
may also invest in taxable obligations.
Scudder Pennsylvania Tax Free Fund's Investments. As a matter of fundamental
policy, which cannot be changed without the approval of a majority of the Fund's
outstanding voting securities (as defined below under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be invested in
municipal obligations the income from which is exempt from regular federal and
Pennsylvania state income taxes ("Pennsylvania municipal securities") except
that the Fund may temporarily invest more than 20% of its net assets in
securities the income from which may be subject to federal and Pennsylvania
state income taxes during periods which, in the opinion of the Adviser, require
a temporary defensive position for the protection of shareholders. It is
impossible to accurately predict how long such alternative strategies will be
utilized.
Normally, at least 75% of the intermediate- and long-term securities
purchased by the Fund will be investment-grade municipal securities which are
those rated Aaa, Aa, A, or Baa by Moody's or AAA, AA, A, or BBB by S&P or Fitch,
or unrated securities judged by the Adviser to be of equivalent quality, or
securities issued or guaranteed by the U.S. Government. The Fund may also invest
up to 25% of its total assets in fixed-income securities rated below
investment-grade, that is, rated below Baa by Moody's or below BBB by S&P or
Fitch, or in unrated securities of equivalent quality as determined by the
Adviser. The Fund may not invest in fixed-income securities rated below B by
Moody's, S&P or Fitch, or their equivalent. During the fiscal year ended March
31, 1998, based upon the dollar-weighted average ratings of the Fund's portfolio
holdings at the end of each month during that period, the Fund had the following
percentage of its net assets invested in debt securities rated below
investment-grade (or if unrated, considered by the Adviser to be equivalent to
rated securities) in the category indicated: 1.27% unrated.
The Fund expects to invest principally in securities rated A or better
by Moody's, S&P or Fitch or unrated securities judged by the Adviser, to be of
equivalent quality at the time of purchase. Securities in these three rating
categories are judged by the Adviser to have an adequate if not strong capacity
to repay principal and pay interest.
High quality bonds, those within the two highest of the quality rating
categories, characteristically have a strong capacity to pay interest and repay
principal. Medium-grade bonds, those within the next two such categories, are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium-grade bonds are considered to have speculative
characteristics. While some lower-grade bonds (so-called "junk bonds"), have
produced higher yields in the past than investment-grade bonds, they are
considered to be predominantly speculative and, therefore, carry greater risk.
The Fund's investments must also meet credit standards applied by the
Adviser. Should the rating of a portfolio security be downgraded after being
purchased by the Fund, the Adviser will determine whether it is in the best
interest of the Fund to retain or dispose of the security.
The Fund invests in municipal securities of issuers located in
Pennsylvania and other qualifying issuers (including Puerto Rico, the U.S.
Virgin Islands and Guam). It is the opinion of bond counsel, rendered on the
date of issuance, that income from these obligations is exempt from both
Pennsylvania personal income tax and regular federal income tax ("Pennsylvania
municipal securities"). These securities include municipal bonds, which meet
longer-term capital needs and generally have maturities of more than one year
when issued. Municipal bonds include general obligation bonds, which are secured
by the issuer's pledge of its faith, credit and taxing power for payment of
principal and interest, and revenue bonds, which may be issued to finance
projects owned or used by either private or public entities and which include
bonds issued to finance industrial enterprises and pollution control facilities.
The Fund may invest in other municipal securities such as variable rate demand
instruments. The Fund may
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also invest in municipal notes of issuers located in Pennsylvania and other
qualifying issuers. They are generally used to provide short-term capital needs
and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes and construction loan notes. For federal income
tax purposes, the income earned from municipal securities may be entirely
tax-free, taxable or subject to only the alternative minimum tax.
Under normal market conditions, the Fund expects to invest principally
in Pennsylvania municipal securities with long-term maturities (i.e., more than
10 years). The Fund has the flexibility, however, to invest in Pennsylvania
municipal securities with short- and medium-term maturities as well.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Pennsylvania municipal securities make it advisable to do so, up to
20% of the Fund's net assets may be held in cash or invested in short-term
taxable investments such as (1) U.S. Treasury notes, bills and bonds; (2)
obligations of agencies and instrumentalities of the U.S. Government; and (3)
money market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances. The Fund may
also invest in when-issued or forward delivery securities and enter into
repurchase agreements and reverse repurchase agreements. Investors should be
aware that shares of the Fund do not represent a complete investment program.
Master/Feeder Structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Strategic Transactions and Derivatives. Scudder New York Tax Free Fund, Scudder
Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund may each, but are not
required to, utilize various other investment strategies as described below to
hedge various market risks (such as interest rates and broad or specific market
movements), to manage the effective maturity or duration of each Fund's
portfolio, or to enhance potential gain. These strategies may be executed
through the use of derivatives contracts. Such strategies are generally accepted
as a part of modern portfolio management and are regularly utilized by many
mutual funds and other institutional investors. Techniques and instruments may
change over time as new instruments and strategies are developed or regulatory
changes occur.
In the course of pursuing these investment strategies, each Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit to attempt to protect against possible changes in the
market value of securities held in or to be purchased for each Fund's portfolio
resulting from securities markets fluctuations, to protect each Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of each Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of each Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic
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Transaction is a function of numerous variables including market conditions. The
ability of Scudder New York Tax Free Fund and Scudder Ohio Tax Free Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The
Funds will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not to create leveraged exposure in a Fund.
Strategic Transactions, including derivatives contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of options and futures transactions entails certain other risks. In particular,
the variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of each Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of each Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, each Fund might not be able to
close out a transaction without incurring substantial losses, if at all.
Although the use of futures and options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. Each Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Scudder
New York Tax Free Fund and Scudder Ohio Tax Free Fund are authorized to purchase
and sell exchange listed options and over-the-counter options ("OTC options").
Exchange listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
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Scudder New York Tax Free Fund's, Scudder Ohio Tax Free Fund's and
Scudder Pennsylvania Tax Free Fund's ability to close out their positions as a
purchaser or seller of an OCC or exchange listed put or call option is
dependent, in part, upon the liquidity of the option market. Among the possible
reasons for the absence of a liquid option market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities including reaching daily price limits; (iv) interruption
of the normal operations of the OCC or an exchange; (v) inadequacy of the
facilities of an exchange or OCC to handle current trading volume; or (vi) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the relevant market for
that option on that exchange would cease to exist, although outstanding options
on that exchange would generally continue to be exercisable in accordance with
their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers", or broker dealers, domestic or foreign banks
or other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Adviser.
The staff of the SEC currently takes the position that OTC options purchased by
the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 10% of its assets in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund may each purchase and sell call options on securities
including U.S. Treasury and agency securities, municipal obligations,
mortgage-backed securities and Eurodollar instruments that are traded on U.S.
and foreign securities exchanges and in the over-the-counter markets, and on
securities indices and futures contracts. All calls sold by each Fund must be
"covered" (i.e., a Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though each Fund will receive the option
premium to help protect it against loss, a call sold by a Fund exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require a Fund to hold a security or instrument which it might otherwise
have sold.
Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
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securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. A Fund will not sell put options if, as a result, more than 50% of
that Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that each Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. Scudder New York Tax Free Fund, Scudder Ohio
Tax Free Fund and Scudder Pennsylvania Tax Free Fund may each enter into
financial futures contracts or purchase or sell put and call options on such
futures as a hedge against anticipated interest rate or fixed-income market
changes, for duration management and for risk management purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
Each Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.
Each Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of a Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. Scudder New York Tax
Free Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund
also may each purchase and sell call and put options on securities indices and
other financial indices and in so doing can achieve many of the same objectives
it would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
Combined Transactions. Scudder New York Tax Free Fund, Scudder Ohio Tax Free
Fund and Scudder Pennsylvania Tax Free Fund may each enter into multiple
transactions, including multiple options transactions, multiple futures
transactions and multiple interest rate transactions and any combination of
futures, options and interest rate transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
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strategy when, in the opinion of the Adviser, it is in the best interests of a
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions are normally entered into based on the Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
each Fund may enter are interest rate and index swaps and the purchase or sale
of related caps, floors and collars. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream a Fund
may be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. An index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund will each usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and each Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. A Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, each Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. Scudder New York Tax Free Fund, Scudder Ohio Tax Free
Fund and Scudder Pennsylvania Tax Free Fund may each make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. Each Fund might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that Scudder New York Tax Free Fund,
Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund
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segregate cash or liquid assets with its custodian to the extent Fund
obligations are not otherwise "covered" through ownership of the underlying
security or financial instrument. In general, either the full amount of any
obligation by a Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid
securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by a Fund
will require that Fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate cash or liquid securities sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by a Fund on an index
will require that Fund to own portfolio securities which correlate with the
index or to segregate cash or liquid assets equal to the excess of the index
value over the exercise price on a current basis. A put option written by a Fund
requires that Fund to segregate cash or liquid assets equal to the exercise
price.
OTC options entered into by Scudder New York Tax Free Fund, Scudder
Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund, including those on
securities, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, a Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, and a Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, each Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, each Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by a Fund. Moreover, instead of segregating assets if a Fund held a futures
or forward contract, it could purchase a put option on the same futures or
forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company. (See "TAXES.")
Management Strategies for Scudder New York Tax Free Fund, Scudder Ohio Tax Free
Fund and Scudder Pennsylvania Tax Free Fund
In pursuit of its investment objectives, each Fund purchases securities
that it believes are attractive and competitive values in terms of quality,
yield, and the relationship of current price to maturity value. However,
recognizing the dynamics of municipal obligation prices in response to changes
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in general economic conditions, fiscal and monetary policies, interest rate
levels and market forces such as supply and demand for various issues, the
Adviser, subject to the Trustees' supervision, performs credit analysis and
manages each Fund's portfolio continuously, attempting to take advantage of
opportunities to improve total return, which is a combination of income and
principal performance over the long term. The primary strategies employed in the
management of each Fund's portfolio are:
Emphasis on Credit Analysis. Each Fund's portfolio will be invested in municipal
obligations rated within, or judged by the Adviser to be of a quality comparable
to, the six highest quality rating categories of Moody's, S&P or Fitch. The
ratings assigned by Moody's, S&P and Fitch represent their opinions as to the
quality of the securities which they undertake to rate. It should be emphasized,
however, that ratings are relative and are not absolute standards of quality.
Furthermore, even within this segment of the municipal bond market, relative
credit standing and market perceptions thereof may shift. Therefore, the Adviser
believes that it should review continuously the quality of municipal
obligations.
The Adviser has over many years developed an experienced staff to
assign its own quality ratings which are considered in making value judgments
and in arriving at purchase or sale decisions. Through the discipline of this
procedure the Adviser attempts to discern variations in credit rankings of the
published services and to anticipate changes in credit ranking.
Variations of Maturity. In an attempt to capitalize on the differences in total
return from municipal obligations of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Adviser's
expectations of changes therein. To the extent that the Fund invests in
short-term maturities, capital volatility will be reduced.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal obligations of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
disparities in yield relationships may afford opportunities to implement a
flexible policy of trading each Fund's holdings in order to invest in more
attractive market sectors or specific issues.
Market Trading Opportunities. In pursuit of the above each Fund may engage in
short-term trading (selling securities held for brief periods of time, usually
less than three months) if the Adviser believes that such transactions, net of
costs, would further the attainment of the Fund's objective. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that each Fund will be able to take advantage of
them. Each Fund will limit its voluntary short-term trading to the extent such
limitation is necessary for it to qualify as a "regulated investment company"
under the Code.
Indexed Securities. Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund
and Scudder Pennsylvania Tax Free Fund may each invest in indexed securities,
the value of which is linked to currencies, interest rates, commodities, indices
or other financial indicators ("reference instruments"). Most indexed securities
have maturities of three years or less.
Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
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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.
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 a 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. A Fund may invest
in municipal securities rated B by S&P, Fitch or Moody's although it intends to
invest principally in securities rated in higher grades. Although the Fund's
quality standards are designed to minimize the credit risk of investing in the
Fund, that risk cannot be entirely eliminated. Shares of the Fund are not
insured by any agency of New York, Ohio or Pennsylvania or of the U.S.
Government.
Special Considerations
Investing in New York
Some of the significant financial considerations relating to the Fund's
investments in New York Municipal Obligations are summarized below. This summary
information is not intended to be a complete description and is principally
derived from official statements relating to issues of New York Municipal
Obligations that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
State Economy. New York is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially. Because New York City (the
"City") is a regional employment center for a multi-state region, State personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
The forecast of the State's economy shows continued expansion during
the 1998 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to continue
to do well, while employment in the manufacturing and government sectors will
post only small, if any, declines. On an average annual basis, the employment
growth rate in the State is expected to be higher than in 1997 and the
unemployment rate is expected to drop further to 6.1 percent. Personal income is
expected to record moderate gains in 1998. Wage growth in 1998 is expected to be
slower than in the previous year as the recent robust growth in bonus payments
moderates.
There can be no assurance that the State economy will not experience
worse-than-predicted results , with corresponding material and adverse effects
on the State's projections of receipts and disbursements.
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State Budget. The State Constitution requires the governor (the
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each year.
In recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1990-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
Other actions taken in the 1997-98 adopted budget add further pressure
to future budget balance in the State. For example, the fiscal effects of tax
reductions adopted in the 1997-98 budget are projected to grow more
substantially beyond the 1998-99 fiscal year, with incremental costs averaging
in excess of $1.3 billion annually over the last three years of the tax
reduction program. These incremental costs reflect the phase-in of State-funded
school property tax and local income tax relief, the phase-out of the
assessments on medical providers, and reductions in estate and gift levies,
utility gross receipts taxes, and the State sales tax on clothing. The full
annual cost of the enacted tax reduction package is estimated at approximately
$4.8 billion when fully effective in State fiscal year 2001-02. In addition, the
1997-98 budget included multi-year commitments for school aid and
pre-kindergarten early learning programs which could add as much as $1.4 billion
in costs when fully annualized in fiscal year 2001-02. These spending
commitments are subject to annual appropriation.
On September 11, 1997, the New York State Comptroller issued a report
which noted that the ability to deal with future budget gaps could become a
significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The State's current fiscal year began on April 1, 1998 and ends on
March 31, 1999 and is referred to herein as the State's 1998-99 fiscal year. The
Legislature adopted the debt service component of the State budget for the
1998-99 fiscal year on March 30, 1998 and the remainder of the budget on April
18, 1998. In the period prior to adoption of the budget for the current fiscal
year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house).
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General Fund disbursements in 1998-99 are now projected to grow by
$2.43 billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax
reduction initiatives, including acceleration of State-funded property and local
income tax relief for senior citizens under the School Tax Relief Program
("STAR"), expansion of the child care income-tax credit for middle-income
families, a phased-in reduction of the general business tax, and reduction of
several other taxes and fees, including an accelerated phase-out of assessments
on medical providers. The enacted budget also provides for significant increases
in spending for public schools, special education programs, and for the State
and City university systems. It also allocates $50 million for a new Debt
Reduction Reserve Fund ("DRRF") that may eventually be used to pay debt service
costs on or to prepay outstanding State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the
General Fund of $1.42 billion that is comprised of a reserve of $761 million
available for future needs, a balance of $400 million in the Tax Stabilization
Reserve Fund ("TSRF"), a balance of $158 million in the Community Projects Fund
("CPF"), and a balance of $100 million in the Contingency Reserve Fund ("CRF").
The TSRF can be used in the event of an unanticipated General Fund cash
operating deficit, as provided under the State Constitution and State Finance
Law. The CPF is used to finance various legislative and executive initiatives.
The CRF provides resource to help finance any extraordinary litigation costs
during the fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for senior
citizens under STAR, which is projected to reduce General Fund receipts by $537
million in 1998-99. The proposed reduction supplements STAR tax reductions
already scheduled in law, which are projected at $187 million in 1998-99. The
Budget also proposes several new tax-cut initiatives and other funding changes
that are projected to further reduce receipts available to the General Fund by
over $200 million. These initiatives include reducing the fee to register
passenger motor vehicles and earmarking a larger portion of such fees to
dedicated funds and other purposes; extending the number of weeks in which
certain clothing purchases are exempt from sales taxes; more fully conforming
State law to reflect recent Federal changes in estate taxes; continuing lower
pari-mutuel tax rates; and accelerating scheduled property tax relief for
farmers from 1999 to 1998. In addition to the specific tax and fee reductions
discussed above, the Executive Budget also proposes establishing a reserve of
$100 million to permit the acceleration into 1998-99 of other tax reductions
that are otherwise scheduled in law for implementation in future fiscal years.
The Division of the Budget ("DOB") estimates that the 1998-99 Financial
Plan includes approximately $62 million in non-recurring resources, comprising
less than two-tenths of one percent of General Fund disbursements. The
non-recurring resources projected for use in 1998-99 consist of $27 million in
retroactive federal welfare reimbursements for family assistance recipients with
HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are estimated at
$4.82 billion, or $1.07 billion higher than 1997-98. The proposed spending plan
includes: $2.51 billion in disbursements for transportation purposes, including
the State and local highway and bridge program; $815 million for environmental
activities; $379 million for correctional services; $228 million for the State
University of New York ("SUNY") and the City University of New York ("CUNY");
$290 million for mental hygiene projects; and $375 million for CEFAP.
Approximately 28 percent of capital projects are proposed to be financed by
"pay-as-you-go" resources. State-supported bond issuances finance 46 percent of
capital projects, with federal grants financing the remaining 26 percent.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
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result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the financial plan is based
upon forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Actual results, however, could differ
materially and adversely from the projections set forth in a financial plan, and
those projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address potential State financial plan shortfalls, and the
Division of Budget believes it could take similar actions should variances occur
in its projections for the current fiscal year.
Recent Financial Results. The General Fund is the principal operating
fund of the State and is used to account for all financial transactions, except
those required to be accounted for in another fund. It is the State's largest
fund and receives almost all State taxes and other resources not dedicated to
particular purposes.
The State ended its 1997-98 fiscal year in balance on a cash basis ,
with a General Fund cash surplus as reported by DOB of approximately $2.04
billion. The cash surplus was derived primarily from higher-than-anticipated
receipts and lower spending on welfare, Medicaid, and other entitlement
programs.
The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The balance is held in three accounts
within the General Fund: the Tax Stabilization Reserve Fund, the Contingency
Reserve Fund and the Community Projects Fund. The TSRF closing balance was $400
million, following a required deposit of $15 million (repaying a transfer made
in 1991-92) and an extraordinary deposit of $68 million made from the 1997-98
surplus. The CRF closing balance was $68 million, following a $27 million
deposit from the surplus. The CPF, which finances legislative initiatives,
closed the fiscal year with a balance of $170 million, an increase of $95
million. The General Fund closing balance did not include $2.39 billion in the
tax refund reserve account, of which $521 million was made available as a result
of the Local Government Assistance Corporation ("LGAC") financing program and
was required to be on deposit on March 31, 1998.
General Fund receipts and transfers from other funds for the 1997-98
fiscal year (including net tax refund reserve account activity) totaled $34.55
billion, an annual increase of $1.51 billion, or 4.57 percent over 1996-97.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent.
Debt Limits and Outstanding Debt. There are a number of methods by
which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the
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payments. The State has also entered into a contractual-obligation financing
arrangement with the LGAC to restructure the way the State makes certain local
aid payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. The State does not anticipate that it will be
called upon to make any payments pursuant to the State guarantee in the 1997-98
fiscal year. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
On January 13, 1992, Standard & Poor's Ratings Services ("Standard &
Poor's") reduced its ratings on the State's general obligation bonds from A to
A- and, in addition, reduced its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On August 28, 1997,
Standard & Poor's revised its ratings on the State's general obligation bonds
from A- to A and revised its ratings on the State's moral obligation, lease
purchase, guaranteed and contractual obligation debt. On March 2, 1998, Standard
& Poor's affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's Investors Service, Inc. ("Moody's") reduced
its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness. On March 20, 1998, Moody's assigned the highest commercial paper
rating of P-1 to the short-term notes of the State. On July 6, 1998, Moody's
assigned an A2 rating with a stable outlook to the State's general obligations.
The State anticipates that its capital programs will be financed, in
part, through borrowings by the State and its public authorities in the 1998-99
fiscal year. Information on the State's five-year Capital Program and Financing
Plan for the 1998-99 through 2002-03 fiscal years, updated to reflect actions
taken in the 1998-99 State budget, will be released on or before July 30, 1998.
The projection of State borrowings for the 1998-99 fiscal year is subject to
change as market conditions, interest rates and other factors vary throughout
the fiscal year.
The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.
The proposed 1997-98 through 2002-03 Capital Program and Financing Plan
was released with the 1998-99 Executive Budget on January 20, 1998. As a part of
that Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
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Litigation. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) alleged responsibility of New York State officials
to assist in remedying racial segregation in the City of Yonkers; (5) challenges
to regulations promulgated by the Superintendent of Insurance establishing
certain excess medical malpractice premium rates; (6) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (7) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; (8) a challenge to the
constitutionality of Clean Water/Clean Air Bond Act; and (9) a challenge to the
Governor's application of his constitutional line item veto authority.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the 1997-98 fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made
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under certain circumstances to certain Authorities. The State has no obligation
to provide additional assistance to localities whose local assistance payments
have been paid to Authorities under these arrangements. However, in the event
that such local assistance payments are so diverted, the affected localities
could seek additional State funds. New York City and Other Localities. The
fiscal health of the State may also be impacted by the fiscal health of its
localities, particularly the City , which has required and continues to require
significant financial assistance from the State. The City depends on State aid
both to enable the City to balance its budget and to meet its cash requirements.
There can be no assurance that there will not be reductions in State aid to the
City from amounts currently projected or that State budgets will be adopted by
the April 1 statutory deadline or that any such reductions or delays will not
have adverse effects on the City's cash flow or expenditures. In addition, the
Federal budget negotiation process could result in a reduction in or a delay in
the receipt of Federal grants which could have additional adverse effects on the
City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979. In 1975, Standard & Poor's
suspended its A rating of City bonds. This suspension remained in effect until
March 1981, at which time the City received an investment grade rating of BBB
from Standard & Poor's.
On July 2, 1985, Standard & Poor's revised its rating of City bonds
upward to BBB+ and on November 19, 1987, to A-. On February 3, 1998 and again on
May 27, 1998, Standard & Poor's assigned a BBB+ rating to the City's general
obligation debt and placed the ratings on CreditWatch with positive
implications.
Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded nearly $28 billion of the City's general obligations from Baa1 to A3.
On June 9, 1998, Moody's again assigned on A3 rating to the City's general
obligations and stated that its outlook was stable.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do not
constitute an enforceable obligation or debt of either the State or the City. As
of June 30, 1997, MAC had outstanding an aggregate of approximately $4.267
billion of its bonds. MAC is authorized to issue bonds and notes to refund its
outstanding bonds and notes and to fund certain reserves, without limitation as
to principal amount, and to finance certain capital commitments to the Transit
Authority and the New York City School Construction Authority through the 1997
fiscal year in the event the City fails to provide such financing.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986,
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the City satisfied the statutory requirements for termination of the control
period. This means that the Control Board's powers of approval are suspended,
but the Board continues to have oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the Financial
Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and CUNY and reflected the
City's expense and capital budgets for the 1998 fiscal year, which were adopted
on June 6, 1997. The 1998-2001 Financial Plan projected revenues and
expenditures for the 1998 fiscal year balanced in accordance with GAAP. The
1998-99 Financial Plan projects General Fund receipts (including transfers from
other funds) of $36.22 billion, an increase of $1.02 billion over the estimated
1997-987 level. Recurring growth in the State General Fund tax base is projected
to be approximately six percent during 1998-99, after adjusting for tax law and
administrative changes. This growth rate is lower than the rates for 1996-97 or
currently estimated for 1997-98, but roughly equivalent to the rate for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the impact
of scheduled tax reductions that will lower receipts by $38 million, as well as
the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 million to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99 in the
General Fund, primarily as a result of the use of the 1997-98 cash surplus. In
1998-99, the General Fund GAAP Financial Plan shows total revenues of $34.68
billion, total expenditures of $35.94 billion, and net other financing sources
and uses of $42 million.
Although the City has maintained balanced budgets in each of its last
seventeen fiscal years and is projected to achieve balanced operating results
for the 1998 fiscal year, there can be no assurance that the gap-closing actions
proposed in the 1998-2001 Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax increases
and reductions in essential City services could adversely affect the City's
economic base.
The projections set forth in the 1998-2001 Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon
the City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. Indebtedness subject to the
constitutional debt limit includes liability on capital contracts that are
expected
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to be funded with general obligation bonds, as well as general obligation bonds.
On June 2, 1997, an action was commenced seeking a declaratory judgment
declaring the legislation establishing the Transitional Finance Authority to be
unconstitutional. If such legislation were voided, projected contracts for the
City capital projects would exceed the City's debt limit during fiscal year
1997-98. Future developments concerning the City or entities issuing debt for
the benefit of the City, and public discussion of such developments, as well as
prevailing market conditions and securities credit ratings, may affect the
ability or cost to sell securities issued by the City or such entities and may
also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's current financial plan projects
$2.4 billion of seasonal financing for the 1998 fiscal year, the City expects to
undertake only approximately $1.4 billion of seasonal financing. The City issued
$2.4 billion of short-term obligations in fiscal year 1997 . Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Certain localities, in addition to the City, have experienced financial
problems and have requested and received additional New York State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the State's projections of its receipts and disbursements for the 1997-98 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken by
the State to assist Yonkers could result in increased State expenditures for
extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, and that was largely continued in 1997. Twenty-eight
municipalities are scheduled to share in more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million will
be dispersed among all cities, towns and villages, a 3.97% increase in General
Purpose State Aid.
The 1998-99 budget includes an additional $29.4 million in unrestricted
aid targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1996, the total indebtedness of all
localities in the State other than New York City was approximately $20.0
billion. A small portion (approximately $77.2 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.
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From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing the State assistance in
the future.
Year 2000 Compliance. The State is currently addressing "Year 2000"
data processing compliance issues. The Year 2000 compliance issue ("Y2K") arises
because most computer software programs allocate two digits to the data field
for "year" on the assumption that the first two digits will be "19". Such
programs will thus interpret the year 2000 as the year 1900 absent
reprogramming. Y2K could impact both the ability to enter data into computer
programs and the ability of such programs to correctly process data.
The Office for Technology is monitoring compliance on a quarterly basis
and is providing assistance and assigning resources to accelerate compliance for
mission critical systems, with most compliance testing expected to be completed
by mid-1999. There can be no guarantee, however, that all of the State's
mission-critical and high-priority computer systems will be Year 2000 compliant
and that there will not be an adverse impact upon State operations or State
finances as a result.
Investing in Ohio
Scudder Ohio Tax Free Fund, except to the extent investments are in
temporary investments, will invest most of its net assets in securities issued
by or on behalf of (or in certificates of participation in lease-purchase
obligations of) the State of Ohio, political subdivisions of the State, or
agencies or instrumentalities of the State or its political subdivisions ("Ohio
Obligations"). The Fund is therefore susceptible to general or particular
economic, political or regulatory factors that may affect issuers of Ohio
Obligations. The following information constitutes only a brief summary of some
of the many complex factors that may have an effect. The information does not
apply to "conduit" obligations on which the public issuer itself has no
financial responsibility. This information is derived from official statements
of certain Ohio issuers published in connection with their issuance of
securities and from other publicly available information, and is believed to be
accurate. No independent verification has been made of any of the following
information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1996 is 11,173,000.
State Economy. While diversifying more into the service and other
non-manufacturing areas, the Ohio economy continues to rely in part on durable
goods manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the economy, with over half the State's area devoted to
farming and approximately 16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, for
the last seven years the State rates were below the national rates (4.6% versus
4.9% in 1996). The unemployment rate and its effects vary among geographic areas
of the State.
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There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
State Budget. The State operates on the basis of a fiscal biennium for
its appropriations and expenditures, and is precluded by law from ending its
July 1 to June 30 fiscal year (FY) or fiscal biennium in a deficit position.
Most State operations are financed through the General Revenue Fund (GRF), for
which the personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
The 1992-93 biennium presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences an interim appropriations act was enacted effective July 1, 1991; it
included GRF debt service and lease rental appropriations for the entire
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium, passed on July 11, 1991,
$200 million was transferred from the Budget Stabilization Fund ("BSF," a cash
and budgeting management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both
in light of a continuing uncertain nationwide economic situation, there was
projected and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF; and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed
for debt service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million was transferred into the BSF. The significant
GRF fund balance, after leaving in the GRF an unreserved and undesignated
balance of $70 million, was transferred to the BSF and other funds including
school assistance funds and, in anticipation of possible federal program
changes, a human services stabilization fund.
Financial Results. From a higher than forecast 1996-97 mid-biennium GRF
fund balance, $100 million was transferred for elementary and secondary school
computer network purposes and $30 million to a new State transportation
infrastructure fund. Approximately $400.8 million served as a basis for
temporary 1996 personal income tax reductions aggregating that amount. The
1996-97 biennium-ending GRF fund balance was $834.9 million. Of that, $250
million went to school building construction and renovation, $94 million to the
school computer network, $44.2 million for school textbooks and instructional
materials and a distance learning program, $34 million to the BSF (which has a
May 9, 1998 balance of $862.7 million), and the $263 million balance to a State
income tax reduction fund.
The GRF appropriations act for the 1997-98 biennium was passed on June
25, 1997 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. Subsequent
legislation increased the fiscal year 1999 GRF appropriation level for
elementary and secondary education, with the increase to be funded in part by
mandated small
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percentage reductions in State appropriations for various State agencies and
institutions. Expressly exempt from those reductions are all appropriations for
debt service, including lease rental payments.
Debt Limits and Outstanding Debt. The State's incurrence or assumption
of debt without a vote of the people is, with limited exceptions, prohibited by
current State constitutional provisions. The State may incur debt, limited in
amount to $750,000, to cover casual deficits or failures in revenues or to meet
expenses not otherwise provided for. The Constitution expressly precludes the
State from assuming the debts of any local government or corporation. (An
exception is made in both cases for any debt incurred to repel invasion,
suppress insurrection or defend the State in war.)
By 14 constitutional amendments approved from 1921 to date (the latest
adopted in 1995) Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At June 26, 1998, $1.06 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding . The only such State debt at that date still
authorized to be incurred were portions of the highway bonds, and the following:
(a) up to $100 million of obligations for coal research and development may be
outstanding at any one time ($28.2 million outstanding); (b) $240 million of
obligations previously authorized for local infrastructure improvements, no more
than $120 million of which may be issued in any calendar year ($945.5 million
outstanding); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any one
time ($88.6 million outstanding , with no more than $50 million to be issued in
any one year).
The electors in 1995 approved a constitutional amendment extending the
local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), and authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million outstanding authorization, and authorizes not more than $1.2 billion to
be outstanding at any time and not more than $220 million to be issued in a
fiscal year.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5 billion of which
were outstanding at June 26, 1998.
The State estimates aggregate FY 1998 rental payments under various
capital lease and lease purchase agreements (as of June 26, 1998) to be
approximately $9.1 million. In recent years, State agencies have also
participated in transportation and office building projects that may have some
local as well as State use and benefit, in connection with which the State
enters into lease purchase agreements with terms ranging from 7 to 20 years.
Certificates of participation, or special obligation bonds of the State or a
local agency, are issued that represent fractionalized interests in or are
payable from the State's anticipated payments. The State estimates highest
future FY payments under those agreements (as of June 26, 1998) to be
approximately $30.7 million (of which $27.2 million is payable from sources
other than the GRF, such as federal highway money distributions). State payments
under all those agreements are subject to biennial appropriations, with the
lease terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment
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obligations under lease-purchase agreements of Ohio public agencies (in which
certificates of participation may be issued) are limited in duration to the
agency's fiscal period, and are renewable only upon appropriations being made
available for the subsequent fiscal period.
Local Governments. Local school districts in Ohio receive a major
portion (state-wide aggregate approximately 44% in recent years) of their
operating moneys from State subsidies, but are dependent on local property
taxes, and in 119 districts (as of June 26, 1998) from voter-authorized income
taxes, for significant portions of their budgets. Litigation, similar to that in
other states, has been pending questioning the constitutionality of Ohio's
system of school funding. The Ohio Supreme Court has concluded that aspects of
the system (including basic operating assistance and the loan program referred
to below) are unconstitutional, and ordered the State to provide for and fund a
system complying with the Ohio Constitution, staying its order for a year (to
March 24, 1998) to permit time for responsive corrective actions. A small number
of the State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A program has provided for school
district cash need borrowing directly from commercial lenders, with diversion of
State subsidy distributions to repayment if needed. Recent borrowings under this
program totaled $41.1 million for 28 districts in FY 1994, $71.1 million for 29
districts in FY 1995 (including $29.5 million for one), $87.2 million for 20
districts in FY 1996 (including $42.1 million for one), and $113.2 million for
12 districts in 1997 (including $90 million to one for restructuring its prior
loans).
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys distributed
by the State.
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
24 cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated (one village and two cities are in preliminary "fiscal
watch" status). As of June 26, 1998, the 1996 school district "fiscal emergency"
provision was applied to six districts, and 10 were on preliminary "fiscal
watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
Investing in Pennsylvania
Scudder Pennsylvania Tax Free Fund concentrates its investments in the
securities of issuers located in the Commonwealth of Pennsylvania. Therefore,
there are risks associated with the Fund that would not be present if its
portfolio were diversified nationally. These risks include possible tax changes,
and economic conditions and differing levels of supply and demand for long-term
municipal obligations particular to the Commonwealth of Pennsylvania.
As of June 30, 1998, outstanding general obligation bonds of the
Commonwealth of Pennsylvania are rated AA by S&P and A1 by Moody's.
The portfolio of the Fund may contain different issues of long-term
debt obligations issued by or on behalf of the Commonwealth of Pennsylvania and
counties, municipalities and political subdivisions or public authorities.
Some of the debt obligations acquired by the Fund may be General
Obligation Bonds of the issuer. Others may be Industrial Revenue Bonds or
Revenue Bonds of municipal utilities, housing authorities, hospital authorities,
parking authorities, school districts or educational institutions which are
dependent upon the revenues from the facility.
Prospective investors should consider the financial difficulties and
pressures which the Commonwealth of Pennsylvania and certain of its municipal
subdivisions have undergone. Without intending to be complete, the following
briefly summarizes some of these difficulties and the current financial
situation, as well as some of the
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complex factors affecting the financial situation in the Commonwealth. It is
derived from sources that are generally available to investors and is based in
part on information obtained from various state and local agencies in
Pennsylvania. No independent verification has been made of the following
information. Both the Commonwealth and the City of Philadelphia have
historically experienced significant revenue shortfalls. There can be no
assurance that the Commonwealth will not experience further declines in economic
conditions or that portions of the municipal obligations purchased by the Fund
will not be affected by such declines.
State Economy. The Commonwealth of Pennsylvania is one of the most
populous states, ranking fifth behind California, New York, Texas and Florida.
Pennsylvania is an established yet growing state with a diversified economy. It
is the headquarters for 58 major corporations. Pennsylvania has been
historically identified as a heavy-industry state although that reputation has
changed recently as the industrial composition of the Commonwealth diversified
when the coal, steel and railroad industries began to decline. The major new
sources of growth in Pennsylvania are in the service sector, including trade,
medical and the health services, education and financial institutions.
Pennsylvania's agricultural industries are also an important component of the
Commonwealth's economic structure, accounting for more than $3.6 billion in crop
and livestock products annually while agribusiness and food related industries
support $39 billion in economic activity annually.
Non-manufacturing employment within the Commonwealth has increased
steadily from 1980 to its December 1997 level of 82.9 percent of total
employment. The growth in employment experienced in Pennsylvania during such
periods is comparable to the growth in employment in the Middle Atlantic region
of the United States. In 1997, manufacturing employment represented 17.3 percent
of all nonagricultural employment in Pennsylvania while the services sector
accounted for 31.6 percent and the trade sector accounted for 22.5 percent.
Pennsylvania's annual average unemployment rate was below the national
average from 1986 until 1990. Slower economic growth caused the unemployment
rate in the Commonwealth to rise to 6.9 percent in 1991 and 7.5 percent in 1992.
The resumption of faster economic growth resulted in a decrease in the
Commonwealth's unemployment rate to 7.1 percent in 1993. In 1994 and 1995,
Pennsylvania's annual average unemployment rate was below the Middle Atlantic
Region's average, but slightly higher than that of the United States. During
1996, the average unemployment rate in the Commonwealth was 5.3 percent compared
to 5.6 percent for the United States. During 1997, the average unemployment rate
in the Commonwealth was 5.2 percent compared to 4.9 percent for the United
States. For May 1998 the unadjusted unemployment rate was 4.5 percent in the
Commonwealth and 4.2 percent in the United States, while the seasonally adjusted
unemployment rate for both the Commonwealth and the United States was 4.3
percent.
State Budget. The Commonwealth operates under an annual budget which is
formulated and submitted for legislative approval by the Governor each February.
The Pennsylvania Constitution requires that the Governor's budget proposal
consist of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
All funds received by the Commonwealth are subject to appropriation in
specific amounts by the General Assembly or by executive authorization by the
Governor. Total appropriations enacted by the General Assembly may not exceed
the ensuing year's estimated revenues, plus (less) the unappropriated fund
balance (deficit) of the preceding year, except for constitutionally authorized
debt service payments. Appropriations from the principal operating funds of the
Commonwealth (the General Fund, the Motor License Fund and the State Lottery
Fund) are generally made for one fiscal year and are returned to the
unappropriated surplus of the fund if not spent or encumbered by the end of the
fiscal year. The Constitution specifies that a surplus of operating funds at the
end of a fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an independent
fiscal and accounting entity with a self-balancing set of accounts,
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recording cash and/or other resources together with all related liabilities and
equities. In the Commonwealth, over 120 funds have been established by
legislative enactment or in certain cases by administrative action for the
purpose of recording the receipt and disbursement of monies received by the
Commonwealth. Annual budgets are adopted each fiscal year for the principal
operating funds of the Commonwealth and several other special revenue funds.
Expenditures and encumbrances against these funds may only be made pursuant to
appropriation measures enacted by the General Assembly and approved by the
Governor. The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bond indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
Financial information for the principal operating funds of the
Commonwealth are maintained on a budgetary basis of accounting, which is used
for the purpose of insuring compliance with the enacted operating budget. The
Commonwealth also prepares annual financial statements in accordance with
generally accepted accounting principles ("GAAP"). Budgetary basis financial
reports are based on a modified cash basis of accounting as opposed to a
modified accrual basis of accounting prescribed by GAAP. Financial information
is adjusted at fiscal year-end to reflect appropriate accruals for financial
reporting in conformity with GAAP.
Financial Condition and Results of Operations. The fiscal years 1992
through 1997 were years of recovery for Pennsylvania from the recession in 1990
and 1991. The recovery fiscal years were characterized by modest economic growth
and low inflation rates in the Commonwealth. These economic conditions, combined
with several years of tax reductions following the various tax rate increases
and tax base expansions enacted in fiscal 1991 for the General Fund, produced
modest increases in Pennsylvania's tax revenues during the period. Tax revenues
from fiscal 1993 through fiscal 1997 rose at an annual average rate of 4.1
percent. Total revenues and other income sources increased during this period by
an average annual rate of 4.7 percent. Expenditures and other uses during the
fiscal 1993 through fiscal 1997 period rose at 4.9 percent annual rate, led by
annual average increases of 13.8 percent for protection of persons and property
program costs and 5.7 percent for public health and welfare program costs. At
the close of fiscal 1997, the fund balance for the governmental fund types
totaled $1,364.9 million, an increase of $729.7 million over fiscal 1996. The
fiscal year-end unreserved-undesignated balance of $187.3 million is the largest
balance recorded since fiscal 1987.
Financial Results for Recent Fiscal Years (GAAP Basis). The five-year
period from fiscal 1993 through fiscal 1997 recorded a 4.6 percent average
annual increase in revenues and other sources, led by an average annual increase
of 8.5 percent for intergovernmental revenues. The increase for
intergovernmental revenues in fiscal 1996 is partly due to an accounting change.
Tax revenues during the five-year period increased an average of 2.5 percent as
modest economic growth, low inflation rates and several tax rate reductions and
other tax reduction measures constrained the growth of tax revenues. The tax
reduction measures followed a $2.7 billion tax increase measure adopted for the
1992 fiscal year.
Expenditures and other uses during the fiscal 1993 through fiscal 1997
period rose at an average annual rate of 4.9 percent led by increases of 13.8
percent for protection of persons and property program costs. The costs of a
prison expansion program and other correctional program expenses are responsible
for the large percentage increase. Efforts to control costs for various social
welfare programs and the presence of favorable economic conditions have led to a
modest 5.7 percent increase for public health and welfare costs for the five
year period.
The fund balance at June 30, 1997 totaled $1,364.9 million, a $729.7
million increase from fiscal 1996 and a $1,277.4 million increase from a balance
of $87.5 million at June 30, 1992.
Fiscal 1994 Financial Results (Budgeting Basis). Commonwealth revenues
during the 1994 fiscal year totaled $15,210.7 million, $38.6 million above the
fiscal year estimate, and 3.9 percent over commonwealth revenues during the 1993
fiscal year. The sales tax was an important contributor to the higher than
estimated revenues. The strength of collections from the sales tax offset the
lower than budgeted performance of the personal income tax that ended the 1994
fiscal year $74.4 million below estimate. The shortfall in the personal income
tax was largely due to shortfalls in income not subject to withholding such as
interest, dividends and other income. Expenditures, excluding pooled financing
expenditures and net of all fiscal 1994 appropriation lapses, totaled $14,934.4
million representing a 7.2 percent increase over fiscal 1993 expenditures.
Medical assistance and prisons spending contributed to the rate of spending
growth for the 1994 fiscal year.
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The Commonwealth maintained an operating balance on a budgetary basis for fiscal
1994 producing a fiscal year ending unappropriated surplus of $335.8 million.
Fiscal 1995 Financial Results (Budgetary Basis). Commonwealth revenues
for the 1995 fiscal year were above estimate and exceeded fiscal year
expenditures and encumbrances. Fiscal 1995 was the fourth consecutive fiscal
year the Commonwealth reported an increase in the fiscal year-end unappropriated
balance. Prior to reserves for transfer to the Tax Stabilization Reserve Fund,
the fiscal 1995 closing unappropriated surplus was $540.0 million, an increase
of $204.2 million over the fiscal 1994 closing unappropriated surplus prior to
transfers.
Commonwealth revenues during the 1995 fiscal year were $459.4 million,
2.9 percent, above the estimate of revenues used at the time the 1995 fiscal
year budget was enacted. Corporation taxes contributed $329.4 million of the
additional receipts largely due to higher receipts from the corporate net income
tax. Fiscal 1995 revenues from the corporate net income tax were 22.6 percent
over collections in fiscal 1994 and include the effects of the reduction of the
tax rate from 12.25 percent to 11.99 percent that became effective with tax
years beginning on and after January 1, 1994. The sales and use tax and
miscellaneous revenues also showed strong year-over-year growth that produced
above-estimate revenue collections. Sales and use tax revenues were $5,526.9
million, $128.8 million above the enacted budget estimate and 7.9 percent over
fiscal 1994 collections. Tax receipts from both motor vehicle and non-motor
vehicle sales contributed to the higher collections. Miscellaneous revenue
collections for fiscal 1995 were $183.5 million, $44.9 million above estimate
and were largely due to additional investment earnings, escheat revenues and
other miscellaneous revenues.
Fiscal 1996 Financial Results (Budgetary Basis). Commonwealth revenues
(prior to tax refunds) for the 1996 fiscal year increased by $113.9 million over
the prior fiscal year to $16,338.5 million representing a growth rate of 0.7
percent. Tax rate reductions and other tax law changes substantially reduced the
amount and rate of revenue growth for the fiscal year. The Commonwealth has
estimated that tax changes enacted for the 1996 fiscal year reduced Commonwealth
revenues by $283.4 million representing 1.7 percentage points of fiscal 1996
growth in Commonwealth revenues. The most significant tax changes enacted for
the 1996 fiscal year were (i) the reduction of the corporate net income tax rate
to 9.99 percent; (ii) double weighing of the sales factor of the corporate net
income apportionment calculation; (iii) an increase in the maximum annual
allowance for a net operating loss deduction from $0.5 million to $ 1.0 million;
(iv) an increase in the basic exemption amount for the capital stock and
franchise tax; (v) the repeal of the tax on annuities; and (vi) the elimination
of inheritance tax on transfers of certain property to surviving spouses.
Among the major sources of Commonwealth revenues for the 1996 fiscal
year, corporate tax receipts declined $338.4 million from receipts in the prior
fiscal year, largely due to the various tax changes enacted for these taxes.
Corporate tax changes were enacted to reduce the cost of doing business in
Pennsylvania for the purpose of encouraging business to remain in Pennsylvania
and to expand employment opportunities within the state. Sales and use tax
receipts for the fiscal year increased $155.5 million, or 2.8 percent, over
receipts during fiscal 1995. All of the increase was produced by the non-motor
vehicle portion of the tax as receipts from the sale of motor vehicles declined
slightly for fiscal 1996. Personal income tax receipts for the fiscal year
increased $291.1 million, or 5.7 percent, over receipts during fiscal 1995.
Personal income tax receipts were aided by a 10.2 percent increase in
non-withholding tax payments which generally are comprised of quarterly
estimated and annual final return tax payments. Non-tax receipts for the fiscal
year increased $23.7 million for the fiscal year. Included in that increase was
$67 million in net receipts from a tax amnesty program that was available for a
portion of the 1996 fiscal year. Some portion of the tax amnesty receipts
represent normal collections of delinquent taxes. The tax amnesty program is not
expected to be repeated.
The unappropriated surplus (prior to transfers to Tax Stabilization
Reserve Fund) at the close of the fiscal year for the General Fund was $183.8
million, $65.5 million above estimate. Transfers to the Tax Stabilization
Reserve Fund from fiscal 1996 operations will be $27.6 million. This amount
represents the fifteen percent of the fiscal year ending unappropriated surplus
transfer provided under current law. With the addition of this transfer and
anticipated interest earnings, the Tax Stabilization Reserve Fund balance will
be $211 million.
Fiscal 1997 Financial Results. The unappropriated balance of
Commonwealth revenues increased during the 1997 fiscal year by $432.9 million.
Higher than estimated revenues and slightly lower expenditures than budgeted
caused the increase . The unappropriated balance rose from an adjusted amount of
$158.5 million at the beginning of fiscal 1997, to $591.4 million (prior to
reserves for transfer to the Tax Stabilization Reserve Fund) at the close of the
fiscal year. Transfers to the Tax Stabilization Reserve Fund for fiscal 1997
operations are expected to be $88.7
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million, which represents the normal fifteen percent of the ending
unappropriated balance, plus an additional $100 million authorized by the
General Assembly when it enacted the fiscal 1998 budget.
Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $17,320.6 million, $576.1 (3.4 percent) above the estimate made at the
time the budget was enacted. Revenue from taxes was the largest contributor to
higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1 percent over
tax revenues in fiscal 1996. This rate of increase was not adjusted for
legislated tax reductions that affected receipts during both of those fiscal
years and therefore understates the actual underlying rate of growth of tax
revenue during fiscal 1997. Receipts from the personal income tax produced the
largest single component of higher revenues for the fiscal year. Personal income
collections were $236.3 million over estimate representing a 6.9 percent
increase. Collections of corporate taxes, led by the capital stock and franchise
and the gross receipts taxes, also exceeded their estimates for the fiscal year.
Non-tax revenues were $19.8 million (5.8 percent) over estimate mostly due to
higher than anticipated interest earnings.
Fiscal 1998 Budget. The budget for fiscal 1998 was enacted in May 1997.
Commonwealth revenues for the fiscal year at that time were estimated to be
$17,435.4 million before reserves for tax refunds. That estimate represented an
increase over estimated fiscal 1997 Commonwealth revenues of 1.0 percent.
Although fiscal 1997 revenues exceeded the fiscal 1998 budget revenue estimate,
the adopted fiscal 1998 budget revenue estimate remains unchanged and represents
a 0.7 percent increase over actual fiscal 1997 revenues. Fiscal 1998 estimates
for Commonwealth revenues are based on an economic forecast for national
economic growth to slow throughout the fiscal year.
The rate of anticipated growth of Commonwealth revenues is also
affected by the enactment of tax reductions and tax revenue dedications
effective for the 1998 fiscal year. Excluding these newly enacted changes,
revenues were projected to increase by 2.4 percent during fiscal 1998. Tax
reductions enacted for the 1998 fiscal year budget totaled an estimated $170.6
million, including $16.2 million that is reflected in higher projected tax
refunds.
Fiscal 1999 Budget. On April 22, 1998, the Governor signed a $17.96
billion General Fund budget, an increase of 4.7% from the fiscal 1998 budget.
Areas receiving the largest budgetary increases are education and workforce
development. In addition, approximately $222 million of tax cuts were signed as
part of the budget package, reducing taxes on individuals by approximately $100
million. The remainder of the tax cuts primarily affect businesses.
Debt Limits and Outstanding Debt. The Constitution of Pennsylvania
permits the issuance of the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster, (ii) electorate
approved debt, (iii) debt for capital projects subject to an aggregate debt
limit of 1.75 times the annual average tax revenues of the preceding five fiscal
years; and (iv) tax anticipation notes payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required
annually to certify to the Governor and the General Assembly certain information
regarding the Commonwealth's indebtedness.
Local Governments. The City of Philadelphia (the "City" or
"Philadelphia") is the largest city in the Commonwealth, with an estimated
population of 1,585,577 according to the 1990 Census. Philadelphia experienced a
series of general fund deficits for fiscal years 1988 through 1992 which
culminated in serious financial difficulties for the City. In its 1992
Comprehensive Annual Financial Report, Philadelphia reported a cumulative
general fund deficit of $71.4 million for fiscal year 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to assist
Philadelphia in remedying fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make factual findings and
recommendations to Philadelphia concerning its budgetary and fiscal affairs. The
legislation empowered PICA to issue notes and bonds on behalf of Philadelphia,
and also authorized Philadelphia to levy a one-percent sales tax the proceeds of
which would be used to pay off the bonds. In return for PICA's fiscal
assistance, Philadelphia is required, among other things, to establish five-year
financial plans that include balanced annual budgets. Under the legislation, if
Philadelphia does not comply with such requirements, PICA may withhold bond
revenues and certain state funding. At this time, the City is operating under a
five-year fiscal plan approved by PICA on April 30, 1996. As of February 28,
1997, PICA has issued approximately $1,761.7 million of its Special Tax Revenue
Bonds.
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The financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the City's
Cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million.
No further PICA bonds are to be issued by PICA for the purpose of
financing a capital project or deficit as the authority for such bond sales
expired on December 31, 1994. PICA's authority to issue debt for the purpose of
financing a cash flow deficit expired on December 31, 1996. Its ability to
refund existing outstanding debt is unrestricted. PICA had $1,146.2 million in
Special Tax Revenue Bonds outstanding as of June 30, 1996.
The audited General fund balance of the City as of June 30, 1994, 1995
and 1996 showed a surplus of approximately $15.4 million, $80.5 million and
$118.5 million, respectively.
S&P's rating on Philadelphia's general obligation bonds is "BBB."
Moody's rating is currently "Baa."
Litigation. The Commonwealth is a party to numerous lawsuits in which
an adverse final decision could materially affect the Commonwealth's
governmental operations and consequently its ability to pay debt service on its
obligations. The Commonwealth also faces tort claims made possible by the
limited waiver of sovereign immunity effected by Act 152, approved September 28,
1978, as amended. Under the Act, damages for any loss are limited to $250,000
per person and $1 million for each accident.
Investments, Investment Techniques and Considerations Common to the Funds
Income Level and Credit Risk. Because the Funds hold principally investment
grade (in the case of New York Tax Free Fund, Scudder Ohio Tax Free Fund and
Scudder Pennsylvania Tax Free Fund) and high quality (in the case of New York
Tax Free Money Fund) municipal obligations, the income earned on shares of each
Fund will tend to be less than it might be on a portfolio emphasizing lower
quality securities. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the federal bankruptcy laws, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions, the power or
ability of any one or more issuers to pay, when due, principal of and interest
on its or their municipal obligations may be materially affected. Scudder New
York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free
Fund may each invest in municipal securities rated B by S&P, Fitch or Moody's
although it intends to invest principally in securities rated in higher grades.
Although each Fund's quality standards are designed to minimize the credit risk
of investing in the Fund, that risk cannot be entirely eliminated. Shares of the
Funds are not insured by any agency of New York, Ohio, Pennsylvania or of the
U.S. Government.
Municipal Obligations. Municipal obligations are issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities to obtain funds for various public
purposes. The interest on most of these obligations is generally exempt from
regular federal income tax in the hands of most individual investors, although
it may be subject to the individual and corporate alternative minimum tax. The
two principal classifications of municipal obligations are "notes" and "bonds."
1. Municipal Notes. Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: tax anticipation notes; revenue anticipation notes;
bond anticipation notes; and construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, such financing provides for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government
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National Mortgage Association). There are, of course, a number of other types of
notes issued for different purposes and secured differently from those described
above.
2. Municipal Bonds. Municipal bonds which meet longer term capital
needs generally have maturities of more than one year when issued and have two
principal classifications: "general obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities,
towns, and regional districts. The proceeds these obligations are used to fund a
wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems, and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial development and pollution control bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Under federal tax legislation, certain
types of Industrial Development Bonds and Pollution Control Bonds may no longer
be issued on a tax-exempt basis, although previously-issued bonds of these types
and certain refundings of such bonds are not affected. Each Fund may invest more
than 25% of its assets in industrial development or other private activity
bonds, subject to each Fund's fundamental investment policies, and also subject
to each Fund's current intention not to invest in municipal securities whose
investment income is taxable or subject to the Fund's 20% limitation on
investing in AMT bonds. For the purposes of each Fund's investment limitation
regarding concentration of investments in any one industry, industrial
development or other private activity bonds ultimately payable by companies
within the same industry will be considered as if they were issued by issuers in
the same industry.
3. Municipal Lease Obligations and Participation Interests. A municipal
lease obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover a Fund's original investment.
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Participation interests represent undivided interests in municipal
leases, installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of the Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Adviser will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
The Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. The Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax and
Massachusetts state income tax.
4. Other Municipal Obligations. There are, in addition, a variety of
hybrid and special types of municipal obligations as well as numerous
differences in the security of municipal obligations both within and between the
two principal classifications above.
The Funds may purchase variable rate demand instruments that are
tax-municipal obligations providing for a periodic adjustment in the interest
rate paid on the instrument according to changes in interest rates generally.
These instruments also permit a Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent. The demand feature may be backed by a bank letter of credit
or guarantee issued with respect to such instrument. The Funds intend to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to the Funds, or (3) to maintain
their respective investment portfolio ratings standards. A bank that issues a
repurchase commitment may receive a fee from a Fund for this arrangement. The
issuer of a variable rate demand instrument may have a corresponding right to
prepay in its discretion the outstanding principal of the instrument plus
accrued interest upon notice comparable to that required for the holder to
demand payment.
The variable rate demand instruments that these Funds may purchase are
payable on demand on not more than thirty calendar days' notice. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily up to six months, and the adjustments are based upon the prime rate
of a bank or other appropriate interest rate adjustment index as provided in the
respective instruments. The Funds will determine the variable rate demand
instruments that it will purchase in accordance with procedures approved by the
Trustees to minimize credit risks. The Adviser may determine that an unrated
variable rate demand instrument meets a Fund's quality criteria by reason of
being backed by a letter of credit or guarantee issued by a bank that meets the
quality criteria for the Fund. Thus, either the credit of the issuer of the
municipal obligation or the guarantor bank or both will meet the quality
standards of a Fund. The Adviser will reevaluate each unrated variable rate
demand instrument held by a Fund on a quarterly basis to determine that it
continues to meet the Fund's quality criteria.
The value of the underlying variable rate demand instruments may change
with changes in interest rates generally, but the variable rate nature of these
instruments should decrease changes in value due to interest rate fluctuations.
Accordingly, as interest rates decrease or increase, the potential for capital
gain and the risk of capital loss on the disposition of portfolio securities are
less than would be the case with a comparable portfolio of fixed income
securities. The Funds may purchase variable rate demand instruments on which
stated minimum or maximum rates, or maximum rates set by state law, limit the
degree to which interest on such variable rate demand instruments may fluctuate;
to the extent it does, increases or decreases in value of such variable rate
demand notes may be
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somewhat greater than would be the case without such limits. Because the
adjustment of interest rates on the variable rate demand instruments is made in
relation to movements of the applicable rate adjustment index, the variable rate
demand instruments are not comparable to long-term fixed interest rate
securities. Accordingly, interest rates on the variable rate demand instruments
may be higher or lower than current market rates for fixed rate obligations of
comparable quality with similar final maturities.
The maturity of the variable rate demand instruments held by the Funds
are ordinarily deemed to be the longer of (1) the notice period required before
the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
General Considerations. An entire issue of municipal obligations may be
purchased by one or a small number of institutional investors such as one of the
Funds. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933, as amended (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 the Funds are subject to the limitations on
holdings of securities which are not readily marketable contained in each Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to each Fund's investments
enhance marketability. In addition, Stand-by Commitments and demand obligations
also enhance marketability.
For the purpose of each Fund's investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal and interest on such obligations.
Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue.
The Funds expect that each will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. Government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments, which might affect all
municipal obligations of a similar type. However, each Fund believes that the
most important consideration affecting risk is the quality of municipal
obligations.
When-Issued Securities. The Funds may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer and
no interest accrues to the purchaser. To the extent that assets of a Fund are
not invested prior to the settlement of a purchase of securities, a Fund will
earn no income; however, it is intended that the Funds will be fully invested to
the extent practicable and subject to the policies stated herein. When-issued or
forward delivery purchases are negotiated directly with the other party, and are
not traded on an exchange. While when-issued or forward delivery securities may
be sold prior to the settlement date, it is intended that the Fund will purchase
such securities with the purpose of actually acquiring them unless a sale
appears desirable for investment reasons. At the time the Fund makes the
commitment to purchase securities on a when-issued or forward delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. The Trust does not believe that either Fund's net asset
value or income will be adversely affected by its purchase of securities on a
when-issued or forward delivery basis. Each Fund will establish a segregated
account in which it will maintain cash, U.S. Government securities and other
high grade debt obligations
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equal in value to commitments for when-issued or forward delivery securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date. Neither Fund will enter into such transactions for
leverage purposes.
Stand-by Commitments. Subject to the receipt of any required regulatory
authorization, a Fund may acquire "Stand-by Commitments," which will enable that
Fund to improve its portfolio liquidity by making available same-day settlements
on portfolio sales (and thus facilitate the payment of same-day payments of
redemption proceeds in federal funds). Each Fund may enter into such
transactions subject to the limitations in the rules under the 1940 Act. A
Stand-by Commitment is a right acquired by a Fund, when it purchases a municipal
obligation from a broker, dealer or other financial institution ("seller"), to
sell up to the same principal amount of such securities back to the seller, at
the Fund's option, at a specified price. Stand-by Commitments are also known as
"puts." Each Fund's investment policies permit the acquisition of Stand-by
Commitments solely to facilitate portfolio liquidity. The exercise by a Fund of
a Stand-by Commitment is subject to the ability of the other party to fulfill
its contractual commitment.
Stand-by Commitments acquired by a Fund will have the following
features: (1) they will be in writing and will be physically held by the Fund's
custodian; (2) the Fund's rights to exercise them will be unconditional and
unqualified; (3) they will be entered into only with sellers which in the
Adviser's opinion present a minimal risk of default; (4) although Stand-by
Commitments will not be transferable, municipal obligations purchased subject to
such commitments may be sold to a third party at any time, even though the
commitment is outstanding; and (5) their exercise price will be (i) the Fund's
acquisition cost (excluding the cost, if any, of the Stand-by Commitment) of the
municipal obligations which are subject to the commitment (excluding any accrued
interest which the Fund paid on their acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date. Each Fund expects to refrain
from exercising a Stand-by Commitment in the event that the amount receivable
upon exercise of the Stand-by Commitment is significantly greater than the then
current market value of the underlying municipal obligations determined, as
described below under "Net Asset Value," in order to avoid imposing a loss on a
seller and thus jeopardizing a Fund's business relationship with that seller.
Each Fund expects that Stand-by Commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, each Fund will pay for Stand-by Commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by a Fund in either manner for outstanding Stand-by Commitments will not
exceed 1/2 of 1% of the value of the total assets of that Fund calculated
immediately after any Stand-by Commitment is acquired. If the Fund pays
additional consideration for a Stand-by Commitment, the yield on the security to
which the Stand-by Commitment relates will, in effect, be lower than if the Fund
had not acquired such Stand-by Commitment.
It is difficult to evaluate the likelihood of use or the potential
benefit of a Stand-by Commitment. Therefore, it is expected that the Trustees
will determine that Stand-by Commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the Stand-by Commitment is less than
the exercise price of the Stand-by Commitment, such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a Stand-by Commitment,
its cost will be reflected as unrealized depreciation for the period during
which the commitment is held.
Management understands that the Internal Revenue Service (the "IRS")
has issued a revenue ruling to the effect that, under specified circumstances, a
registered investment company will be the owner of tax-exempt municipal
obligations acquired subject to a put option. The IRS has also issued private
letter rulings to certain taxpayers (which do not serve as a precedent for other
taxpayers) to the effect that tax-exempt interest received by a regulated
investment company with respect to such obligations will be tax-exempt in the
hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. Each Fund intends to take the position that it is the owner of any
municipal obligations acquired subject to a Stand-By Commitment and that
tax-exempt interest earned with respect to such municipal obligations will be
tax-exempt in its hands. There is no assurance that the IRS will agree with such
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position in any particular case. There is no assurance that Stand-by Commitments
will be available to a Fund nor has either Fund assumed that such commitments
would continue to be available under all market conditions.
Third Party Puts. The Funds may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals (not exceeding 397 calendar days in the
case of Scudder New York Tax Free Money Fund) to tender (or "put") its bonds to
the institution and receive the face value thereof (plus accrued interest).
These third party puts are available in several different forms, may be
represented by custodial receipts or trust certificates and may be combined with
other features such as interest rate swaps. The Fund receives a short-term rate
of interest (which is periodically reset), and the interest rate differential
between that rate and the fixed rate on the bond is retained by the financial
institution. The financial institution granting the option does not provide
credit enhancement, and in the event that there is a default in the payment of
principal, or interest on, or downgrading of a bond to below investment grade,
or a loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond and, in the case of Scudder New York Tax Free Money Fund, the weighted
average maturity of the Fund's portfolio would be adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-By
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands. There is no assurance that the IRS
will agree with such position in any particular case. Additionally, the federal
income tax treatment of certain other aspects of these investments, including
the treatment of tender fees and swap payments, in relation to various regulated
investment company tax provisions is unclear. However, the Adviser intends to
manage the Funds' portfolios in a manner designed to minimize any adverse impact
from these investments.
Repurchase Agreements. The Funds may enter into repurchase agreements with any
member bank of the Federal Reserve System or any broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other obligations the Funds may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest
quality ratings categories assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for a Fund to earn taxable
income on funds for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Fund) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price on the date of repurchase. In either
case, the income to a Fund (which is taxable) is unrelated to the interest rate
on the Obligation itself. Obligations will be held by the Fund's custodian or in
the Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the Obligation before repurchase of the Obligation under a
repurchase agreement, a Fund may encounter delay and incur costs before being
able to sell the security. Delays may involve loss of interest or decline in
price of the Obligation. If the court characterizes the transaction as a loan
and a Fund has not perfected a security interest in the Obligation, the Fund may
be required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt obligation purchased for each Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case the Fund may incur a loss if the proceeds to the Fund of the sale to a
third party are less than the repurchase price. However, if the market value of
the Obligation subject to the repurchase agreement becomes less
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than the repurchase price (including interest), each Fund will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. The Funds may enter into "reverse repurchase
agreements," which are repurchase agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. Each Fund
will maintain a segregated account, as described under "When-Issued Securities"
in connection with outstanding reverse repurchase agreements. Reverse repurchase
agreements are deemed to be borrowings subject to each Fund's investment
restrictions applicable to that activity. Each Fund will enter into reverse
repurchase agreements only when the Adviser believes that the interest income to
be earned from the investment of the proceeds of the transaction will be greater
than the interest expense of the transaction. The Funds do not intend to invest
more than 5% in reverse repurchase agreements.
Trustees' Power to Change Objectives and Policies
Except as specifically stated to the contrary, the objectives and
policies of the Funds stated above may be changed by the Trustees without a vote
of the shareholders.
Investment Restrictions
Unless specified to the contrary, the following restrictions may not be
changed by a Fund without the approval of a majority of the outstanding voting
securities of that Fund which, under the 1940 Act and the rules thereunder and
as used in this Statement of Additional Information, means the lesser of (1) 67%
or more of the shares of a Fund present at a meeting, if the holders of more
than 50% of the outstanding shares of that Fund are present or represented by
proxy; or (2) more than 50% of the outstanding shares of a Fund. Any investment
restrictions herein which involve a maximum percentage of securities or assets
shall not be considered to be violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, the Fund.
As a matter of fundamental policy, each Fund may not:
(1) borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts relating to
physical commodities; or
(7) make loans to other persons, except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests
in indebtedness in accordance with the Fund's objective and
policies may be deemed to be loans.
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In addition, as a matter of fundamental policy, Scudder New York Tax
Free Fund and Scudder New York Tax Free Money Fund will each:
(8) have at least 80% of its net assets invested in municipal
securities of issuers located in New York and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam) during periods of normal market conditions.
In addition, as a matter of fundamental policy, Scudder Ohio Tax Free
Fund will:
(9) have at least 80% of its net assets invested in municipal
securities of issuers located in Ohio and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and
Guam) during periods of normal market conditions.
In addition, as a matter of fundamental policy, Scudder Pennsylvania
Tax Free Fund will:
(10) have at least 80% of its net assets invested in municipal
securities of issuers located in Pennsylvania and other
qualifying issuers (including Puerto Rico, the U.S. Virgin
Islands and Guam) during periods of normal market conditions.
As a matter of non-fundamental policy, each Fund may not:
(i) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(ii) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(iii) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(iv) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(v) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(vi) lend portfolio securities in an amount greater than 5% of its
total assets.
PURCHASES
(See "Purchases" and "Transaction information" in the Funds' prospectuses.)
Additional Information About Opening An Account
Shareholders of other Scudder funds who have submitted an account
application and have a certified taxpayer identification number, clients having
a regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the
National Association of Securities Dealers, Inc. ("NASD") and banks may open an
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account by wire. These investors must call 1-800-225-5163 to get an account
number. During the call, the investor will be asked to indicate the Fund name,
amount to be wired ($1,000 minimum), name of bank or trust company from which
the wire will be sent, the exact registration of the new account, the taxpayer
identification number or Social Security number, address and telephone number.
The investor must then call the bank to arrange a wire transfer to The Scudder
Funds, State Street Bank and Trust Company, Boston, MA 02101, ABA Number
011000028, DDA Account Number 9903-5552. The investor must give the Scudder fund
name, account name and the new account number. Finally, the investor must send
the completed and signed application to the Fund promptly.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust shall have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from or restricted in placing future orders in any of the Scudder
funds.
Wire Transfer of Federal Funds
In the case of Scudder New York Tax Free Money Fund, to obtain net
asset value determined as of twelve o'clock noon and the same day's dividend,
your bank must forward federal funds by wire transfer and provide the required
account information so as to be available to Scudder New York Tax Free Money
Fund prior to twelve o'clock noon eastern time on that day. If either the
federal funds or the account information is received after twelve o'clock noon
eastern time but both the funds and the information are made available before
the close of regular trading on the New York Stock Exchange (the "Exchange")
(normally 4 p.m. eastern time), on any business day, shares will be purchased at
net asset value determined as of the close of trading on that day but will not
receive the dividend; in such cases, dividends commence on the next business
day.
To purchase shares of Scudder New York Tax Free Fund, Scudder Ohio Tax
Free Fund and Scudder Pennsylvania Tax Free Fund and obtain the same day's
dividend you must have your bank forward federal funds by wire transfer and
provide the required account information so as to be available to the Funds
prior to twelve o'clock noon eastern time on that day. If you wish to make a
purchase of $500,000 or more you should notify the Funds' transfer agent,
Scudder Service Corporation (the "Transfer Agent") of such a purchase by calling
1-800-225-5163. If either the federal funds or the account information is
received after twelve o'clock noon eastern time, but both the funds and the
information are made available before the close of regular trading on the
Exchange (normally 4 p.m. eastern time) on any business day, shares will be
purchased at net asset value determined on that day but will not receive the
dividend; in such cases, dividends commence on the next business day.
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently the Funds pay a fee for receipt by State Street Bank
and Trust Company (the "Custodian") of "wired funds" but the right to charge
investors for this service is reserved.
Boston banks are presently closed on certain holidays although the
Exchange may be open. These holidays include: Columbus Day (the 2nd Monday in
October) and Veterans Day (November 11). Investors are not able to purchase
shares by wiring federal funds on such holidays because the Custodian is not
open to receive such federal funds on behalf of a Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of a Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, 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.
QuickBuy requests received after the close of regular
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trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for Scudder IRA
accounts and most other retirement plan accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
for Scudder New York Tax Free Money Fund normally will be computed twice a day,
as of twelve o'clock noon eastern time and the close of regular trading on each
day when the Exchange is open for trading. Net asset value for Scudder New York
Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund
normally will be computed once a day, as of the close of regular trading on each
day when the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange are executed at the next business day's net
asset value. If the order has been placed by a member of the NASD, other than
the Funds' principal underwriter, Scudder Investor Services, Inc., it is the
responsibility of that member broker, rather than a Fund, to forward the
purchase order to the Funds' transfer agent in Boston by the close of regular
trading on the Exchange.
Share Certificates
Due to the desire of the Funds' management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Funds.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
If purchases or redemptions of Fund shares are arranged and settlement
is made at the investor's election through a member of the NASD, other than
Scudder Investor Services, Inc., that member may, at its discretion, charge a
fee for that service. The Trustees and Scudder Investor Services, Inc. each has
the right to limit the amount of purchases by, and to refuse to sell to any
person, and each may suspend or terminate the offering of shares of each Fund at
any time.
The "Tax Identification Number" section of the application must be
completed when opening an account. Applications and purchase orders without a
certified tax identification number and certain other certified information
(e.g., from exempt organizations a certification of exempt status) may be
returned to the investor.
A Fund may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of, the assets of any investment
company (or series thereof) or personal holding company, subject to the
requirements of the 1940 Act.
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EXCHANGES AND REDEMPTIONS
(See "Exchanges and redemptions" and "Transaction information" in
the Funds' prospectuses.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be an
additional investment into an existing account or may involve opening a new
account in the other fund. When an exchange involves a new account, the new
account is established with the same registration, tax identification number,
address, telephone redemption option, "Scudder Automated Information Line"
(SAIL) transaction authorization and dividend option as the existing account.
Other features will not carry over automatically to the new account. Exchanges
to a new fund account must be for a minimum of $1,000. When an exchange
represents an additional investment into an existing account, the account
receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is to be different in any respect, the
exchange request must be in writing and must contain a signature guarantee as
described under "Transaction information--Redeeming shares--Signature
guarantees" in the Funds' prospectuses.
Exchange orders received before the close of regular trading on any
business day ordinarily will be executed at respective net asset values
determined on that day. Exchange orders received after the close of regular
trading will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund at current net asset value through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by phone or in
writing to have the feature removed, or until the originating account is
depleted. The Corporation and the Transfer Agent each reserves the right to
suspend or terminate the privilege of the Automatic Exchange Program at any
time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder fund is a redemption of shares, and therefore
may result in tax consequences (gain or loss) to the shareholder and the
proceeds of such exchange may be subject to backup withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Funds employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Funds do not follow such
procedures, they may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Funds will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine. The Funds and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "The Scudder Family of Funds" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated.
Redemption by Telephone
Shareholders currently receive the right to redeem up to $50,000 to
their address of record automatically, without having to elect it. Shareholders
may also request by telephone to have the proceeds mailed or wired to their
predesignated bank account. In order to request redemptions by telephone,
shareholders must have completed and returned to the Transfer Agent the
application, including the designation of a bank account to which the redemption
proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section
on the application.
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<PAGE>
(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a designated bank account or who want to change
the bank account previously designated to receive redemption
payments should either return a Telephone Redemption Option
Form (available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Funds do not follow such procedures, they may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that they
reasonably believe to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between a Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days. Telephone redemption is not available with respect to shares
represented by share certificates.
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of a Fund by telephone. To sell shares by
QuickSell, 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. QuickSell requests
received after the close of regular trading on the Exchange will begin their
processing and be redeemed at the net asset value calculated the following
business day. QuickSell transactions are not available for Scudder IRA accounts
and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
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<PAGE>
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signatures guaranteed as explained in the
Funds' prospectus.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding share certificates or shares
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
When shares are held in the name of a corporation, trust, fiduciary agent,
attorney or partnership, the Transfer Agent requires, in addition to the stock
power, certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within five business days
after receipt by the Transfer Agent of a request for redemption that complies
with the above requirements. Delays of more than seven days of payment for
shares tendered for repurchase or redemption may result but only until the
purchase check has cleared.
Redemption by Write-A-Check
All new investors and existing shareholders of Scudder New York Tax
Free Money Fund who apply for checks may use them to pay any person, provided
that each check is for at least $100 and not more than $5 million. By using the
checks, the shareholder will receive daily dividend credit on his or her shares
until the check has cleared the banking system. Investors who purchased shares
by check may write checks against those shares only after they have been on the
Fund's books for seven days. Shareholders who use this service may also use
other redemption procedures. No shareholder may write checks against
certificated shares. the Fund pays the bank charges for this service. However,
the Fund reviews the cost of operation periodically and reserves the right to
determine if direct charges to the persons who avail themselves of this service
would be appropriate.
Checks will be returned by the Custodian if there are insufficient
shares to meet the withdrawal amount. Possible fluctuations in the per share
value of the Fund should be considered in determining the amount of the check.
An investor should not attempt to close an account by check, because the exact
balance at the time the check clears will not be known when the check is
written. The Trust on behalf of Scudder New York Tax Free Money Fund, Scudder
Service Corporation and the Custodian each reserves the right at any time to
suspend or terminate the "Write-A-Check" procedure.
Redemption-In-Kind
Each Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption in kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash.
Other Information
If a shareholder redeems all shares in the account, the shareholder
will receive, in addition to the net asset value thereof, all declared but
unpaid dividends thereon. The value of shares redeemed or repurchased may be
more or less than a shareholder's cost depending upon the net asset value at the
time of redemption or repurchase. The Trust does not impose a redemption or
repurchase charge, although a wire charge may be applicable for redemption
proceeds wired to an investor's bank account. Redemptions of shares, including
redemptions undertaken to effect an exchange for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and the
proceeds of such redemptions may be subject to backup withholding (see "TAXES").
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
44
<PAGE>
weekend and holiday closings, (b) during which trading on the Exchange is
restricted for any reason, (c) during which an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practicable
or it is not reasonably practicable for a Fund fairly to determine the value of
its net assets, or (d) during which the SEC, by order, permits a suspension of
the right of redemption or a postponement of the date of payment or of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
If transactions at any time reduce a shareholder's account balance in a
Fund to below $1,000 in value, such Fund may notify the shareholder that, unless
the account balance is brought up to at least $1,000, the Trust will redeem all
shares, close the account and send redemption proceeds to the shareholder. The
shareholder has 60 days to bring the account balance up to $1,000 before any
action will be taken by the Trust. (This policy applies to accounts of new
shareholders, but does not apply to certain Special Plan Accounts.)
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "Shareholder benefits" in the Funds' prospectuses.)
The Pure No-Load(TM) Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its funds from the
vast majority of mutual funds available today. The primary distinction is
between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Rules of Fair Practice, a mutual fund
can call itself a "no-load" fund only if the 12b-1 fee and/or service fee does
not exceed 0.25% of a fund's average annual net assets.
Because Scudder funds do not pay any asset-based sales charges or
service fees, Scudder developed and trademarked the phrase pure no-load(TM) to
distinguish Scudder funds from other no-load mutual funds. Scudder pioneered the
no-load concept when it created the nation's first no-load fund in 1928, and
later developed the nation's first family of no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart show the value
of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
<TABLE>
<S> <C> <C> <C> <C> <C>
<CAPTION>
====================================================================================================================
YEARS ScudderPure No-Load(TM) 8.50% Load Fund Load Fund with 0.75% No-Load Fund with
Fund 12b-1 Fee 0.25% 12b-1 Fee
45
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Investors are encouraged to review the fee tables on page 2 of the
Fund's 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 Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me*TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the
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<PAGE>
method of payment must be received by the Transfer Agent at least five days
prior to a dividend record date. Shareholders also may change their dividend
option either by calling 1-800-225-5163 or by sending written instructions to
the Transfer Agent. Please include your account number with your written
request. See "How to contact Scudder" in the Funds' prospectuses for the
address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "How to contact Scudder" in the prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Funds.
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/Funds']
[prospectus/prospectuses].)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
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<PAGE>
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
- --------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
- --------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
- --------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
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<PAGE>
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in securities of small and medium-size growth companies.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
SCUDDER CHOICE SERIES
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
- --------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
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<PAGE>
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Scudder tax-advantaged retirement plans," "Purchases--By
Automatic Investment Plan" and "Exchanges and redemptions--By
Automatic Withdrawal Plan" in the Funds' prospectuses.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. It is
advisable for an investor considering the funding of the investment plans
described below to consult with an attorney or other investment or tax adviser
with respect to the suitability requirements and tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Automatic Withdrawal Plan
Non-retirement plan shareholders who currently own or purchase $10,000
or more of shares of the Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions
52
<PAGE>
from his or her account for any designated amount of $50 or more. Shareholders
may designate which day they want the automatic withdrawal to be processed. The
check amounts may be based on the redemption of a fixed dollar amount, fixed
share amount, percent of account value or declining balance. The Plan provides
for income dividends and capital gains distributions, if any, to be reinvested
in additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information--Redeeming shares--Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Trust or its agent on written notice, and will be terminated
when all shares of the Fund under the Plan have been liquidated or upon receipt
by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
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.
53
<PAGE>
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and performance information--Dividends and capital gains
distributions" in the Funds' prospectuses.)
Each Fund will follow the practice of distributing substantially all
and in no event less than 90% of its net investment income (defined under
"ADDITIONAL INFORMATION--Glossary"), which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. Each Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However, if
it appears to be in the best interest of a Fund and its shareholders, such Fund
may retain all or part of such gain for reinvestment.
Dividends will be declared daily and distributions of net investment
income will be made monthly. Any dividends or capital gains distributions
declared in October, November or December with a record date in such a month and
paid during the following January will be treated by shareholders for federal
income tax purposes as if received on December 31 of the calendar year declared.
Distributions of net short-term and net long-term capital gains realized during
each fiscal year, if any, will be made annually. An additional distribution may
be made (or treated as made) in November or December if necessary to prevent the
application of the excise tax described in "TAXES" below. Both types of
distributions will be made in shares of the Funds and confirmations will be
mailed to each shareholder unless a shareholder has elected to receive cash, in
which case a check will be sent.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Fund issues to each shareholder a statement of the
federal income tax status of all distributions, including a statement of the
percentage of the prior calendar year's distributions which such Fund has
designated as tax-exempt, and the percentage of such tax-exempt distributions
treated as a tax-preference item for purposes of the alternative minimum tax.
PERFORMANCE INFORMATION
(See "Distribution and performance information--Performance
information" in the Funds' prospectuses.)
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for the periods of one year, five years and the life of the Fund each
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Funds' shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compound rates of return of a hypothetical investment over
such periods, according to the following formula (average annual total return is
then expressed as a percentage):
54
<PAGE>
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of
a hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Return for periods ended March 31, 1998
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
Scudder New York Tax Free Money Fund 2.85% 2.51% -- 3.47%
Scudder New York Tax Free Fund 4.76 7.10 7.01% --
Scudder Ohio Tax Free Fund 5.58 7.10 -- 7.55
Scudder Pennsylvania Tax Free Fund 5.30 7.09 -- 7.80
</TABLE>
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect the change in the price of the Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
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.
Cumulative Total Return for periods ended March 31, 1998
<TABLE>
<S> <C> <C> <C> <C>
<CAPTION>
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
Scudder New York Tax Free Money Fund 2.85% 13.21% -- 39.94%
Scudder New York Tax Free Fund 4.76 40.91 96.99% --
Scudder Ohio Tax Free Fund 5.58 40.90 -- 104.73
Scudder Pennsylvania Tax Free Fund 5.30 40.86 -- 109.51
</TABLE>
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
SEC Yield
Yield for Scudder New York Tax Free Money Fund is the net annualized
yield based on a specified seven calendar days calculated at simple interest
rates. Yield, sometimes referred to as the Fund's "SEC yield," is calculated by
determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
55
<PAGE>
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return. The yield is
annualized by multiplying the base period return by 365/7. The yield figure is
stated to the nearest hundredth of one percent. The yield of the Fund for the
seven-day period ended March 31, 1998 was 3.02%.
Yield for Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund
and Scudder Pennsylvania Tax Free Fund is the net annualized SEC yield based on
a specified 30-day (or one month) period assuming a semiannual compounding of
income. Yield is calculated by dividing the net investment income per share
earned during the period by the maximum offering price per share on the last day
of the period, according to the following formula:
YIELD = 2[(a-b/cd + 1)^6-1]
Where:
a = dividends and interest earned during the period, including
the amortization of market premium or accretion of market
discount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
30-day net annualized SEC yield for the period ended March 31, 1998:
Scudder New York Tax Free Fund 4.00%
Scudder Ohio Tax Free Fund 4.19%
Scudder Pennsylvania Tax Free Fund 4.19%
Effective Yield
Effective yield for Scudder New York Tax Free Money Fund is the net
annualized yield for a specified seven calendar-days assuming a reinvestment of
the income or compounding. Effective yield is calculated by the same method as
yield except the yield figure is compounded by adding 1, raising the sum to a
power equal to 365 divided by 7, and subtracting one from the result, according
to the following formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1.
Effective yield for the seven day period ended March 31, 1998:
Scudder New York Tax Free Money Fund 3.02%
Tax-Equivalent Yield
Tax-equivalent yield for Scudder New York Tax Free Money Fund is the
net annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified seven day period assuming a reinvestment of
all dividends paid during such period. Tax-equivalent yield is calculated by
dividing that portion of the Fund's yield (as computed in the yield description
above) which is tax-exempt by one minus a stated income tax rate and adding the
product to that portion, if any, of the yield of the Fund that is not
tax-exempt. Thus, taxpayers in the highest combined state and federal income tax
bracket would need to earn a taxable yield of 5.59% to receive after-tax income
equal to the 3.02% tax-free effective yield of Scudder New York Tax Free Money
Fund for the seven day period ended March 31, 1998.
Tax-equivalent yield for Scudder New York Tax Free Fund is the net
annualized taxable yield needed to produce a specified tax-exempt yield at a
given tax rate based on a specified 30-day (or one month) period assuming
semiannual compounding of income. Tax-equivalent yield is calculated by dividing
that portion of the Fund's yield (as computed in the yield description above)
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt. Thus,
taxpayers in the highest combined
56
<PAGE>
state and federal income tax bracket would need to earn a taxable yield of 7.53%
to receive after-tax income equal to the 4.00% tax-free yield of Scudder New
York Tax Free Fund for the thirty-day period ended March 31, 1998.
For Scudder Ohio Tax Free Fund, taxpayers in the highest combined state
and federal income tax bracket would need to earn a taxable yield of 7.50% to
receive after-tax income equal to the 4.19% tax-free yield of Scudder Ohio Tax
Free Fund for the 30-day period ended on March 31, 1998.
For Scudder Pennsylvania Tax Free Fund, taxpayers in the highest
combined state and federal income tax bracket would need to earn a taxable yield
of 7.14% to receive after-tax income equal to the 4.19% tax-free yield of
Scudder Pennsylvania Tax Free Fund for the 30-day period ended on March 31,
1998.
Quotations of a Fund's performance are historical, show the performance
of a hypothetical investment and are not intended to indicate future
performance. Performance of the Fund will vary based on changes in market
conditions and the level of the Fund's expenses. An investor's shares when
redeemed, may be worth more or less than their original cost.
Investors should be aware that the principal of each Fund is not
insured.
Comparison of 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 Corporation 500
Composite Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the
Nasdaq Industrials Index, the Russell 2000 Index, and statistics published by
the Small Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
57
<PAGE>
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.
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.
58
<PAGE>
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.
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.
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SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectuses.)
The Funds are each non-diversified series of Scudder State Tax Free
Trust (the "Trust"). The Trust is a Massachusetts business trust established
under a Declaration of Trust dated May 25, 1983. Such Declaration of Trust was
amended and restated on December 8, 1987. Its authorized capital consists of an
unlimited number of shares of beneficial interest of $0.01 par value. The shares
are currently divided into six series. The series of the Trust are Scudder
Massachusetts Limited Term Tax Free Fund, Scudder Massachusetts Tax Free Fund,
Scudder Ohio Tax Free Fund, Scudder Pennsylvania Tax Free Fund, Scudder New York
Tax Free Money Fund and Scudder New York Tax Free Fund. Each share of each Fund
has equal rights with each other share of that Fund as to voting, dividends and
liquidation. Shareholders have one vote for each share held on matters on which
they are entitled to vote. All shares issued and outstanding will be fully paid
and non-assessable by the Trust, and redeemable as described in this Statement
of Additional Information and in the Funds' prospectuses.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with its equitable share of the
general liabilities of the Trust, as determined by the Trustees. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust or any
series, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such shares available for distribution to
shareholders.
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Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Trustees have the authority to issue more series of shares and to
designate the relative rights and preferences as between the different series.
All shares issued and outstanding will be fully paid and non-assessable by the
Trust, and redeemable as described in this Statement of Additional Information
and in the Fund's prospectus.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
INVESTMENT ADVISER
(See "Fund organization--Investment adviser" in the Funds' prospectuses.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc.,
Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway
Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder Tax Free
Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund, Scudder
Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil Fund, Inc.,
The Korea Fund, Inc., The Japan Fund, Inc. and Scudder Spain and Portugal Fund,
Inc. Some of the foregoing companies or trusts have two or more series.
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The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLinkSM Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLinkSM Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLinkSM
is a service mark of AMA Solutions, Inc.
In selecting the securities in which the Funds may invest, the
conclusions and investment decisions of the Adviser with respect to the Funds
are based primarily on the analyses of its own research department. The Adviser
receives published reports and statistical compilations of the issuers
themselves, as well as analyses from brokers and dealers who may execute
portfolio transactions for the Adviser's clients. However, the Adviser regards
this information and material as an adjunct to its own research activities.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for the Funds and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a Fund. Purchase and sale orders for a Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to a Fund.
Scudder New York Tax Free Fund
The investment management agreement between Scudder New York Tax Free
Fund and Scudder was last approved by the Trustees on August 12, 1997. Because
the transaction between Scudder and Zurich resulted in the assignment of the
Fund's investment management agreement with Scudder, that Agreement was deemed
to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, a new Investment Management Agreement
(the "Agreement") between the Fund and the Adviser was approved by the Fund's
Trustees. At a special meeting of the Fund's shareholders held on October 24,
1997, the shareholders also approved the new investment management agreement.
The new Agreement became effective on December 31, 1997, and will be in effect
for an initial term ending on September 30, 1998. The Agreement is in all
material respects on the same terms as the previous investment management
agreement in supersedes. The Agreement incorporates conforming changes which
promote consistency among all of the Funds advised by the Adviser and which
permit ease of administration. The Agreement will continue in effect thereafter
by its terms from year to year only so long as its continuance is specifically
approved at least annually by the vote of a majority of those Trustees who are
not parties to such Agreements or "interested persons" of the Adviser or the
Trust cast in person at a meeting called for the purpose of voting on such
approval and either by vote of the majority of the Trustees or a majority of the
outstanding voting securities of the Fund. The Agreement may be terminated at
any time without payment of penalty by either party on sixty days' written
notice, and automatically terminates in the event of its assignment.
Under its Agreement the Adviser regularly provides Scudder New York Tax
Free Fund with continuing investment management consistent with the Fund's
investment objectives and policies and restrictions and determines what
securities shall be purchased for the Fund's portfolio, what securities shall be
held or sold by the Fund, and what portion of each Fund's assets shall be held
uninvested, subject always to the provisions of the Trust's Declaration of
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Trust and By-Laws, the Investment Company Act of 1940, the Internal Revenue Code
of 1986 and the Fund's investment objectives, policies and restrictions and
subject further to such policies and instructions as the Trustees of the Trust
may from time to time establish. The Adviser also advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees and the appropriate committees of the
Trustees regarding the conduct of business of the Trust.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Trust's
operations as an open-end investment company including, but not limited to,
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Fund's transfer agent, pricing
agents, custodian, accountants and others); preparing and making filings with
the SEC and other regulatory agencies; assisting in the preparation and filing
of the Fund's federal, state and local tax returns; preparing and filing the
Fund's federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
The Adviser pays the compensation and expenses (except those for
attending Board and Committee meetings outside New York, New York and Boston,
Massachusetts) of all officers and executive employees of the Fund affiliated
with the Adviser and makes available, without expense to the Fund, the services
of such directors, officers, and employees as may duly be elected officers or
Trustees of the Trust, subject to their individual consent to serve and to any
limitations imposed by law, and provides the Trust's office rent and provides
investment advisory, research and statistical facilities and all clerical
services relating to research, statistical and investment work.
For these services Scudder New York Tax Free Fund pays a fee of 0.625
of 1% on an annual basis of the first $200 million of average daily net assets
of the Fund and 0.60 of 1% on an annual basis of such net assets in excess of
$200 million payable monthly, provided the Fund will make such interim payments
as may be requested by the Adviser not to exceed 75% of the amount of the fee
then accrued on the books of the Fund and unpaid.
For the fiscal years ended March 31, 1996, 1997 and 1998 the investment
management fees incurred by Scudder New York Tax Free Fund were $1,215,011,
$1,165,330 and $1,184,089, respectively.
Under its Agreement Scudder New York Tax Free Fund is responsible for
all of its other expenses, including fees and expenses incurred in connection
with membership in investment company organizations; brokers' commissions;
legal, auditing and accounting expenses; taxes and governmental fees; the fees
and expenses of the Transfer Agent; and any other expenses, including clerical
expenses, of issue, sale, underwriting, distribution, redemption or repurchase
of shares; the expenses of and fees for registering or qualifying securities for
sale; the fees and expenses of the Trustees, officers and employees of the Trust
who are not affiliated with the Adviser; the cost of printing and distributing
reports and notices to shareholders; and the fees and disbursements of
custodians. The Fund may arrange to have third parties assume all or part of the
expenses of sale, underwriting and distribution of shares of the Fund. The Fund
is also responsible for its expenses incurred in connection with litigation,
proceedings and claims and the legal obligation it may have to indemnify its
officers and Trustees with respect thereto. The Custodian Agreement provides
that the custodian shall compute the net asset value.
Scudder New York Tax Free Money Fund
The investment management agreement between Scudder New York Tax Free
Money Fund and Scudder was last approved by the Trustees on August 12, 1997.
Because the transaction between Scudder and Zurich resulted in the assignment of
the Fund's investment management agreement with Scudder, that Agreement was
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, a new Investment Management Agreement
(the "Agreement") between the Fund and the Adviser was approved by the Fund's
Trustees. At a special meeting of the Fund's shareholders held on October 24,
1997, the shareholders also approved the new investment management agreement.
The new Agreement became effective on December 31, 1997, and will be in
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effect for an initial term ending on September 30, 1998. The Agreement is in all
material respects on the same terms as the previous investment management
agreement in supersedes. The Agreement incorporates conforming changes which
promote consistency among all of the Funds advised by the Adviser and which
permit ease of administration. The Agreement will continue in effect from year
to year thereafter only if its continuance is approved annually by the vote of a
majority of the Trustees who are not parties to the Agreement or "interested
persons" of the Adviser or the Trust cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or a majority of the outstanding voting securities of the Fund. The
Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice, and automatically terminates in the event
of its assignment.
Under its Agreement the Adviser regularly provides Scudder New York Tax
Free Money Fund with investment research, advice and supervision and furnishes
continuously an investment program consistent with the Fund's investment
objectives and policies and determines what securities shall be purchased for
each Fund's portfolio, what securities shall be held or sold by the Fund, and
what portion of the Fund's assets shall be held uninvested, subject always to
the provisions of the Trust's Declaration of Trust and By-Laws, and of the
Investment Company Act of 1940, as amended, and to the Fund's investment
objectives, policies and restrictions, and subject further to such policies and
instructions as the Trustees of the Trust may from time to time establish. The
Adviser also advises and assists the officers of the Trust in taking such steps
as are necessary or appropriate to carry out the decisions of its Trustees and
the appropriate committees of the Trustees regarding the conduct of the business
of the Trust.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Trust and makes available, without
expense to the Fund, the services of the Adviser's directors, officers, and
employees as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
pays the Trust's office rent and provides investment advisory, research and
statistical facilities and all clerical services relating to research,
statistical and investment work.
For these services Scudder New York Tax Free Money Fund pays a monthly
fee of 1/24 of 1% (approximately 0.50 of 1% on an annual basis) of the average
daily net assets of the Fund. For the fiscal years ended March 31, 1996, 1997
and 1998, investment management fees incurred by Scudder New York Tax Free Money
Fund were $277,273, $286,728 and $337,692, respectively.
The Adviser has agreed to maintain the annualized expenses of the Fund
at not more than 0.60% of average daily net assets of the Fund until July 31,
1999. For the fiscal year ended March 31, 1998, the Adviser did not impose a
portion of its fee amounting to $215,318 and the portion imposed amounted to
$122,374.
Under the Agreement Scudder New York Tax Free Money Fund is responsible
for all of its other expenses, including organization expenses; clerical
salaries; fees and expenses incurred in connection with membership in investment
company organizations; brokers' commissions; payment for portfolio pricing
services to a pricing agent, if any; legal, auditing or accounting expenses;
taxes or governmental fees; the fees and expenses of the Transfer Agent; the
cost of preparing share certificates or any other expenses, including clerical
expenses, of issuance, redemption or repurchase of shares of beneficial
interest; the expenses of and fees for registering or qualifying securities for
sale; the fees and expenses of the Trustees of the Trust who are not affiliated
with the Adviser; the cost of preparing and distributing reports and notices to
shareholders; and the fees or disbursements of custodians. The Trust is also
responsible for its expenses incurred in connection with litigation, proceedings
and claims and the legal obligation it may have to indemnify its officers and
Trustees with respect thereto.
Since the Adviser absorbed Scudder New York Tax Free Money Fund's
expenses as described above, the expense ratios for the fiscal years ended March
31, 1996, 1997 and 1998 were 0.60%, 0.60% and 0.60%, respectively. The expense
ratios for Scudder New York Tax Free Fund for the fiscal years ended March 31,
1996, 1997 and 1998 were 0.82%, 0.82% and 0.83%, respectively.
Scudder Ohio Tax Free Fund
The investment management agreement between Scudder Ohio Tax Free Fund
and Scudder was last approved by the Trustees on August 12, 1997. Because the
transaction between Scudder and Zurich resulted in the assignment of the Fund's
investment management agreement with Scudder, that Agreement was deemed to be
automatically
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terminated at the consummation of the transaction. In anticipation of the
transaction, however, a new Investment Management Agreement (the "Agreement")
between the Fund and the Adviser was approved by the Fund's Trustees. At a
special meeting of the Fund's shareholders held on October 24, 1997, the
shareholders also approved the new investment management agreement. The new
Agreement became effective on December 31, 1997, and will be in effect for an
initial term ending on September 30, 1998. The Agreement is in all material
respects on the same terms as the previous investment management agreement in
supersedes. The Agreement incorporates conforming changes which promote
consistency among all of the Funds advised by the Adviser and which permit ease
of administration. The Agreement will continue in effect from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or "interested
persons" of the Adviser or the Trust cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or a majority of the outstanding voting securities of the Fund. The
Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice, and automatically terminates in the event
of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the Fund's investment objectives and policies
and determines what securities shall be purchased for the Fund's portfolio, what
securities shall be held or sold by the Fund, and what portion of the Fund's
assets shall be held uninvested, subject always to the provisions of the Trust's
Declaration of Trust and By-Laws, the Investment Company Act of 1940, the
Internal Revenue Code of 1986 and to the Fund's investment objective, policies
and restrictions, and subject further to such policies and instructions as the
Trustees of the Trust may from time to time establish. The Adviser also advises
and assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of the Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Trust and makes available, without
expense to the Trust, the services of such Advisers, Directors, Officers, and
employees as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities and provides investment
advisory, research and statistical facilities and all clerical services relating
to research, statistical and investment work. For these services, the Fund pays
the Adviser a monthly fee of 1/20 of 1% (approximately 0.60 of 1% on an annual
basis) of the average daily net assets of the Fund. For the fiscal years ended
March 31, 1996, 1997 and 1998, the investment management fees incurred by the
Fund were $172,284, $190,438 and $226,379, respectively. Had the Adviser imposed
a full investment management fee for the fiscal years ended March 31, 1996, 1997
and 1998, the investment management fees would have equaled $486,363, $509,970
and $532,714, respectively.
The Adviser has agreed to maintain the annualized expenses of the Fund
at not more than 0.50% of average daily net assets of the Fund until January 31,
1999.
Under the Agreement the Fund is responsible for all of its other
expenses, including organization expenses; clerical salaries; fees and expenses
incurred in connection with membership in investment company organizations;
brokers' commissions; payment for portfolio pricing services to a pricing agent,
if any; legal, auditing or accounting expenses; taxes or governmental fees; the
fees and expenses of the Transfer Agent; the cost of preparing share
certificates and any other expenses, including clerical expense, of issuance,
redemption or repurchase of shares of beneficial interest; the expenses of and
fees for registering or qualifying securities for sale; the fees and expenses of
the Trustees of the Trust who are not affiliated with the Adviser; the cost of
preparing and distributing reports and notices to shareholders; and the fees or
disbursements of custodians. The Trust is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto.
Scudder Pennsylvania Tax Free Fund
The investment management agreement between Scudder Pennsylvania Tax
Free Fund and Scudder was last approved by the Trustees on August 12, 1997.
Because the transaction between Scudder and Zurich resulted in the assignment of
the Fund's investment management agreement with Scudder, that Agreement was
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, a new Investment Management Agreement
(the "Agreement") between the Fund and the Adviser was approved by the Fund's
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Trustees. At a special meeting of the Fund's shareholders held on October 24,
1997, the shareholders also approved the new investment management agreement.
The new Agreement became effective on December 31, 1997, and will be in effect
for an initial term ending on September 30, 1998. The Agreement is in all
material respects on the same terms as the previous investment management
agreement in supersedes. The Agreement incorporates conforming changes which
promote consistency among all of the Funds advised by the Adviser and which
permit ease of administration. The Agreement will continue in effect from year
to year thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or "interested
persons" of the Adviser or the Trust cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or a majority of the outstanding voting securities of the Fund. The
Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice, and automatically terminates in the event
of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the Fund's investment objectives and policies
and determines what securities shall be purchased for the Fund's portfolio, what
securities shall be held or sold by the Fund, and what portion of the Fund's
assets shall be held uninvested, subject always to the provisions of the Trust's
Declaration of Trust and By-Laws, the Investment Company Act of 1940, the
Internal Revenue Code of 1986 and to the Fund's investment objective, policies
and restrictions, and subject further to such policies and instructions as the
Trustees of the Trust may from time to time establish. The Adviser also advises
and assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of the Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Trust and makes available, without
expense to the Trust, the services of such Advisers, Directors, Officers and
employees as may duly be elected officers or Trustees of the Trust, subject to
their individual consent to serve and to any limitations imposed by law, and
provides the Fund's office space and facilities and provides investment
advisory, research and statistical facilities and all clerical services relating
to research, statistical and investment work. For these services, the Fund pays
the Adviser a monthly fee of 1/20 of 1% (approximately 0.60 of 1% percent on an
annual basis) of the average daily net assets of the Fund. For the fiscal year
ended March 31, 1996, 1997 and 1998, the Adviser did not impose a portion of its
management fees amounting to $308,030, $316,193 and $292,000, respectively; the
portion imposed amounted to $145,682, $136,180 and $158,978, respectively. The
Adviser has agreed to maintain the annualized expenses of the Fund at not more
than 0.50% of average daily net assets of the Fund until January 31, 1999.
Under the Agreement the Fund is responsible for all of its other
expenses, including organization expenses; clerical salaries; fees and expenses
incurred in connection with membership in investment company organizations;
brokers' commissions; payment for portfolio pricing services to a pricing agent,
if any; legal, auditing or accounting expenses; taxes or governmental fees; the
fees and expenses of the Transfer Agent; the cost of preparing share
certificates or any other expenses, including clerical expenses of issuance,
redemption or repurchase of shares of beneficial interest; the expenses of and
fees for registering or qualifying securities for sale; the fees and expenses of
the Trustees of the Trust who are not affiliated with the Adviser; the cost of
preparing and distributing reports and notices to shareholders; and the fees or
disbursements of custodians. The Trust is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto.
The Agreements further provide that as between the Trust and the
Adviser, the Trust will be responsible for all expenses, including clerical
expense of offer, sale, underwriting and distribution of the Funds' shares only
so long as the Trust employs a principal underwriter to act as the distributor
of the Funds' shares pursuant to an underwriting agreement which provides that
the underwriter will assume such expenses. The Trust's underwriting agreement
provides that the principal underwriter shall pay all expenses of offer and sale
of the Funds' shares except the expenses of preparation and filing of
registration statements under the Securities Act of 1933 and under state
securities laws, issue and transfer taxes, if any, and a portion of the
prospectuses used by the Trust. In the event that the Trust ceases to employ a
principal underwriter to act as the distributor of the Funds' shares, the
expenses of distributing the Funds' shares will be borne by the Adviser unless
the Trust shall have adopted a plan or plans pursuant to Rule 12b-1 under the
1940 Act providing that the Funds shall be responsible for some or all of such
distribution expenses.
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Each Agreement requires the Adviser to return to each Fund all or a
portion of advances of its management fee to the extent annual expenses of such
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which such Fund's shares are offered for sale.
Management has been advised that, while most states have eliminated expense
limitations, the lowest limitation is currently 2 1/2% of average daily net
assets up to $30 million, 2% of the next $70 million of average daily net assets
and 1 1/2% of average daily net assets in excess of that amount. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitations. Any such fee advance required to be
returned to the Fund will be returned as promptly as practicable after the end
of the Fund's fiscal year. However, no fee payment will be made to the Adviser
during any fiscal year which will cause year to date expenses to exceed the
cumulative pro rata expense limitation at the time of such payment. The
amortization of organization costs is described herein under "ADDITIONAL
INFORMATION--Other Information."
Each Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Funds, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning each Agreement, the Trustees of the Trust who are not
"interested persons" of the Trust are represented by independent counsel at the
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 Trust's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Trust
relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the Trustees or officers of the Trust may have dealings with
the Trust as principals in the purchase or sale of securities, except as
individual subscribers to or holders of shares of the Funds.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
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<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<S> <C> <C> <C>
<CAPTION>
Position with
Underwriter,
Name, Date of Birth Principal Occupation** Scudder Investor
and Address Position with Trust and Affiliations Services, Inc.
- ----------- ------------------- ---------------- --------------
Daniel Pierce (3/18/34)*#++ President and Trustee Managing Director of Scudder President, Assistant
Kemper Investments, Inc. Treasurer and Director
Henry P. Becton, Jr. Trustee President and General --
(10/16/43) Manager, WGBH Educational
WGBH Foundation
125 Western Avenue
Allston, MA 02134
Dawn-Marie Driscoll (11/5/46) Trustee Executive Fellow, Center for --
5760 Flamingo Drive Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates
Peter B. Freeman (8/4/32)++ Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
George M. Lovejoy, Jr. Trustee President and Director, Fifty --
(4/15/30) Associates (real estate
160 Federal Street investment trust)
Boston, MA 02110
Wesley W. Marple, Jr. Trustee Professor of Business --
(2/22/32)++ Administration, Northeastern
413 Hayden Hall University College of
360 Huntington Avenue Business Administration
Boston, MA 02115
Kathryn L. Quirk Trustee Managing Director of Scudder Vice President,
(12/3/52)*#++ Kemper Investments, Inc. Director and
Assistant Director
Jean C. Tempel (3/24/43) Trustee Managing Partner, Technology --
Ten Post Office Square Equity Partners; Special
Suite 1325 Limited Partner, TL Ventures
Boston, MA 02109
Donald C. Carleton (-/-/-)# Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Philip G. Condon (8/15/50)# Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Jerard K. Hartman (3/1/33)+ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
68
<PAGE>
Position with
Underwriter,
Name, Date of Birth Principal Occupation** Scudder Investor
and Address Position with Trust and Affiliations Services, Inc.
- ----------- ------------------- ---------------- --------------
Thomas W. Joseph (4/22/39)# Vice President Senior Vice President of Vice President,
Scudder Kemper Investments, Director, Treasurer
Inc. and Assistant Clerk
Jeremy L. Ragus (5/24/52)# Vice President Senior Vice President of --
Scudder Kemper Investments,
Inc.
Rebecca Wilson (2/23/62)# Vice President Senior Vice President of --
Scudder Kemper Investments,
Inc.
Thomas F. McDonough (1/20/47)# Vice President and Senior Vice President of Clerk
Secretary Scudder Kemper Investments,
Inc.
John R. Hebble (6/27/58)# Assistant Treasurer Senior Vice President of --
Scudder Kemper Investments,
Inc.
Caroline Pearson (4/1/62)# Assistant Secretary Vice President of Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm) 1989-1997
</TABLE>
* Mr. Pierce and Ms. Quirk are considered by the Trust and its counsel to
be Trustees who are "interested persons" of the Adviser or of the Trust
within the meaning of the Investment Company Act of 1940, as amended.
** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
++ Messrs. Freeman, Marple and Pierce are members of the Executive
Committee, which has the power to declare dividends from ordinary
income and distributions of realized capital gains to the same extent
as the Board is so empowered.
# Address: Two International Place, Boston, Massachusetts 02110
+ Address: 345 Park Avenue, New York, New York 10154
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of June 30, 1998 all Trustees and officers of the Trust as a group
owned beneficially (as that term is defined in Section 13(d) under the
Securities Exchange Act of 1934) less than 1% of the shares of each Fund
outstanding on such date.
As of June 30, 1998, 11,203,011 shares in the aggregate, 13.14% of the
outstanding shares of Scudder New York Tax Free Money Fund, were held in the
name of Edmond D. Villani, 345 Park Avenue, 25th Floor, New York, NY 10154-0004.
As of June 30, 1998, Charles Schwab & Co. owned in the aggregate, by or
on behalf of accounts for which it acts as investment adviser, 577,092 shares of
Scudder Ohio Tax Free Fund, or 8.16% of the outstanding shares of such Fund.
Charles Schwab & Co. may be deemed to be the beneficial owner of such shares but
disclaims any beneficial ownership in such shares.
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<PAGE>
As of June 30, 1998, Charles Schwab & Co. owned in the aggregate, by or
on behalf of accounts for which it acts as investment adviser, 319,340 shares of
Scudder Pennsylvania Tax Free Fund, or 5.56% of the outstanding shares of such
Fund. Charles Schwab & Co. may be deemed to be the beneficial owner of such
shares but disclaims any beneficial ownership in such shares.
To the knowledge of the Trust, as of June 30, 1998 no person owned
beneficially more than 5% of each Fund's outstanding shares, except as noted
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 Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that each Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by each Fund's independent public accountants and
by independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Funds of Scudder State Tax Free Trust: an annual trustee's fee of $1,800 for a
Fund in which total net assets do not exceed $100 million and $3,600 for a Fund
in which total net assets exceed $100 million; a fee of $100 for attendance at
all other meetings;] and reimbursement of expenses incurred for travel to and
from Board Meetings. The Independent Trustee who serves as lead or liaison
trustee receives an additional annual retainer fee of $500 from each Fund. 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 or service on special trustee task forces or subcommittees .
Independent Trustees do not receive any employee benefits such as pension or
retirement benefits or health insurance. Notwithstanding the schedule of fees,
the Independent Trustees have in the past and may in the future waive a portion
of their compensation.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1997 from the Trust and from all of the Scudder funds as a group.
70
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
<CAPTION>
Scudder State
Tax Free Trust All Scudder Funds
-------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust(1) the Adviser(2) the Funds the Adviser(2)
- ---- ------------ -------------- --------- --------------
Henry P. Becton, $19,550 $2,400 $114,554 $9,500 (24 funds)
Trustee
Dawn-Marie $19,750 $2,400 $107,722 $8,800 (24 funds)
Driscoll, Trustee
Peter B. Freeman, $19,550 $2,400 $137,011 $14,625 (42 funds)
Trustee
George M. Lovejoy,Jr., $1,500 $0 $139,113 $10,700 (22 funds)
Trustee
Wesley W. Marple,Jr., $19,550 $2,400 $121,129 $10,100 (23 funds)
Trustee
Jean C.Tempel, $19,750 $2,400 $122,504 $10,100 (23 funds)
Trustee
</TABLE>
(1) Scudder State Tax Free Trust consists of six funds: Scudder
Massachusetts Limited Term Tax Free Fund, Scudder
Massachusetts Tax Free Fund, Scudder New York Tax Free Money
Fund, Scudder New York Tax Free Fund, Scudder Ohio Tax Free
and Scudder Pennsylvania Tax Free Fund.
(2) Meetings associated with the Adviser's alliance with Zurich
Insurance Company. See "Investment Adviser" for additional
information.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a Massachusetts corporation, which is a wholly-owned
subsidiary of the Adviser, a Delaware corporation. The Trust's underwriting
agreement dated June 1, 1987 will remain in effect until September 30, 1998 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 12, 1997.
Under the underwriting agreement, the Trust is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of its registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Trust as a broker or dealer; the
fees and expenses of preparing, printing and mailing prospectuses annually to
existing shareholders (see below for expenses relating to prospectuses paid by
the Distributor), notices, proxy statements, reports or other communications to
shareholders of a Fund; the cost of printing and mailing confirmations of
purchases of shares and the prospectuses accompanying such confirmations; any
issuance taxes and/or any initial transfer taxes; a portion of shareholder
toll-free telephone charges and expenses of shareholder service representatives;
the cost of wiring funds for share purchases and redemptions (unless paid by the
shareholder who initiates the transaction); the cost of printing and postage of
business reply envelopes; and a portion of the cost of computer terminals used
by both the Trust and the Distributor.
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<PAGE>
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of a Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by each Fund, unless a Rule 12b-1 Plan is in effect
which provides that the Fund shall bear some or all of such expenses.
Note: Although the Trust does not currently have a 12b-1 Plan and the Trustees
have no current intention of adopting one, the Trust would also pay those fees
and expenses permitted to be paid or assumed by the Trust pursuant to a 12b-1
Plan, if any, were such a plan adopted by the Trust, notwithstanding any other
provision to the contrary in the underwriting agreement.
As agent the Distributor currently offers shares of each Fund on a
continuous basis to investors in all states in which shares of each Fund may
from time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of either Fund.
TAXES
(See "Distribution and performance information--Dividends and capital gains
distributions" and "Transaction information--Tax information, Tax
identification number" in the Funds' prospectuses.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situation.
Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in the Funds.
Federal Taxation
Each Fund within the Trust will be separate for investment and
accounting purposes, and will be treated as a separate taxable entity for
Federal income tax purposes. Each Fund has elected to be treated as a separate
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code") and has qualified as such, and intends to continue
to so qualify, in each taxable year as required under the Code in order to avoid
payment of federal income tax at the fund level.
In order to qualify as a regulated investment company, each Fund must
meet certain requirements regarding the source of its income and the
diversification of its assets and must also derive less than 30% of its gross
income in each taxable year from certain types of investments (such as
securities, options and financial futures) held for less than three months. The
30 percent of gross income limitation may restrict Scudder New York Tax Free
Fund's activities involving Strategic Transactions. Legislation currently
pending before the U.S. Congress would repeal this requirement. However, it is
impossible to predict whether this legislation will become law and, if it is so
enacted, what form it will eventually take.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90
percent of its taxable net investment income which includes net short-term
capital gain in excess of long-term capital loss and at least 90 percent of its
tax-exempt net investment income and generally is not subject to federal income
tax to the extent that it distributes annually all of its taxable net investment
income and net realized long-term and short-term capital gains in accordance
with the timing requirements of the Code. Each Fund intends to distribute at
least annually substantially all, and in no event less than 90 percent, of its
taxable and tax-exempt net investment income and net realized capital gains.
72
<PAGE>
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by a Fund, the Fund will elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim his share of federal income taxes paid by a Fund on such gains as
a credit against his own federal income tax liability, and will be entitled to
increase the adjusted tax basis of his Fund shares by the difference between his
pro rata share of such gains and his tax credit.
Each Fund is subject to a 4 percent nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98 percent of a Fund's taxable ordinary income for the
calendar year and at least 98% of the excess of its capital gains over capital
losses realized during the one-year period ending October 31 during such year,
together with any undistributed, untaxed amounts of ordinary income and capital
gains from the previous calendar year. Each Fund has adjusted its distribution
policies to minimize any adverse impact from this tax or eliminate its
application.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of a Fund. New York Tax Free Fund and
New York Tax Free Money Fund intend to offset realized capital gains by using
their capital loss carryforwards before distributing any gains. As of March 31,
1997, New York Tax Free Fund had a net capital loss carryforward of
approximately $6,317,000, which may be applied against realized capital gains of
each succeeding year until fully utilized or until March 31, 2003, $3,937,000
expires March 31, 2003 and $2,380,000 expires March 31, 2004. New York Tax Free
Money Fund had a capital loss carryforward of approximately $53,000, which may
be applied against realized capital gains of each succeeding year until fully
utilized or until March 31, 2000 ($1,000), March 31, 2001 ($2,000), March 31,
2002 ($4,000) and March 31, 2003 ($43,000), and March 31, 2004 ($3,000), the
respective expiration dates, whichever occurs first.
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations the interest on which is excluded from gross
income under Section 103(a) of the Code. Each Fund intends to satisfy this 50
percent requirement in order to permit its distributions of tax-exempt interest
to be treated as such for federal income tax purposes in the hands of its
shareholders. Distributions to shareholders of tax-exempt interest earned by the
Fund for the taxable year are therefore not subject to regular federal income
tax, although they may be subject to the individual and corporate alternative
minimum taxes described below. Discount from certain stripped tax-exempt
obligations or their coupons, however, may be taxable.
The Revenue Reconciliation Act of 1993 requires that any market
discount recognized on a tax-exempt bond is taxable as ordinary income. This
rule applies only for disposals of bonds purchased after April 30, 1993. A
market discount bond is a bond acquired in the secondary market at a price below
its redemption value. Under prior law, the treatment of market discount as
ordinary income did not apply to tax-exempt obligations. Instead, realized
market discount on tax-exempt obligations was treated as capital gain. Under the
new law, gain on the disposition of a tax-exempt obligation or any other market
discount bond that is acquired for a price less than its principal amount will
be treated as ordinary income (instead of capital gain) to the extent of accrued
market discount. This rule is effective only for bonds purchased after April 30,
1993.
Since no portion of a Fund's income will be comprised of dividends from
domestic corporations, none of the income distributions of a Fund will be
eligible for the dividends-received deduction available for certain taxable
dividends received by corporations.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of a Fund have been held by such
shareholders. Such distributions to corporate shareholders of a Fund are not
eligible for the dividends-received deduction. Any loss realized upon the
redemption of shares within six months from the date of their purchase will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with
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<PAGE>
respect to such shares. Any loss realized upon the redemption of shares within
six months from the date of their purchase will be disallowed to the extent of
any tax-exempt dividends received with respect to such shares. All or a portion
of a loss realized on the redemption of shares of Scudder New York Tax Free
Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund may be
disallowed if shares of the Fund are purchased (including shares purchased under
the dividend reinvestment plan or the automatic investment plan) within 30 days
before or after such redemption.
Distributions derived from interest which is exempt from regular
federal income tax may subject corporate shareholders to or increase their
liability under the 20 percent corporate alternative minimum tax. A portion of
such distributions may constitute a tax preference item for individual
shareholders and may subject them to or increase their liability under the 24
percent individual alternative minimum tax, but normally no more than 20 percent
of a Fund's net assets will be invested in securities the interest on which is
such a tax preference item for individuals.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the federal income tax status of all distributions.
All distributions of taxable or tax-exempt net investment income and net
realized capital gain, whether received in shares or in cash, must be reported
by each shareholder on his or her federal income tax return. Dividends declared
in October, November or December with a record date in such a month and paid
during the following January will be treated by shareholders for federal income
tax purposes as if received on December 31 of the calendar year declared.
Shareholders are also required to report tax-exempt interest. Redemptions of
shares of Scudder New York Tax Free Fund, including exchanges for shares of
another Scudder Fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
Interest which is tax-exempt for federal income tax purposes is
included as income for purposes of determining the amount of Social Security or
railroad retirement benefits subject to tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Fund will not be deductible for federal income tax purposes. Under
rules applied by the IRS to determine when borrowed funds are used for the
purpose of purchasing or carrying particular assets, the purchase of shares may
be considered to have been made with borrowed funds even though the borrowed
funds are not directly traceable to the purchase of shares.
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain governmental obligations held by persons who are
"substantial users" (or persons related thereto) of facilities financed by such
obligations. The Funds have not undertaken any investigation as to the users of
the facilities financed by bonds in their portfolios.
Distributions by Scudder New York Tax Free Fund, Scudder Ohio Tax Free
Fund and Scudder Pennsylvania Tax Free Fund result in a reduction in the net
asset value of the Fund's shares. Should a distribution reduce the net asset
value below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder, to the extent it is derived from other than
tax-exempt interest, as ordinary income or capital gain as described above, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, investors should consider the tax implications of buying
shares just prior to a distribution. The price of shares purchased at that time
includes the amount of the forthcoming distribution. Those purchasing just prior
to a distribution will then receive a partial return of capital upon the
distribution, which, to the extent it is derived from other than tax-exempt
interest, will nevertheless be taxable to them.
All futures contracts entered into by Scudder New York Tax Free Fund,
Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund and all listed
nonequity options written or purchased by a Fund (including options on futures
contracts and options on securities indexes) will be governed by Section 1256 of
the Code. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such position generally will be
treated as 60 percent long-term and 40 percent short-term, and on the last
trading day of the Funds' fiscal year, all outstanding Section 1256 positions
will be marked to market (i.e. treated as if such positions were closed out at
their
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<PAGE>
closing price on such day), with any resulting gain or loss recognized as 60
percent long-term and 40 percent short-term. Under certain circumstances, entry
into a futures contract to sell a security may constitute a short sale for
federal income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in each Fund's
portfolio.
Positions of Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund
and Scudder Pennsylvania Tax Free Fund which consist of at least one debt
security not governed by Section 1256 and at least one futures contract or
nonequity option governed by Section 1256 which substantially diminishes a
Fund's risk of loss with respect to such debt security will be treated as a
"mixed straddle." Mixed straddles are subject to the straddle rules of Section
1092 of the Code, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses. Certain tax elections, however,
exist for them which reduce or eliminate the operation of these rules. The Trust
will monitor each Fund's transactions in options and futures and may make
certain tax elections in order to mitigate the operation of these rules and
prevent disqualification of a Fund as a regulated investment company for federal
income tax purposes.
Under the federal income tax law, each Fund will be required to report
to the IRS all distributions of taxable income and capital gains, as well as, in
the case of New York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund, gross proceeds from the redemption or exchange of
Fund shares, except in the case of certain exempt shareholders. Under the backup
withholding provisions of Section 3406 of the Code, distributions of taxable
income and capital gains and proceeds from the redemption or exchange of the
shares of a regulated investment company are generally subject to withholding of
federal income tax at the rate of 31 percent in the case of non-exempt
shareholders who fail to furnish the investment company with their taxpayer
identification numbers and with their required certifications regarding their
status under the federal income tax law. Under a special exception,
distributions of taxable income and capital gains of a Fund will not be subject
to backup withholding if the Fund reasonably estimates that at least 95 percent
of all of its distributions will consist of tax-exempt interest. However, in
this case, the proceeds from the redemption or exchange of shares may be subject
to backup withholding. Under another special exception, proceeds from the
redemption or exchange of Fund shares are exempt from withholding if the Fund
maintains a constant net asset value per share. Withholding may also be required
if a Fund is notified by the IRS or a broker that the taxpayer identification
number furnished by the shareholder is incorrect or that the shareholder has
previously failed to report interest or dividend income. If the withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in additional shares, will be reduced by the amounts required
to be withheld.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of a Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30
percent (or at a lower rate under an applicable income tax treaty) on amounts
constituting any ordinary income received.
State Taxation
The Trust is organized as a Massachusetts business trust, and neither
the Trust nor the Funds are liable for any income or franchise tax in the
Commonwealth of Massachusetts provided that each Fund qualifies as a regulated
investment company.
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund
New York State corporate tax law has special provisions governing
regulated investment companies that are qualified and taxed under Subchapter M
of the Code. To the extent a Fund has no federal income tax liability because it
distributes all of its investment income and the excess of net short-term
capital gain over net long-term capital loss and all of the excess of net
long-term capital gain over net short-term capital loss, it will incur no New
York State income tax, other than a possible nominal minimum tax. New York City
tax consequences are identical except that the amount of the possible minimum
tax differs. Individual shareholders who are residents of New York State will be
able to exclude for state income tax purposes that portion of the distributions
which is derived from interest on obligations of New York State and its
political subdivisions and of Puerto Rico, The Virgin Islands and Guam, because
at least 50%
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of the value of the assets of a Fund will be invested in state or municipal
obligations the interest on which is exempt for federal income tax purposes.
Individual shareholders who are residents of New York City will also be
able to exclude such income for New York City income tax purposes. Capital gains
that are retained by each Fund will be taxed to that Fund, and New York State
and New York City residents will receive no New York income tax credit for such
tax. Capital gains that are distributed by a Fund will be treated as capital
gains for New York State and City income tax purposes in the hands of New York
State and New York City residents.
Scudder Ohio Tax Free Fund
In the opinion of Ohio tax counsel, Squire, Sanders & Dempsey, under
Ohio law, provided that the Fund continues to qualify as a regulated investment
company under the Code and that at all times at least 50 percent of the value of
the total assets of the Fund consists of obligations issued by or on behalf of
the State of Ohio, political subdivisions thereof or agencies or
instrumentalities of the State of Ohio or its political subdivisions ("Ohio
Obligations"), or similar obligations of other states or their subdivisions (a
fund satisfying such requirements being referred to herein as an "Ohio fund"),
shareholders of the Fund who are otherwise subject to the Ohio personal income
tax, or school district or municipal income taxes in Ohio will not be subject to
such taxes on distributions with respect to shares of the Fund to the extent
that such distributions are properly attributable to (1) interest on or gain
from the sale, exchange or other disposition of Ohio Obligations, or (2)
interest on obligations of the United States or its territories or possessions
or of any authority, commission or instrumentality of the United States that is
exempt from state income taxes under the laws of the United States (e.g.,
obligations issued by the Governments of Puerto Rico, the Virgin Islands or Guam
and their authorities and municipalities) ("Federal and Possessions
Obligations").
Provided the Fund qualifies as an Ohio fund, shareholders who are
otherwise subject to the net income base of the Ohio corporation franchise tax
will not be subject to such tax on distributions with respect to shares of the
Fund to the extent that such distributions are (1) properly attributable to
interest on or gain from the sale, exchange or other disposition of Ohio
Obligations, (2) properly attributable to interest on Federal and Possessions
Obligations, or (3) exempt-interest dividends for Federal income tax purposes.
However, shares of the Fund will be includable in the computation of net worth
for purposes of such tax. Corporate shareholders that are subject to Ohio
municipal income taxes will not be subject to such tax on distributions received
from the Fund to the extent such distributions are properly attributable to
interest on or gain from the sale of Ohio Obligations or are properly
attributable to interest on Federal and Possessions Obligations.
Scudder Pennsylvania Tax Free Fund
Under a ruling of the Pennsylvania Department of Revenue, individual
shareholders of the Fund resident in Pennsylvania will not be subject to
Pennsylvania income tax on distributions received from the Fund to the extent
such distributions are attributable to interest or capital gain from the sale of
tax-exempt obligations of the Governments of Puerto Rico, The Virgin Islands and
Guam. Distributions attributable to capital gain from the sale of tax-exempt
obligations of the Commonwealth and its political subdivisions and authorities
issued before February 1, 1994 will also be exempt from Pennsylvania personal
income tax. Other distributions from the Fund, including capital gain dividends,
will generally not be exempt from Pennsylvania personal income tax.
The Department has also ruled that corporations which are subject to
the Pennsylvania corporate net income tax will not be subject to such tax on
distributions received from the Fund to the extent such distributions are
exempt-interest dividends attributable to interest on tax-exempt obligations of
the Commonwealth and its political subdivisions and authorities. Distributions
attributable to capital gain from the sale of tax-exempt obligations of the
Commonwealth and its political subdivisions and authorities issued before
February 1, 1994 will also be exempt from Pennsylvania corporate net income tax.
Other distributions from the Fund, including capital gain dividends, will
generally not be exempt from the Pennsylvania corporate net income tax.
The Fund believes that shares of the Fund will not be subject to
personal property taxation by Pennsylvania local taxing authorities in
proportion to the extent that the personal property owned by the Fund would not
be subject to such taxation if owned by a resident of Pennsylvania. The Fund has
obtained from several such authorities written confirmation of this view and
expects that the numerous other local taxing authorities administer the personal
property
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tax in a similar manner. Accordingly, because the Fund will invest predominantly
in obligations of the Commonwealth and its political subdivisions and
authorities, most or all of which obligations are not subject to personal
property taxation in Pennsylvania, only a small fraction, if any, of the value
of the shares of the Fund would be subject to such tax.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
To the maximum extent feasible, the Adviser places orders for portfolio
transactions for each Fund through the Distributor, which in turn places orders
on behalf of a Fund with issuers, underwriters, or other brokers and dealers.
The Distributor receives no commissions, fees or other remuneration from the
Funds for this service.
Allocation of brokerage is supervised by the Adviser.
Each Fund's purchases and sales of portfolio securities are generally
placed by the Adviser with the issuer or a primary market maker for these
securities on a net basis, without any brokerage commission being paid by the
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Transaction costs may also include fees paid to third parties for
information as to potential purchasers or sellers of securities but only for the
purpose of seeking for the Fund the most favorable net results, including such
fee, on a particular transaction. Purchases of underwritten issues may be made
which will include an underwriting fee paid to the underwriter.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund's portfolio is to obtain the most favorable
net results taking into account such factors as price, commission where
applicable (negotiable in the case of U.S. national securities exchange
transactions), size of order, difficulty of execution and skill required of the
executing broker/dealer. The Adviser seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of the Distributor with commissions charged on comparable
transactions, as well as by comparing commissions paid by a Fund to reported
commissions paid by others. The Adviser reviews on a routine basis commission
rates, execution and settlement services performed, making internal and external
comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes, or who supply research, market and
statistical information to the Trust or the Adviser. The term "research, market
and statistical information" includes advice as to the value of securities, the
advisability of investing in, purchasing or selling securities; the availability
of securities or purchasers or sellers of securities; and analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. The Adviser is authorized
when placing portfolio transactions for a Fund to pay a brokerage commission in
excess of that which another broker might have charged for effecting the same
transaction solely on account of the receipt of research, market or statistical
information. The Adviser will not place orders with brokers or dealers on the
basis that a broker or dealer has or has not sold shares of a Fund. In effecting
transactions in over-the-counter securities, orders will be placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Trust and to the Adviser, it is the
opinion of the Adviser that such information will only supplement the Adviser's
own research effort, since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than the Trust and not all such
information is used by the Adviser in connection with the Funds. Conversely,
such information provided to the Adviser by brokers and dealers through whom
other clients of the Adviser effect securities transactions may be useful to the
Adviser in providing services to the Trust.
The Trustees intend to review from time to time whether the recapture
for the benefit of a Fund of some portion of the brokerage commissions or
similar fees paid by the Fund on portfolio transactions is legally permissible
and advisable.
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Portfolio Turnover
Each Fund's portfolio will experience turnover. The portfolio turnover
rates of Scudder New York Tax Free Fund (defined by the SEC as the ratio of the
lesser of sales or purchases of securities to the monthly average value of the
portfolio, excluding all securities with remaining maturities of less than one
year) for the fiscal years ended March 31, 1996, 1997 and 1998 were 80.5%, 71.0%
and 28.8%, respectively.
The portfolio turnover rates for Scudder Ohio Tax Free Fund for the
fiscal periods ended March 31, 1996, 1997 and 1998 were 19.6%, 9.66% and 4.9%,
respectively. The portfolio turnover rates for Scudder Pennsylvania Tax Free
Fund for the fiscal periods ended March 31, 1996, 1997 and 1998 were 11.1%,
11.64% and 20.4%, respectively.
NET ASSET VALUE
Scudder New York Tax Free Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund. The net asset value of shares of the Fund is
computed as of the close of regular trading on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading (the "Value Time"). The
Exchange is scheduled to be closed on the following holidays: New Year's Day,
Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value per
share is determined by dividing the value of the total assets of a Fund, less
all liabilities, by the total number of shares outstanding.
An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("Nasdaq") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the Nasdaq System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
purchased with remaining maturities of sixty days or less shall be valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
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Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
Scudder New York Tax Free Money Fund. The net asset value per share of Scudder
New York Tax Free Money Fund is determined by the Custodian (twice daily as of
twelve o'clock noon and the close of trading on the Exchange), on each day when
the Exchange is open for trading (as noted above). Net asset value per share is
determined by dividing the total assets of the Fund, less all of its
liabilities, by the total number of shares of the Fund outstanding. The
valuation of the Fund's portfolio securities is based upon their amortized cost
which does not take into account unrealized securities gains or losses. This
method involves initially valuing an instrument at its cost and thereafter
amortizing to maturity any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. During periods of declining
interest rates, the quoted yield on shares of the Fund may tend to be higher
than a like computation made by a fund with identical investments utilizing a
method of valuation based upon market prices and estimates of market prices for
all of its portfolio instruments. Thus, if the use of amortized cost by the Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Fund would be able to obtain a somewhat higher yield if shares
of the Fund were purchased on that day, than would result from investment in a
fund utilizing solely market values, and existing investors in the Fund would
receive less investment income. The converse would apply in a period of rising
interest rates. Other assets for which market quotations are not readily
available are valued in good faith at fair value using methods determined by the
Trustees and applied on a consistent basis. For example, securities with
remaining maturities of more than 60 days for which market quotations are not
readily available are valued on the basis of market quotations for securities of
comparable maturity, quality and type. The Trustees review the valuation of the
Fund's securities through receipt of regular reports from the Adviser at each
regular Trustees' meeting. Determinations of net asset value made other than as
of the close of the Exchange may employ adjustments for changes in interest
rates and other market factors.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Funds in this combined Statement of
Additional Information have been audited by PricewaterhouseCoopers LLP, One Post
Office Square, Boston, Massachusetts 02109, independent accountants, and are
included in this Statement of Additional Information in reliance upon the
accompanying report of said firm, which report is given upon their authority as
experts in accounting and auditing.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Trust property or the
acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the respective Fund's property of any
shareholder held personally liable for the claims and liabilities to which a
shareholder may become subject by reason of being or having been a shareholder.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself would
be unable to meet its obligations.
Ratings of Municipal Obligations
The six highest ratings of Moody's for municipal bonds are Aaa, Aa, A,
Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be of the best quality.
Bonds rated Aa are judged to be of high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high quality bonds.
Moody's states that Aa bonds are rated lower than the best bonds because margins
of protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and
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interest of A rated municipal bonds are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Securities rated Baa are considered medium grade, with factors giving security
to principal and interest adequate at present but may be unreliable over any
period of time. Such bonds have speculative elements as well as investment-grade
characteristics. Securities rated Ba or below by Moody's are considered below
investment grade, with factors giving security to principal and interest
inadequate and potentially unreliable over any period of time. Such securities
are commonly referred to as "junk" bonds and as such they carry a high margin of
risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG-1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-access to the market for refinancing, or both. Loans bearing the
designation MIG-2 are of high quality, with margins of protection ample although
not so large as in the preceding group.
The six highest ratings of S&P for municipal bonds are AAA (Prime), AA
(High-grade), A (Good-grade), BBB (Investment-grade) and BB or B (Below
investment-grade). Bonds rated AAA have the highest rating assigned by S&P to a
municipal obligation. Capacity to pay interest and repay principal is extremely
strong. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions. Bonds rated BBB have an adequate capacity to pay interest
and to repay principal. Adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds of this category than for bonds of higher rated categories.
Securities rated BB or below by S&P are considered below investment grade, with
factors giving security to principal and interest inadequate and potentially
unreliable over any period of time. Such securities are commonly referred to as
"junk" bonds and as such they carry a high margin of risk.
S&P's top ratings for municipal notes issued are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest.
The six highest ratings of Fitch for municipal bonds are AAA, AA, A,
BBB, BB and B. Bonds rated AAA are considered to be investment-grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+. Bonds rated A are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher rates.
Bonds rated BBB are considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse effects on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings. Securities
rated BB or below by Fitch are considered below investment grade, with factors
giving security to principal and interest inadequate and potentially unreliable
over any period of time. Such securities are commonly referred to as "junk"
bonds and as such they carry a high margin of risk.
Commercial Paper Ratings
Commercial paper rated A-1 or better by S&P has the following
characteristics: liquidity ratios are adequate to meet cash requirements;
long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed; the issuer has access to at least two additional channels of
borrowing; and basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances. Typically, the issuer's industry is well
established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned.
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The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend or earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
The rating F-1+ is the highest rating assigned by Fitch. Among the
factors considered by Fitch in assigning this rating are: (1) the issuer's
liquidity; (2) its standing in the industry; (3) the size of its debt; (4) its
ability to service its debt; (5) its profitability; (6) its return on equity;
(7) its alternative sources of financing; and (8) its ability to access the
capital markets. Analysis of the relative strength or weakness of these factors
and others determines whether an issuer's commercial paper is rated F-1+.
Relative strength or weakness of the above factors determine how the
issuer's commercial paper is rated within the above categories.
Glossary
1. Bond
A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity
date) and to pay a stated rate of interest until maturity. Interest is
generally paid semiannually in amounts equal to one half the annual
interest rate.
2. Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.
3. Discount and Premium
A discount (premium) bond is a bond selling in the market at a price
lower (higher) than its face value. The amount of the market discount
(premium) is the difference between market price and face value.
4. Maturity
The date on which the principal amount of a debt obligation comes due
by the terms of the instrument.
5. Municipal Obligation
Obligations issued by or on behalf of states, territories and
possessions of the United States, their political subdivisions,
agencies and instrumentalities and the District of Columbia and other
issuers, the interest from which is, at the time of issuance in the
opinion of bond counsel for the issuers, exempt from regular federal
income tax.
6. Net Asset Value Per Share
The value of each share of a Fund for purposes of sales and
redemptions.
7. Net Investment Income
The net investment income of each Fund is comprised of its interest
income, including amortizations of original issue discounts, less
amortizations of premiums and expenses paid or accrued computed under
GAAP.
8. Unit Investment Trust
An investment company organized under a trust or similar agreement
which does not have a board of trustees and which issues only
redeemable securities each of which represents an undivided interest in
a portfolio of specified securities.
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Other Information
Each Fund has a fiscal year ending on March 31.
Portfolio securities of each Fund are held separately, pursuant to a
custodian agreement, by the Fund's custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02101.
The firm of Willkie Farr & Gallagher of New York is counsel for the
Trust.
The CUSIP number of the New York Tax Free Money Fund is 811184-20-9.
The CUSIP number of the New York Tax Free Fund is 811184-10-0. The CUSIP number
of Scudder Ohio Tax Free Fund is 811184-40-7. The CUSIP number of Scudder
Pennsylvania Tax Free Fund is 811184-50-6.
The name "Scudder State Tax Free Trust" is the designation of the
Trustees for the time being under an Amended and Restated Declaration of Trust
dated December 8, 1987, as amended from time to time, and all persons dealing
with a Fund must look solely to the property of that Fund for the enforcement of
any claims against that Fund as neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of a Fund. No fund of the Trust is liable for the obligations of any
other Fund. Upon the initial purchase of shares, the shareholder agrees to be
bound by the Trust's Declaration of Trust, as amended from time to time. The
Declaration of Trust of the Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts. All persons dealing with a Fund must
look only to the assets of that Fund for the enforcement of any claims against
such Fund as no other series of the Trust assumes any liabilities for
obligations entered into on behalf of a Fund.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net
asset value per share for each Fund. Scudder New York Tax Free Money Fund pays
SFAC an annual fee equal to 0.020% of the first $150 million of average daily
net assets, 0.0060% of the next $850 million of such assets and 0.0035% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. The fee incurred by Scudder New York Tax Free Money Fund for the fiscal
year ended March 31, 1997 amounted to $30,000. Scudder New York Tax Free Money
Fund, Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free Fund each pay
SFAC an annual fee equal to 0.024% of the first $150 million of average daily
net assets, 0.0070% of such assets in excess of $150 million, 0.004% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. The fee incurred by Scudder New York Tax Free Fund for the fiscal years
ended March 31, 1996, 1997 and 1998, respectively, amounted to $53,141, $53,983
and $52,711, respectively. For the fiscal years ended March 31, 1996, 1997 and
1998, respectively, the amounts charged to Scudder Ohio Tax Free Fund by SFAC
amounted to $36,000, $36,000 and $36,000, of which $3,000 was unpaid at March
31, 1998. For the fiscal years ended March 31, 1996, 1997 and 1998,
respectively, the amounts charged to Scudder Pennsylvania Tax Free Fund by SFAC
amounted to $36,000, $36,000 and $36,000, respectively, of which $3,000 was
unpaid at March 31, 1998.
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston,
Massachusetts 02107-2291, a subsidiary of Scudder, Stevens & Clark, Inc., is the
transfer and dividend-disbursing agent for the Funds. Service Corporation also
serves as shareholder service agent. Scudder New York Tax Free Fund pays SSC an
annual fee of $25.00 for each account maintained for a shareholder, which is
$13.25 for its services as transfer and dividend-paying agent and $11.75 for its
services as shareholder service agent. Scudder New York Tax Free Money Fund pays
SSC an annual fee of $28.90, which is $12.40 for its services as transfer and
dividend-paying agent and $16.50 for its services as shareholder service agent,
for each account maintained for a shareholder. For the fiscal years ended March
31, 1996, 1997 and 1998, respectively, Scudder New York Tax Free Fund incurred
SSC fees of $124,088, $119,944 and $118,928, respectively, of which $10,151,
$10,181 and $9,933 was unpaid at March 31, 1996, 1997 and 1998, respectively.
For the fiscal years ended March 31, 1996, 1997 and 1998, respectively, Scudder
New York Tax Free Money Fund incurred SSC fees of $60,783, $58,369 and $57,141,
respectively, of which $5,060, $4,874 and $4,445 was unpaid at March 31, 1996,
1997 and 1998, respectively. For the fiscal years ended March 31, 1996, 1997 and
1998, respectively, Scudder Ohio Tax Free Fund incurred SSC fees of $58,847,
$58,820 and $58,657, respectively, of which $4,831, $5,048 and $4,622 was unpaid
at March 31, 1996, 1997 and 1998, respectively. For the fiscal years ended March
31, 1996, 1997 and 1998, respectively, Scudder Pennsylvania Tax Free Fund
incurred SSC fees of $62,311, $62,522 and $61,715, respectively, of which
$5,167, $5,480 and $5,020 was unpaid at March 31, 1996, 1997 and 1998,
respectively.
82
<PAGE>
The Funds, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
The Funds' prospectuses and this Statement of Additional Information
omit certain information contained in the Registration Statement which the Trust
has filed with the SEC under the Securities Act of 1933 and reference is hereby
made to the Registration Statement for further information with respect to the
Funds and the securities offered hereby. This Registration Statement is
available for inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Scudder New York Tax Free Fund
The financial statements, including the Investment Portfolio, of
Scudder New York Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements in the
Annual Report to the shareholders of the Fund dated March 31, 1998, are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
Scudder New York Tax Free Money Fund
The financial statements, including the Investment Portfolio, of
Scudder New York Tax Free Money Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements in the
Annual Report to the shareholders of the Fund dated March 31, 1998, are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
Scudder Ohio Tax Free Fund
The financial statements, including the Investment Portfolio, of
Scudder Ohio Tax Free Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements in the Annual Report to
the shareholders of the Fund dated March 31, 1998, are incorporated herein by
reference and are hereby deemed to be a part of this Statement of Additional
Information.
Scudder Pennsylvania Tax Free Fund
The financial statements, including the Investment Portfolio, of
Scudder Pennsylvania Tax Free Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements in the
Annual Report to the shareholders of the Fund dated March 31, 1998, are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
83
<PAGE>
Scudder
New York
Tax Free Money Fund
Scudder
New York
Tax Free Fund
Annual Report
March 31, 1998
Pure No-Load(TM) Funds
For investors seeking triple-tax-free income exempt from New York state and New
York City personal income taxes and regular federal income taxes.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder New York Tax Free Money Fund
- --------------------------------------------------------------------------------
Date of Inception: 5/28/87 Total Net Assets as of Ticker Symbol: SCNXX
3/31/98: $92.5 million
- --------------------------------------------------------------------------------
o Scudder New York Tax Free Money Fund offered a seven-day effective yield of
3.02% on March 31, 1998, equivalent to a 5.37% taxable yield for investors in
the top federal and state income tax brackets.
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
7-Day Effective Yield on March 31, 1998
BAR CHART DATA:
-----------------------------------
Scudder New York Taxable
Tax Free Money Equivalent
Fund Yield
-----------------------------------
3.02% 5.37%
-----------------------------------
Table of Contents
4 Letter from the Fund's President 34 Report of Independent Accountants
7 Portfolio Management Discussion 35 Tax Information
12 Glossary of Investment Terms 36 Shareholder Meeting Results
13 Investment Portfolio 40 Officers and Trustees
16 Financial Statements 41 Investment Products and Services
19 Financial Highlights 42 Scudder Solutions
30 Notes to Financial Statements
2 - Scudder New York Tax Free Money Fund
<PAGE>
Scudder New York Tax Free Fund
- --------------------------------------------------------------------------------
Date of Inception: 7/22/83 Total Net Assets as of Ticker Symbol: SCYTX
3/31/98: $195.7 million
- --------------------------------------------------------------------------------
o Scudder New York Tax Free Fund provided a 4.00% 30-day net annualized SEC
yield on March 31, 1998. For shareholders subject to the 43.74% maximum combined
federal and state income tax rate, the Fund's yield was equal to a taxable yield
of 7.11%. The Fund posted a solid 11.20% total return for its most recent fiscal
year ended March 31, 1998.
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
30-Day SEC Yield on March 31, 1998
BAR CHART DATA:
-----------------------------------
Taxable
Scudder New York Equivalent
Tax Free Fund Yield
-----------------------------------
4.00% 7.11%
-----------------------------------
Table of Contents
4 Letter from the Fund's President 30 Notes to Financial Statements
5 Performance Update 34 Report of Independent Accountants
6 Portfolio Summary 35 Tax Information
9 Portfolio Management Discussion 38 Shareholder Meeting Results
12 Glossary of Investment Terms 40 Officers and Trustees
20 Investment Portfolio 41 Investment Products and Services
26 Financial Statements 42 Scudder Solutions
29 Financial Highlights
3 - Scudder New York Tax Free Fund
<PAGE>
Letter from the Funds' President
Dear Shareholders,
We are pleased to report to you concerning the performance of Scudder New
York Tax Free Money Fund and Scudder New York Tax Free Fund over their most
recent fiscal year ended March 31, 1998. Scudder New York Tax Free Money Fund
posted a 5.37% tax equivalent yield based on the maximum federal and state tax
rates at the close of the period.
Scudder New York Tax Free Fund posted a 4.00% 30-day net annualized SEC
yield as of March 31, equivalent to a taxable yield of 7.11% for investors in
the top New York tax bracket. In addition, the Fund earned a solid total return
of 11.20% for the 12 months ended March 31. Please read the portfolio management
discussions beginning on page 7 for more information.
As of January 1, 1998, the Fund's investment adviser changed its name to
Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc., pursuant
to the acquisition of a majority interest in Scudder, Stevens & Clark by Zurich
Insurance Company, and the combining of Scudder's business with that of Zurich
Kemper Investments, Inc. As of January 1 we also welcomed a new portfolio
management team for Scudder New York Tax Free Money Fund: Frank J. Rachwalski,
Jr., Lead Portfolio Manager, and Jerri I. Cohen, Portfolio Manager, with a
combined 42 years of investment industry experience.
For those of you interested in new Scudder products, we recently introduced
three industry sector funds as a part of our Choice Series: Scudder Financial
Services Fund, which seeks long-term growth by investing in financial services
companies in the United States and abroad; Scudder Health Care Fund, which seeks
long-term growth from health care companies located around the world; and
Scudder Technology Fund, which pursues long-term growth by investing in
companies that develop, produce, or distribute technology. In addition, April 6,
1998, marked the debut of our newest entrant in the growth and income category:
Scudder Real Estate Investment Fund, investing in equity securities of companies
in the real estate industry. Please see page 41 for more information on Scudder
products and services.
As always, please call a Scudder Investor Information representative at
1-800-225-2470 if you have questions about your Fund. Page 42 provides more
information on how to contact Scudder. Thank you for choosing Scudder to help
meet your investment needs.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
4 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
Performance Update as of March 31, 1998
- -------------------------------------------
Fund Index Comparisons
- -------------------------------------------
Total Return
- -------------------------------------------
Period Ended Growth of Average
3/31/98 $10,000 Cumulative Annual
- -------------------------------------------
Scudder New York Tax Free Fund
- -------------------------------------------
1 Year $11,120 11.20% 11.20%
5 Year $13,554 35.54% 6.27%
10 Year $22,038 120.38% 8.22%
- -------------------------------------------
Lehman Brothers Municipal Bond Index
- -------------------------------------------
1 Year $11,073 10.73% 10.73%
5 Year $13,911 39.11% 6.82%
10 Year $22,289 122.89% 8.34%
- -------------------------------------------
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 March 31
Scudder New York
Tax Free Fund
Year Amount
- ---------------------
'88 $10,000
'89 $10,855
'90 $11,743
'91 $12,659
'92 $14,065
'93 $16,260
'94 $16,473
'95 $17,525
'96 $18,919
'97 $19,819
'98 $22,038
Lehman Brothers Municipal
Bond Index
Year Amount
- ---------------------
'88 $10,000
'89 $10,719
'90 $11,851
'91 $12,943
'92 $14,238
'93 $16,022
'94 $16,393
'95 $17,611
'96 $19,088
'97 $20,129
'98 $22,289
The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of municipal bonds issued across the United States. Index issues have
a credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended March 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
--------------------------------------------------------------------------------
Net Asset Value $10.53 $10.60 $10.73 $10.98 $11.40 $10.32 $10.38 $10.67 $10.63 $11.27
Income Dividends $ .72 $ .69 $ .67 $ .65 $ .61 $ .54 $ .52 $ .53 $ .53 $ .51
Capital Gains and
Other Distributions $ -- $ .09 $ -- $ .25 $ .61 $ .73 $ .05 $ -- $ .01 $ .02
Fund Total
Return (%) 8.55 8.18 7.79 11.11 15.60 1.31 6.39 7.95 4.76 11.20
Index Total
Return (%) 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38 5.45 10.73
</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.
5 - Scudder New York Tax Free Fund
<PAGE>
Portfolio Summary as of March 31, 1998
- -------------------------------
Diversification
- -------------------------------
Core Cities/Lease 20%
State General Obligation 13%
Higher Education 11%
Water/Sewer Revenue 10%
Hospital/Health 9%
County General Obligation/
Lease 7%
Pollution Control/
Industrial Development 6%
Other General Obligation/
Lease 6%
Port/Airport Revenue 5%
Miscellaneous Municipal 13%
- -------------------------------
100%
- -------------------------------
The Fund invests in a broad
selection of New York tax-free
bonds.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- ------------------------------
Quality
- ------------------------------
AAA 47%
AA 6%
A 13%
BBB 21%
Not Rated 13%
- ------------------------------
100%
- ------------------------------
Weighted average quality: AA
Overall portfolio quality remains
high, with over 65% of portfolio
securities rated A or better as of
March 31.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- ------------------------------
Effective Maturity
- ------------------------------
Less than 1 year 2%
1-5 years 5%
5-10 years 48%
10-15 years 30%
Greater than 15 years 15%
- ------------------------------
100%
- ------------------------------
Weighted average effective maturity:
10.5 years
We continue to focus on the
purchase of noncallable bonds with
maturities of 15 years or less.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
For more complete details about the Fund's investment portfolio, see page 20.
6 - Scudder New York Tax Free Fund
<PAGE>
Portfolio Management Discussion
Scudder New York Tax Free Money Fund
Dear Shareholders,
During Scudder New York Tax Free Money Fund's most recent fiscal year, interest
rates of tax-exempt money fund instruments drifted downward in the face of
healthy demand for these securities, no action on interest rates by the Federal
Reserve, and a vibrant U.S. economy accompanied by low inflation. The Fund's
7-day effective yield as of March 31 was 3.02%. For investors in the highest
combined state and federal income tax bracket, the Fund's yield equaled a 5.37%
compounded taxable yield, higher than the 5.03% average for taxable money funds,
according to IBC Financial Data, Inc., an independent firm that tracks money
fund performance. Our strategy during this period was to purchase tax-exempt
commercial paper -- which enables the buyer to select a specific maturity date
- -- with three-, four-, and five-month maturities. We also attempted to obtain
attractive value by concentrating our purchases during periods of seasonal
market weakness.
With the State's economy continuing to grow, barring any downturn in the U.S.
economy caused by aftershocks from the Asian crisis we believe the New York
tax-free money market and the Fund should perform well over the coming months.
We will continue to seek to take advantage of seasonal market weakness, such as
in April, when last-minute
7 - Scudder New York Tax Free Money Fund
<PAGE>
taxpayers sell their securities and create a temporary surge of supply that
lasts into May. Our continuing goal is to provide New York Fund shareholders
with a competitive triple-tax-free yield by searching for high-quality,
short-term municipal securities while actively managing the Fund's average
maturity.
Sincerely,
Your Portfolio Management Team
/s/Frank J. Rachwalski, Jr. /s/Jerri I. Cohen
Frank J. Rachwalski, Jr. Jerri I. Cohen
Scudder New York
Tax Free Money Fund:
A Team Approach to Investing
Scudder New York Tax Free Money Fund is managed by a team of Scudder Kemper
Investments, Inc. (the "Adviser") professionals who each play an important
role in the Fund's management process. Team members work together to develop
investment strategies and select securities for the Fund's portfolio. They are
supported by the Adviser's large staff of economists, research analysts,
traders, and other investment specialists who work in our offices across the
United States and abroad. We believe our team approach benefits Fund investors
by bringing together many disciplines and leveraging our extensive resources.
Lead Portfolio Manager Frank J. Rachwalski, Jr. assumed responsibility for the
Fund's day-to-day management in 1998. Mr. Rachwalski joined the Adviser in
1973 and he has 25 years of experience managing money market portfolios. Jerri
I. Cohen, Portfolio Manager, joined the Fund's team in January 1998. Ms.
Cohen, who has been with the Adviser since 1981, has 17 years of experience in
the financial industry including five years in tax-exempt money fund
investing.
8 - Scudder New York Tax Free Money Fund
<PAGE>
Portfolio Management Discussion
Scudder New York Tax Free Fund
Dear Shareholders,
For its most recent fiscal year ended March 31, 1998, Scudder New York Tax Free
Fund posted a solid total return as interest rates continued a slow and steady
decline against a backdrop of low inflation and healthy economic growth. The
Fund's 11.20% total return for the period consisted of a $0.64 increase in net
asset value per share to $11.27, income distributions of $0.51 per share, and a
short-term capital gain distribution of $0.02 per share. This return outpaced
the 10.49% average of 97 similar funds tracked by Lipper over the 12-month
period.
New York Update
New York State was without an approved state budget as of April 1, 1998 -- the
fourteenth consecutive year this deadline has passed unmet. The most contentious
issue preventing an agreement was how to allocate the State's $2 billion 1998
fiscal year General Fund surplus. Despite the lack of resolution on this front,
New York continues to benefit from the strength of its own economy as well as
that of the U.S. economy.
Higher than expected income tax revenues and lower than expected social service
costs accounted for New York's budget surplus. The State will use $800 million
of this surplus to finance expenditures in the 1999 fiscal year budget. The
State's economy continues to grow, though more slowly than the national economy.
New York's 1997 private sector job growth of 2%, or 115,300 jobs, was the
highest rate in ten years. The underlying strength of New York's economy
continues to lie in the finance, insurance, and real estate sectors. Companies
on Wall Street have been reaping tremendous profits resulting in higher salaries
and even higher year-end bonuses for their employees. In 1996, the State's per
capita income was $26,782 -- 18% higher than the national average.
Governor Pataki's proposed budget includes $1 billion in new debt financing for
various State projects, over one half of which is earmarked for school
construction. Due to the size of the State's budget and its high wealth levels,
we believe the State's growing debt burden and the Governor's proposed bond
issuance will not lead to a deterioration of New York's credit standing.
Steady Growth and
Low Inflation
The long-running U.S. economic scenario of moderate growth and low inflation
forges on. Asia, expected by many to export its way out of economic crisis and
in doing so derail U.S. growth, has so far increased exports only modestly. At
the same time, the U.S. bond market has benefited from Federal Reserve inaction
on interest rates, falling commodity prices, mixed economic statistics, and
portfolio rebalancing by investors who have acted to reduce the overweighting of
stocks in their portfolios. Moreover, the municipal bond market has enjoyed its
first significant increase in investor interest in four years. During the Fund's
most recent
9 - Scudder New York Tax Free Fund
<PAGE>
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
Municipal Yields Compared with Inflation
March 31, 1995 - March 31, 1998
LINE CHART DATA:
-----------------------------------------------------
CPI 10-year
municipal bonds
-----------------------------------------------------
3/95 2.81 4.90
2.73 4.65
2.90 5.00
1/96 2.95 5.15
2.99 5.00
3.04 4.85
2.50 5.10
1/97 2.23 4.75
2.08 4.50
1.84 4.60
1.60 4.20
1.40 4.30
3/98 1.40 4.50
-----------------------------------------------------
(Chart indicates a 3.10% spread between the 10-year municipal bonds at 4.50%
(3/98) and the CPI at 1.40% (3/98).)
Municipal yields represented by 10-year, AAA-rated municipal bonds.
Inflation represented by CPI (Consumer Price Index).
Sources: Salomon Brothers; Datastream
- ----------
fiscal year, yields of 10-year Treasury bonds declined 1.3 percentage points and
their prices rose 9.3%, while yields of comparable municipal bonds declined
almost three quarters of a percentage point and their prices increased 5.2%.
It's important to note that in the current environment of lower municipal bond
yields, "real" interest rates -- interest rates minus increases in the CPI, a
recognized barometer of inflation -- have rarely been higher. Real interest
rates depict the level of income bondholders actually earn, taking into account
the erosion in value of their principal from inflation. The chart above
illustrates the widening gap between yield levels and inflation since March
1995.
Focus on Intermediate Noncallable Bonds
As a means of locking in a substantial income stream for Scudder New York Tax
Free Fund over time, we continue to focus on the purchase of noncallable bonds
with maturities of 15 years or less. As of March 31, over 80% of the Fund's
securities had maturities in this range. We also continue to look for
opportunities to add high yielding BBB-rated and non-rated bonds to the
portfolio. Higher yielding bonds, while carrying some additional credit risk,
generally exhibit less interest rate sensitivity than municipal bonds rated A or
above. During the most recent fiscal year, the Fund benefited from a credit
upgrade of New York City bonds from BBB to A3 by Moody's ratings service. (The
Fund previously increased its New York City holdings significantly in 1996.)
Many other New York municipal credits were also upgraded during the period,
including State lease bonds held by the Fund. (For a summary of the Fund's
quality, diversification, and maturity structure, see page 6.)
Overall portfolio quality remains high, with over 60% of portfolio securities
rated A or better at the close of the period. We continue to invest in a broad
selection of New York municipal bonds, including core cities/lease, general
obligation, and higher education bonds.
The Fund seeks to provide investors with a competitive level of federal and
state tax-exempt income as well as the best possible total return performance.
Our long-term investment strategy focuses on four basic elements: (1) purchasing
bonds with effective maturities of 15 years or less;
10 - Scudder New York Tax Free Fund
<PAGE>
(2) purchasing noncallable bonds at yields close to those of callable bonds with
comparable maturities; (3) purchasing high-yielding callable bonds, and (4)
diversifying investments based on careful credit selection.
Outlook
In the words of Federal Reserve Chairman Greenspan, the U.S. economy delivered
"exemplary performance" in 1997, with real GNP growth of 3.8%. We believe this
level of growth will be difficult to maintain in 1998 because of two current
drags on the economy -- burdensome consumer debt, and a high level of corporate
write-offs -- and one that still looms -- possible economic fallout from Asia's
troubles. Any slowdown from current levels of growth would provide a basis for a
sustained decline in interest rates and favorable bond market performance. At
the same time, we believe that the Fed will stand ready to raise interest rates
at the first sign of runaway growth.
We will continue our focus on noncallable municipal bonds with maturities of 15
years or less as we seek to boost yield and achieve attractive long-term returns
for our investors. In addition, we will attempt to limit volatility by
maintaining a neutral average maturity and high overall credit quality as we
pursue triple-tax-free income and competitive total return for Scudder New York
Tax Free Fund shareholders.
Sincerely,
Your Portfolio Management Team
/s/Jeremy L. Ragus /s/Christopher J. Mier
Jeremy L. Ragus Christopher J. Mier
Scudder New York
Tax Free Fund:
A Team Approach to Investing
Scudder New York Tax Free Fund is managed by a team of Scudder Kemper
Investments, Inc. (the "Adviser") professionals who each play an important
role in the Fund's management process. Team members work together to develop
investment strategies and select securities for the Fund's portfolio. They are
supported by the Adviser's large staff of economists, research analysts,
traders, and other investment specialists who work in our offices across the
United States and abroad. We believe our team approach benefits Fund investors
by bringing together many disciplines and leveraging our extensive resources.
Lead Portfolio Manager Jeremy L. Ragus has had responsibility for the Fund's
day-to-day management since 1990. Mr. Ragus, who joined the Adviser in 1990,
has 16 years of experience in municipal investing. Christopher J. Mier,
Portfolio Manager, joined the Fund's management team in 1998. Mr. Mier, who
has been with the Adviser since 1986, has more than 20 years of experience in
municipal investing and portfolio management.
11 - Scudder New York Tax Free Fund
<PAGE>
Glossary of Investment Terms
BOND An interest-bearing security issued by the
federal, state, or local government or a
corporation that obligates the issuer to pay
the bondholder a specified amount of interest
for a stated period -- usually a number of
years -- and to repay the face amount of the
bond at its maturity date.
GENERAL OBLIGATION BOND A municipal bond backed by the "full faith
and credit" (including the taxing and further
borrowing power) of the city, state, or
agency that issues the bond. A general
obligation bond is repaid with the issuer's
general revenue and borrowings.
INFLATION An overall increase in the prices of goods
and services, as happens when business and
consumer spending increases relative to the
supply of goods available in the marketplace
-- in other words, when too much money is
chasing too few goods. High inflation has a
negative impact on the prices of fixed-income
securities.
MUNICIPAL BOND An interest-bearing debt security issued by a
state or local government entity.
NET ASSET VALUE (NAV) The price per share of a mutual fund based on
the sum of the market value of all the
securities owned by the fund divided by the
number of outstanding shares.
TAXABLE EQUIVALENT YIELD The level of yield a fully taxable instrument
would have to provide to equal that of a
tax-free municipal bond on an after-tax
basis.
30-DAY SEC YIELD The standard yield reference for bond funds,
based on a formula prescribed by the SEC.
This annualized yield calculation reflects
the 30-day average of the income earnings of
every holding in a given fund's portfolio,
net of expenses, assuming each is held to
maturity.
TOTAL RETURN The most common yardstick to measure the
performance of a fund. Total return --
annualized or compound -- is based on a
combination of share price changes plus
income and capital gain distributions, if
any, expressed as a percentage gain or loss
in value.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
12 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
Investment Portfolio as of March 31, 1998
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Value ($)
Amount ($) (Unaudited) (Note A)
- ------------------------------------------------------------------------------------------------------------------------------
Municipal Investments 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York
Albany, New York, Industrial Development Authority, Davies Office Refurbishing,
Series 1997,Weekly Demand Note, AMT, 3.55%, 2/1/17* ........................... 2,300,000 A1 2,300,000
Buffalo, NY, Revenue Anticipation Notes, 4.4%, 8/5/98 ........................... 1,000,000 SP1+ 1,001,953
Erie County, NY, Water Authority, Waterworks Revenue, Weekly Demand Bonds,
3.45%, 12/1/16 (c)* ........................................................... 2,000,000 A1+ 2,000,000
Freeport Union Free School District, NY, Tax Anticipation Note, 4.25%, 6/29/98 .. 1,500,000 SKI 1,500,880
Hempstead, NY, Industrial Development Agency, Trigen-Nassua Energy Corporation,
Weekly Demand Note, AMT, 3.55%, 9/15/15* ...................................... 1,000,000 A1+ 1,000,000
Monroe County, NY, General Obligation, Tax Exempt Commercial Paper, Series 1997,
3.25%, 5/11/98 ................................................................ 1,000,000 A1+ 1,000,000
Monroe County, NY, Industrial Development Agency, Office Building Associates,
Series 1992, Weekly Demand Note, 3.45%, 10/1/00* .............................. 1,499,000 P1 1,499,000
Municipal Assistance Corp. for New York City:
Series 1996G, 4.5%, 7/1/98 .................................................... 1,500,000 AA 1,502,357
Series K1, Weekly Demand Note, 3.5%, 7/1/08* .................................. 2,000,000 A1+ 2,000,000
Series K2, Adjustable Weekly, 3.5%, 7/1/08* ................................... 3,600,000 A1+ 3,600,000
Tax Exempt Commercial Paper, 3.45%, 5/5/98 .................................... 1,500,000 A1+ 1,500,000
Tax Exempt Commercial Paper, 3.45%, 5/18/98 ................................... 2,000,000 A1+ 2,000,000
Tax Exempt Commercial Paper, 3.3%, 6/15/98 .................................... 2,000,000 A1+ 2,000,000
Nassua County, NY, Tax Anticipation Note, 4.25%, 12/22/98 ....................... 1,000,000 SP1 1,002,934
New York City Health and Hospital Corporation Revenue, Series 1997 A, Weekly
Demand Note, 3.5%, 2/15/26* ................................................... 1,000,000 A1+ 1,000,000
New York City, Housing Development Corporation, Revenue Bonds, Weekly Demand
Note, 3.5%, 5/1/30* ........................................................... 1,000,000 A1 1,000,000
New York City, Industrial Development Agency, Korean Airlines, Series 1997 A,
Weekly Demand Note, 3.6%, 11/1/24* ............................................ 2,000,000 MIG1 2,000,000
New York City Municipal Water Finance Authority, Daily Demand Note:
3.85%, 6/15/22 (c)* ........................................................... 200,000 MIG1 200,000
3.85%, 6/15/24 (c)* ........................................................... 300,000 MIG1 300,000
New York City, NY, General Obligation:
Series 1993B, Daily Demand Note, 3.8%, 10/1/20 (c)* ........................... 200,000 A1+ 200,000
Series 1993B, Daily Demand Note, 3.8%, 10/1/22 (c)* ........................... 300,000 A1+ 300,000
Series 1994A-4, Daily Demand Note, 3.85%, 8/1/22* ............................. 200,000 MIG1 200,000
Series 1994B-2, Daily Demand Note, 3.85%, 8/15/03 (c)* ........................ 1,500,000 MIG1 1,500,000
New York City, NY, Revenue Anticipation Notes, Series 1997 A, 4.5%, 6/30/98 ..... 2,000,000 SP1+ 2,003,077
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder New York Tax Free Money Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Value ($)
Amount ($) (Unaudited) (Note A)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York City, NY, Tax Exempt Commercial Paper, General Obligation:
3.45%, 4/20/98 (c) ............................................................ 1,000,000 A1+ 1,000,000
3.45%, 5/11/98 ................................................................ 2,400,000 A1+ 2,400,000
New York Metropolitan Transportation Authority, Daily Demand Note, 3.85%,
1/1/18 (c)* ................................................................... 3,000,000 MIG1 3,000,000
New York State Energy Research and Development Authority:
Gas Facilities Revenue Bonds, Weekly Demand Note, 3.6%, 12/1/20 (c)* .......... 1,000,000 A1+ 1,000,000
Long Island Lighting Co., Weekly Demand Note, 3.55%, 12/1/27* ................. 4,000,000 MIG1 4,000,000
New York State Electric & Gas Co.:
1994 Series C, Daily Demand Note, 3.65%, 6/1/29* ............................. 1,565,000 A1+ 1,565,000
1994 Series D, Daily Demand Note, 3.65%, 10/1/29* ............................ 1,400,000 A1+ 1,400,000
Pollution Control Revenue, Niagara Mohawk Co.:
1985 Series A, Daily Demand Note, 3.95%, 7/1/15* ............................. 200,000 A1+ 200,000
1985 Series B, Daily Demand Note, 3.75%, 12/1/25* ............................ 200,000 P1 200,000
1985 Series C, Daily Demand Note, 3.75%, 12/1/25* ............................ 200,000 P1 200,000
1987 Series B, Daily Demand Note, AMT, 4%, 7/1/27* ........................... 300,000 A1+ 300,000
Pollution Control Revenue, Orange & Rockland Utilities, Weekly Demand Notes,
3.45%, 10/1/14 (c)* .......................................................... 2,100,000 MIG1 2,100,000
New York State Housing Finance Agency:
Hospital for Special Surgery, Weekly Demand Bonds, 3.3%, 11/1/10* ............. 2,110,000 MIG1 2,110,000
Normandie Court 1 Housing Revenue, Weekly Demand Bond, 3.5%, 5/15/15* ......... 3,900,000 MIG1 3,900,000
Tribeca Landing Housing, Revenue Bonds, Weekly Demand Note, AMT,
Series 1997A, 3.5%, 11/1/30* ................................................. 2,000,000 A1 2,000,000
New York State Job Development Authority:
Special Purpose, Series B1-21, Daily Demand Note, AMT, 3.8%, 3/1/05* .......... 830,000 MIG1 830,000
Variable Rate Demand Bond, Series 1984F, 4.1%, 3/1/99* ........................ 495,000 MIG1 495,000
New York State Local Government Assistance Corporation, Series 1993 A,
Weekly Demand Note, 3.45%, 4/1/22* ............................................ 1,000,000 MIG1 1,000,000
New York State Medical Care Facilities Finance Agency, Children's Hospital of
Buffalo, Weekly Demand Bond, 3.5%, 11/1/05* ................................... 2,500,000 MIG1 2,500,000
New York State, Tax Exempt Commercial Paper:
Bond Anticipation Notes, 3.65%, 6/18/98 ....................................... 2,000,000 A1 2,000,000
Dormitory Authority, 3.45%, 5/7/98 ............................................ 200,000 A1 200,000
Environmental Facilities Corp., 3.45%, 6/22/98 ................................ 2,000,000 A1+ 2,000,000
Environmental Quality, 3.6%, 4/9/98 ........................................... 1,500,000 A1+ 1,500,000
Environmental Quality Control, 3.4%, 6/8/98 ................................... 1,000,000 A1+ 1,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder New York Tax Free Money Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Value ($)
Amount ($) (Unaudited) (Note A)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Environmental Quality Control, 3.5%, 6/3/98 ................................... 3,000,000 A1+ 3,000,000
Power Authority of New York, 3.25%, 5/6/98 .................................... 1,500,000 A1 1,500,000
Power Authority of New York, 3.5%, 5/11/98 .................................... 2,000,000 A1 2,000,000
Onondaga County, NY, Industrial Development Agency, Southern Container Corp.,
Weekly Demand Note, AMT, 3.55%, 8/1/07* ....................................... 1,500,000 SKI 1,500,000
Port Authority of New York and New Jersey, Tax Exempt Commercial Paper, AMT:
3.15%, 4/3/98 ................................................................. 1,370,000 A1+ 1,370,000
3.5%, 6/25/98 ................................................................. 960,000 A1+ 960,000
Schenectady, NY, Industrial Development Revenue, 3.5%, 6/1/09* .................. 2,070,000 P1 2,070,000
Suffolk County, NY, Tax Anticipation Notes, 4.25%, 8/13/98 ...................... 4,000,000 SP1+ 4,009,013
Triborough Bridge and Tunnel Authority, NY, Special Obligation, Weekly Demand
Bonds, 3.45%, 1/1/24 (c)* ..................................................... 4,600,000 MIG1 4,600,000
Ulster County, NY, Bond Anticipation Notes, 4.5%, 5/15/98 ....................... 1,908,000 SKI 1,908,883
West Babylon Union Free School District, NY, Tax Anticipation Notes,
4.25%, 6/25/98 ................................................................ 1,500,000 SKI 1,501,006
Puerto Rico
Commonwealth of Puerto Rico Tax and Revenue Anticipation Notes, Series 1997 A,
4.5%, 7/30/98 ................................................................. 4,000,000 SP1+ 4,011,355
- ------------------------------------------------------------------------------------------------------------------------------
Total Municipal Investments (Cost $97,940,458) 97,940,458
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $97,940,458) (a) 97,940,458
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $97,940,458.
(b) All of the securities held have been determined to be of appropriate
credit quality as required by the Fund's investment objectives. Credit
ratings shown are assigned by either Standard & Poor's Ratings Group,
Moody's Investors Service, Inc. or Fitch Investors Service, Inc.
Securities rated by Scudder Kemper Investments, Inc. (SKI) have been
determined by the Adviser to be of comparable quality to rated eligible
securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, FSA or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand
notes are securities whose yields are periodically reset at levels that
are generally comparable to tax-exempt commercial paper. These securities
are payable on demand within seven calendar days and normally incorporate
an irrevocable letter of credit from a major bank. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.
AMT: Alternative minimum tax
The accompanying notes are an integral part of the financial statements.
15 - Scudder New York Tax Free Money Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of March 31, 1998
<TABLE>
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost $97,940,458) .................. $ 97,940,458
Cash ................................................................. 253,584
Interest receivable .................................................. 646,851
Receivable for Fund shares sold ...................................... 160,939
Other assets ......................................................... 1,368
----------------
Total assets ......................................................... 99,003,200
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed ..................................... 6,395,683
Dividends payable .................................................... 22,626
Accrued management fee ............................................... 46,042
Other payables and accrued expenses .................................. 24,809
----------------
Total liabilities .................................................... 6,489,160
-------------------------------------------------------------------------------------------
Net assets, at value $ 92,514,040
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Accumulated net realized gain (loss) ................................. (52,500)
Paid-in capital ...................................................... 92,566,540
-------------------------------------------------------------------------------------------
Net assets, at value $ 92,514,040
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($92,514,040 / 92,516,860 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ........................................................ $1.00
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder New York Tax Free Money Fund
<PAGE>
Statement of Operations
year ended March 31, 1998
<TABLE>
<CAPTION>
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Income:
Interest ............................................................. $ 2,439,038
----------------
Expenses:
Management fee ....................................................... 337,692
Services to shareholders ............................................. 78,469
Custodian and accounting fees ........................................ 40,959
Trustees' fees and expenses .......................................... 16,816
Auditing ............................................................. 24,276
Reports to shareholders .............................................. 10,571
Legal ................................................................ 6,329
Registration fees .................................................... 5,905
Other ................................................................ 8,266
----------------
Total expenses before reductions ..................................... 529,283
Expense reductions ................................................... (122,374)
----------------
Expenses, net ........................................................ 406,909
-------------------------------------------------------------------------------------------
Net investment income 2,032,129
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 2,032,129
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder New York Tax Free Money Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended March 31,
Increase (Decrease) in Net Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ....................................... $ 2,032,129 $ 1,613,526
---------------- ----------------
Distributions to shareholders from net investment
income .................................................... (2,032,129) (1,613,526)
---------------- ----------------
Fund share transactions at net asset value of $1.00
per share:
Shares sold ................................................. 133,210,045 52,781,839
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................. 1,770,083 1,405,013
Shares redeemed ............................................. (102,004,740) (53,062,079)
---------------- ----------------
Net increase (decrease) in net assets from Fund share
transactions .............................................. 32,975,388 1,124,773
---------------- ----------------
Increase (decrease) in net assets ........................... 32,975,388 1,124,773
Net assets at beginning of period ........................... 59,538,652 58,413,879
---------------- ----------------
Net assets at end of period ................................. $92,514,040 $59,538,652
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder New York Tax Free Money 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>
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning -----------------------------------------------------------------------------------
of period ..................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
-----------------------------------------------------------------------------------
Net investment income ............ .030 .028 .031 .025 .017 .022 .035 .046 .052 .047
Distributions from net
investment income ............. (.030) (.028) (.031) (.025) (.017) (.022) (.035) (.046) (.052) (.047)
Net asset value, end of -----------------------------------------------------------------------------------
period ........................ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
-----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ............. 3.06 2.85 3.18 2.57 1.75 2.22 3.55 4.69 5.33 4.78
Ratios and Supplemental Data
Net assets, end of period
($ millions) .................. 93 60 58 55 47 40 36 40 36 41
Ratio of operating expenses, net
to average daily net
assets (%) .................... .60 .60 .60 .60 .60 .60 .60 .60 .60 .53
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) .......... .78 .85 .86 .89 .97 .97 1.01 1.08 1.08 .98
Ratio of net investment income to
average daily net assets (%) .. 3.00 2.81 3.13 2.56 1.73 2.19 3.46 4.57 5.21 4.76
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
19 - Scudder New York Tax Free Money Fund
<PAGE>
Investment Portfolio as of March 31, 1998
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Municipal Investments 2.2%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York
New York City Municipal Water Finance Authority, Variable Rate Demand Note,
3.85%, 6/15/24* (c) .......................................................... 300,000 MIG1 300,000
New York City, NY, General Obligation:
Daily Demand Note, 3.85%, 8/1/23* ............................................ 1,100,000 MIG1 1,100,000
Series A-5, Daily Demand Note, 3.85%, 8/1/16* ................................ 700,000 A1+ 700,000
Series A-4, Daily Demand Note, 3.85%, 8/1/22* ................................ 500,000 MIG1 500,000
Series B, Daily Demand Note, 3.8%, 10/1/20 (c)* .............................. 100,000 A1+ 100,000
Series B, Floating Rate, 3.85%, 8/15/03 (c)* ................................. 100,000 MIG1 100,000
Series 1995B, 3.7%, 8/15/05 (c)* ............................................. 400,000 MIG1 400,000
New York State Energy Research & Development Daily Demand Note,
3.65%, 6/1/29* ............................................................... 1,000,000 A1+ 1,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Investments (Cost $4,200,000) 4,200,000
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Municipal Investments 97.8%
- ------------------------------------------------------------------------------------------------------------------------------
New York
34th Street Partnership Inc., NY, Capital Improvement, 5.5%, 1/1/14 ............ 1,900,000 A 1,930,856
Albany County Airport Revenue:
Series 1997, 5.375%, 12/15/17 (c) ............................................ 1,000,000 AAA 1,007,254
Series 1997, 5.5%, 12/15/19 (c) .............................................. 1,000,000 AAA 1,024,210
Albany, NY, General Obligation, 7%, 1/15/08 (c) ................................ 485,000 AAA 518,999
Canandaigua, NY, School District, General Obligation:
6.4%, 6/1/08 (c) ............................................................. 500,000 AAA 575,905
6.5%, 6/1/11 (c) ............................................................. 550,000 AAA 645,739
Chautauqua County, NY:
7.3%, 4/1/08 (c) ............................................................. 575,000 AAA 701,431
7.3%, 4/1/09 (c) ............................................................. 575,000 AAA 706,169
Series 1990, 7.3%, 4/1/07 (c) ................................................ 465,000 AAA 560,641
Series 1990, 6.4%, 9/15/08 (c) ............................................... 520,000 AAA 600,730
Dutchess County, NY, Resource Recovery, General Obligation, 7.5%, 1/1/09 (c) ... 1,000,000 AAA 1,073,450
Erie County, New York, Public Improvement Unlimited, Series 1992,
6.125%, 1/15/12 (c) .......................................................... 590,000 AAA 669,414
Glen Cove Housing Authority, Series 1996, AMT, 8.25%, 10/1/26 .................. 1,500,000 NR 1,672,965
Inverse Variable Rate Certificate Trust, Metropolitan Transit Authority,
Series 1993 B, 6.52%, 6/30/02 (c)** .......................................... 8,000,000 NR 8,760,000
Islip New York Community Development Agency, 7.5%, 3/1/26 ...................... 4,000,000 NR 4,435,600
</TABLE>
The accompanying notes are an integral part of the financial statements.
20 - Scudder New York Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jamestown, New York, General Obligation:
Series 1991 A, 7%, 3/15/07 (c) ............................................... 725,000 AAA 857,958
Series 1991 A, 7%, 3/15/08 (c) ............................................... 600,000 AAA 717,156
Monroe County, NY, General Obligation:
Series 1996, 6%, 6/1/06 ...................................................... 500,000 AA 553,990
Series 1996, 6%, 3/1/13 ...................................................... 1,050,000 AA 1,179,486
Series 1996, 6%, 3/1/14 ...................................................... 1,040,000 AA 1,167,837
Series 1996, 6%, 3/1/17 ...................................................... 1,410,000 AA 1,592,285
Municipal Assistance Corp. for New York City Revenue, Series I, 6.25%, 7/1/07 .. 1,575,000 AA 1,782,821
Nassau County, NY, General Obligation:
Series A, 6%, 7/1/11 (c) ..................................................... 1,780,000 AAA 2,000,524
Series 1993G, 5.4%, 1/15/10 (c) .............................................. 1,655,000 AAA 1,761,913
New York State Dormitory Authority Revenue, 6.5%, 2/15/11 ...................... 1,000,000 AAA 1,150,320
New York City Housing Authority, Multi-Family Revenue:
Series A, 5.35%, 7/1/07 ...................................................... 500,000 A 514,400
Series A, 5.65%, 7/1/10 ...................................................... 1,000,000 A 1,036,150
New York City Municipal Water Finance Authority, Water & Sewer System:
Series A, 5.125%, 6/15/21 .................................................... 1,000,000 A 976,710
1993 Series A, 5.875%, 6/15/13 (c) ........................................... 2,750,000 AAA 3,053,628
New York City Transitional Finance Authority, Revenue Bonds, Series A,
5%, 8/15/27 .................................................................. 2,000,000 AA 1,928,320
New York City, Industrial Development Agency:
Brooklyn Navy Yard, Revenue Bonds, 6.2%, 10/1/22 ............................. 1,250,000 BBB 1,399,638
Civil Facility Revenue, YMCA Greater New York Project:
Series 1997, 6%, 8/1/06 ..................................................... 580,000 BBB 621,540
Series 1997, 5.85%, 8/1/08 .................................................. 600,000 BBB 638,226
Series 1997, 5.8%, 8/1/16 ................................................... 1,000,000 BBB 1,043,480
Japan Air Lines, Series 1996, 6%, AMT, 11/1/15 (c) ........................... 1,000,000 AAA 1,068,740
New York City, NY, General Obligation:
6.25%, 4/15/07 (c) ........................................................... 2,000,000 AAA 2,249,620
6%, 4/15/09 .................................................................. 2,000,000 AAA 2,167,400
7.25%, 8/15/07 ............................................................... 2,250,000 A 2,662,920
NC Series 1996 A, 6.25%, 8/1/09 .............................................. 5,175,000 BBB 5,737,264
Series 1996 A, 7%, 8/1/05 .................................................... 5,000,000 BBB 5,709,300
Series B, 7.5%, 2/1/05 ....................................................... 2,500,000 A 2,786,666
</TABLE>
The accompanying notes are an integral part of the financial statements.
21 - Scudder New York Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1996 A, 7%, 8/1/06 .................................................... 5,000,000 BBB 5,770,050
Series B, 8.25%, 6/1/06 ...................................................... 2,750,000 A 3,391,410
Series B1, Prerefunded 7.3%, 8/15/10 ......................................... 45,000 AAA 52,933
Series E, 8%, 8/1/05 (c) ..................................................... 330,000 AAA 402,818
Series L, 5.625%, 8/1/07 ..................................................... 3,250,000 A 3,459,625
New York City, NY, Industrial Development Agency:
Civil Facilities, USTA National Tennis Center:
6.1%, 11/15/04 (c) .......................................................... 1,215,000 AAA 1,339,805
6.25%, 11/15/06 (c) ......................................................... 3,000,000 AAA 3,358,800
Visy Paper Inc. Project, Series 1995, 7.95%, 1/1/28 .......................... 2,250,000 NR 2,622,533
New York State Dormitory Authority Revenue:
6.5%, 5/15/06 ................................................................ 2,000,000 BBB 2,256,440
5.75%, 7/1/09 (c) ............................................................ 1,000,000 AAA 1,097,270
6.5%, 2/15/10 ................................................................ 1,500,000 A 1,719,840
6%, 2/15/12 .................................................................. 2,500,000 A 2,747,800
College and University Pooled Capital Program, 7.8%,12/1/05 (c) .............. 3,220,000 AAA 3,353,855
Columbia University, 5%, 7/1/15 .............................................. 2,500,000 AAA 2,471,350
Columbia University, NY, Revenue, 6%, 7/1/10 ................................. 1,000,000 A 1,083,530
City University Series 1995A, 5.625%, 7/1/16 ................................. 2,750,000 BBB 2,906,475
City University System Series 1995 A, 5.625%, 7/1/16 (c) ..................... 1,100,000 AAA 1,187,076
Mental Health Services Facilities Series 1997 B, 5.625%, 2/15/21 (c) ......... 500,000 AAA 519,130
Montefiore Medical Center, Series 1996:
6%, 8/1/08 (c) .............................................................. 2,000,000 AAA 2,231,580
6%, 2/1/09 (c) .............................................................. 2,000,000 AAA 2,231,220
Mt. Sinai School of Medicine, Series B, 5.7%, 7/1/11 (c) ..................... 1,825,000 AAA 2,001,441
Nyack Hospital:
NC, Series 1996, 6%, 7/1/06 ................................................. 1,000,000 A 1,078,050
Series 1996, 6.25%, 7/1/13 .................................................. 500,000 A 536,735
Pace University:
6.5%, 7/1/08 (c) ............................................................ 1,360,000 AAA 1,576,417
6.5%, 7/1/09 (c) ............................................................ 555,000 AAA 646,225
Saint Josephs Hospital, Series 1997, 5.25%, 7/1/18 (c) ....................... 1,000,000 AAA 999,910
State University Educational Facility, Series A, 5.875%, 5/15/11 ............. 2,250,000 BBB 2,460,353
State University, Series 1993A, 5.875%, 5/15/11 (c) .......................... 380,000 AAA 422,153
Upstate Community College, 5.8%, 7/1/06 ...................................... 1,075,000 BBB 1,152,733
</TABLE>
The accompanying notes are an integral part of the financial statements.
22 - Scudder New York Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York State Environmental Facilities Corporation:
NC Series 1994, 5.75%, 6/15/10 ............................................... 1,750,000 AA 1,917,353
State Water Revolving Fund, Series D, 6.9%, 5/15/15 .......................... 1,630,000 AAA 1,870,996
Special Obligation Revenue, Riverbank State Park:
Series 1996, 6.25%, 4/1/07 (c) .............................................. 2,055,000 AAA 2,320,362
Series 1996, 6.25%, 4/1/08 (c) .............................................. 2,185,000 AAA 2,482,663
New York State Health Facilities Authority, 6.375%, 11/1/04 .................... 2,000,000 BBB 2,200,780
New York State Mortgage Agency Revenue, AMT, Series 1994, 6.8%, 10/1/05 ........ 1,000,000 AA 1,067,510
New York State Throughway Authority General Revenue, Capital Appreciation
Special Obligation, Series 1991 A, Zero Coupon, 1/1/06 ....................... 2,905,000 NR 2,002,271
New York State Urban Development Corp. Revenue:
5.7%, 4/1/09 (c) ............................................................. 4,250,000 AAA 4,627,060
5.5%, 1/1/14 (c) ............................................................. 2,000,000 AAA 2,128,220
Correctional Capital Facilities, NC Series 95, 5.375%, 1/1/15 (c) ............ 2,000,000 AAA 2,040,140
Series 1996 A, 6.25%, 4/1/05 (c) ............................................. 1,375,000 AAA 1,525,961
New York, Brooksdale Hospital Medical Center, Revenue Bonds, 5.2%, 2/15/16 ..... 2,000,000 A 1,966,520
New York, Revenue Bonds:
Crouse Health Hospital, 5.25%, 1/1/16 ........................................ 1,000,000 BBB 982,360
Crouse Health Hospital, 5.375%, 1/1/23 ....................................... 1,000,000 BBB 989,110
Local Government Assistance Corporation, 5.25%, 4/1/16 (c) ................... 1,185,000 AAA 1,231,345
Presbyterian Hospital, 5.5%, 2/1/10 (c) ...................................... 2,000,000 AAA 2,127,000
St. Clare's Hospital of New York City, 5.125%, 2/15/12 ....................... 500,000 AAA 493,380
Urban Development Corporation, Correctional Facilities, 5%, 1/1/28 ........... 1,000,000 AAA 949,520
Vassar Brothers Hospital, 5.5%, 7/1/08 (c) ................................... 1,000,000 AAA 1,068,600
Niagara County, NY, General Obligation, 7.1%, 2/15/11 (c) ...................... 500,000 AAA 613,240
Niagara Falls, NY, Water Treatment Plant, Subject to AMT:
7%, 11/1/03 (c) .............................................................. 2,260,000 AAA 2,558,727
8.5%, 11/1/05 (c) ............................................................ 2,140,000 AAA 2,683,132
8.5%, 11/1/06 (c) ............................................................ 1,240,000 AAA 1,582,724
Oswego County, NY, General Obligation Series 1991, 6.7%, 6/15/12 ............... 1,100,000 A 1,311,090
Port Authority of New York & New Jersey:
NC Series 1996, 7%, 10/1/07 .................................................. 3,500,000 NR 3,966,200
Special Obligation Revenue, JFK International Air Terminal:
6.25%, 12/1/10 (c) .......................................................... 2,500,000 AAA 2,838,325
6.25%, 12/1/11 (c) .......................................................... 2,500,000 AAA 2,846,550
</TABLE>
The accompanying notes are an integral part of the financial statements.
23 - Scudder New York Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shenendehowa Central School District, NY, Clifton Park:
6.85%, 6/15/08 (c) ........................................................... 350,000 AAA 417,193
6.85%, 6/15/09 (c) ........................................................... 350,000 AAA 418,527
Suffolk County, NY, Industrial Development Agency, Southwest Sewer System,
6%, 2/1/07 (c) ............................................................... 500,000 AAA 553,365
Troy, New York, Municipal Assistance Corporation:
Series 1996 A, 5%, 1/15/16 (c) ............................................... 500,000 AAA 492,435
Series 1996 A, 5%, 1/15/22 (c) ............................................... 2,130,000 AAA 2,069,231
Zero Coupon Series, 1996 A, 1/15/07 (c) ...................................... 650,000 AAA 441,110
Zero Coupon Series, 1996 A, 7/15/07 (c) ...................................... 650,000 AAA 431,490
Zero Coupon Series, 1996 A, 1/15/08 (c) ...................................... 750,000 AAA 484,223
Zero Coupon Series, 1996 A, 1/15/09 (c) ...................................... 650,000 AAA 398,359
Zero Coupon Series, 1996 A, 7/15/09 (c) ...................................... 350,000 AAA 209,689
Zero Coupon Series, 1996 A, 7/15/10 (c) ...................................... 600,000 AAA 339,420
Valley Central School District, Montgomery, NY, 7.15%, 6/15/08 (c) ............. 625,000 AAA 757,000
Puerto Rico
Commonwealth of Puerto Rico, General Obligation, 4.5%, 7/1/23 .................. 1,000,000 A 899,540
Virgin Islands
Virgin Islands, Special Tax Bonds, Hugo Bonds, 7.75%, 10/1/06 .................. 1,310,000 NR 1,457,139
Virgin Islands, General Obligation, Public Finance Authority, Mortgage
Fund Loan Notes, Series 1992 A, 7%, 10/1/02 .................................. 500,000 BBB 549,770
- ------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $175,131,640) 188,628,842
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $179,331,640) (a) 192,828,842
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $179,335,012. At March 31,
1998, net unrealized appreciation for all securities based on tax cost was
$13,493,830. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $13,558,942 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$65,112.
(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 by the Investment Adviser to be of
comparable quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, FSA, FHA or
MBIA/BIG.
AMT: Alternative minimum tax
The accompanying notes are an integral part of the financial statements.
24 - Scudder New York 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.
** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of March 31, 1998.
The accompanying notes are an integral part of the financial statements.
25 - Scudder New York Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of March 31, 1998
<TABLE>
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $179,331,640) .............. $ 192,828,842
Cash ............................................................... 393,425
Interest receivable ................................................ 2,972,427
Receivable for Fund shares sold .................................... 267,814
Other assets ....................................................... 5,475
----------------
Total assets ....................................................... 196,467,983
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Dividends payable .................................................. 263,125
Payable for Fund shares redeemed ................................... 328,312
Accrued management fee ............................................. 108,054
Other payables and accrued expenses ................................ 37,096
----------------
Total liabilities .................................................. 736,587
-------------------------------------------------------------------------------------------
Net assets, at market value $ 195,731,396
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Unrealized appreciation (depreciation) on investments .............. 13,497,202
Accumulated net realized gain (loss) ............................... (6,609,127)
Paid-in capital .................................................... 188,843,321
-------------------------------------------------------------------------------------------
Net assets, at market value $ 195,731,396
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($195,731,396 / 17,368,966 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ...................................................... $11.27
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26 - Scudder New York Tax Free Fund
<PAGE>
Statement of Operations
year ended March 31, 1998
<TABLE>
<CAPTION>
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Interest ........................................................... $ 10,294,704
----------------
Expenses:
Management fee ..................................................... 1,184,089
Services to shareholders ........................................... 166,409
Custodian and accounting fees ...................................... 96,374
Trustees' fees and expenses ........................................ 18,117
Auditing ........................................................... 30,585
Reports to shareholders ............................................ 33,696
Legal .............................................................. 13,244
Registration fees .................................................. 6,655
Other .............................................................. 9,876
----------------
1,559,045
-------------------------------------------------------------------------------------------
Net investment income 8,735,659
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ........................................................ 680,031
Futures ............................................................ (10,387)
Options ............................................................ (16,537)
----------------
653,107
Net unrealized appreciation (depreciation) during the period on
investments ...................................................... 10,291,177
-------------------------------------------------------------------------------------------
Net gain (loss) on investments 10,944,284
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 19,679,943
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27 - Scudder New York Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended March 31,
Increase (Decrease) in Net Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ...................................... $ 8,735,659 $ 9,246,365
Net realized gain (loss) from investment transactions ...... 653,107 1,006,614
Net unrealized appreciation (depreciation) on
investment transactions .................................. 10,291,177 (1,348,644)
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ............................................... 19,679,943 8,904,335
---------------- ----------------
Distributions to shareholders from net investment
income ................................................... (8,735,659) (9,246,365)
---------------- ----------------
Distributions to shareholders from net realized gains ...... (254,878) (174,661)
---------------- ----------------
Fund share transactions:
Proceeds from shares sold .................................. 47,326,586 29,307,330
Net asset value of shares issued to shareholders in
reinvestment of distributions ........................... 5,891,191 6,202,562
Cost of shares redeemed .................................... (48,822,944) (45,999,331)
---------------- ----------------
Net increase (decrease) in net assets from Fund share
transactions ............................................. 4,394,833 (10,489,439)
---------------- ----------------
Increase (decrease) in net assets .......................... 15,084,239 (11,006,130)
Net assets at beginning of period .......................... 180,647,157 191,653,287
---------------- ----------------
Net assets at end of period ................................ $ 195,731,396 $ 180,647,157
---------------- ----------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................. 16,986,861 17,964,551
---------------- ----------------
Shares sold ................................................ 4,258,999 2,742,130
Shares issued to shareholders in reinvestment of
distributions ............................................ 530,284 580,341
Shares redeemed ............................................ (4,407,178) (4,300,161)
---------------- ----------------
Net increase (decrease) in Fund shares ..................... 382,105 (977,690)
---------------- ----------------
Shares outstanding at end of period ........................ 17,368,966 16,986,861
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
28 - Scudder New York 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>
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of ----------------------------------------------------------------------------------------
period ......................... $10.63 $10.67 $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53 $10.39
Income from investment operations: ----------------------------------------------------------------------------------------
Net investment income ............. .51 .53 .53 .52 .54 .61 .65 .67 .69 .72
Net realized and unrealized gain
(loss) on investment
transactions ................... .66 (.03) .29 .11 (.35) 1.03 .50 .13 .16 .14
Total from investment ----------------------------------------------------------------------------------------
operations ..................... 1.17 .50 .82 .63 .19 1.64 1.15 .80 .85 .86
Less distributions: ----------------------------------------------------------------------------------------
From net investment income ........ (.51) (.53) (.53) (.52) (.54) (.61) (.65) (.67) (.69) (.72)
From paid-in capital .............. -- -- -- -- -- -- -- -- (.08) --
From net realized gains ........... (.02) (.01) -- -- (.67) (.61) (.25) -- (.01) --
In excess of net realized gains ... -- -- -- (.05) (.06) -- -- -- -- --
----------------------------------------------------------------------------------------
Total distributions ............... (.53) (.54) (.53) (.57) (1.27) (1.22) (.90) (.67) (.78) (.72)
----------------------------------------------------------------------------------------
Net asset value, end of ----------------------------------------------------------------------------------------
period ......................... $11.27 $10.63 $10.67 $10.38 $10.32 $11.40 $10.98 $10.73 $10.60 $10.53
----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) .................. 11.20 4.76 7.95 6.39 1.31 15.60 11.11 7.79 8.18 8.55
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 196 181 192 194 207 201 159 142 132 123
Ratio of operating expenses to
average daily net assets (%) ... .83 .83 .82 .82 .82 .82 .87 .91 .89 .89
Ratio of net investment
income to average daily
net assets (%) ................. 4.65 4.95 4.91 5.13 4.80 5.36 5.96 6.29 6.39 6.89
Portfolio turnover rate (%) ....... 28.8 71.0 80.5 83.8 158.0 201.4 168.2 224.9 114.3 132.1
</TABLE>
29 - Scudder New York Tax Free Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder New York Tax Free Money Fund ("Tax Free Money Fund"), a nondiversified
fund, and New York Tax Free Fund ("Tax Free Fund"), a diversified fund, are each
a series of Scudder State Tax Free Trust (the "Trust") which is organized as a
Massachusetts business trust and registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company.
The Funds' financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Funds in the
preparation of their financial statements.
Security Valuation. Tax Free Money Fund values all portfolio securities
utilizing the amortized cost method permitted in accordance with Rule 2a-7 under
the 1940 Act and pursuant to which Tax Free Money Fund must adhere to certain
conditions. Under this method, which does not take into account unrealized gains
and losses on securities, an instrument is initially valued at its cost and
thereafter assumes a constant accretion/amortization to maturity of any
discount/premium.
Tax Free Fund's portfolio debt securities with remaining maturities greater than
sixty days are valued by pricing agents approved by the Officers of the Fund,
which quotations reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Money market investments purchased with an original maturity of sixty days or
less are valued at amortized cost.
When-issued and Forward Delivery Securities. The Tax Free Fund may purchase
securities on a when-issued or forward delivery basis, for payment and delivery
at a later date. The price of such securities, which may be expressed in yield
terms, is fixed at the time the commitment to purchase is made, but delivery and
payment take place at a later time. At the time the 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. During the period between purchase and settlement, no payment is
made by the Tax Free Fund to the issuer and no interest accrues to the Tax Free
Fund. At the time of settlement, the market value of the security may be more or
less than the purchase price. The Fund will establish a segregated account in
which it will maintain cash and liquid debt securities equal in value to
commitments for when-issued or forward delivery securities.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the year ended
March 31, 1998, the Tax Free Fund purchased interest rate futures to manage the
duration of the portfolio and sold interest rate futures to hedge against
declines in the value of portfolio securities.
Upon entering into a futures contract, the Tax Free Fund is required to deposit
with a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Tax Free Fund each
day, dependent on the daily fluctuations in the value of the underlying
security, and are recorded for financial reporting purposes as unrealized gains
or losses by the Tax Free Fund. When entering into a closing transaction, the
Tax Free Fund will realize a gain or loss equal to the difference between the
value of the futures contract to sell and the futures contract to buy. Futures
contracts are valued at the most recent settlement price.
30 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Tax Free Fund's ability to
close out a futures contract prior to the settlement date and that a change in
the value of a futures contract may not correlate exactly with changes in the
value of the securities or currencies hedged. When utilizing futures contracts
to hedge, the Tax Free Fund gives up the opportunity to profit from favorable
price movements in the hedged positions during the term of the contract.
Options. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Tax Free Fund if the option is exercised. During
the year ended March 31, 1998, the Tax Free Fund wrote call options on interest
rate futures as a hedge against potential adverse price movements in the value
of portfolio assets and purchased call options on interest rate futures to
manage the duration of the portfolio.
If the Tax Free Fund writes an option and the option expires unexercised, the
Tax Free Fund will realize income, in the form of a capital gain, to the extent
of the amount received for the option (the "premium"). If the Tax Free Fund
elects to close out the option it would recognize a gain or loss based on the
difference between the cost of closing the option and the initial premium
received. If the Tax Free Fund purchased an option and allows the option to
expire it would realize a loss to the extent of the premium paid. If the Tax
Free Fund elects to close out the option it would recognize a gain or loss equal
to the difference between the cost of acquiring the option and the amount
realized upon the sale of the option.
The gain or loss recognized by the Tax Free Fund upon the exercise of a written
call or purchased put option is adjusted for the amount of option premium. If a
written put or purchased call option is exercised the Tax Free Fund's cost basis
of the acquired security or currency would be the exercise price adjusted for
the amount of the option premium.
The liability representing the Tax Free Fund's obligation under an exchange
traded written option or investment in a purchased option is valued at the last
sale price or, in the absence of a sale, the mean between the closing bid and
asked price or at the most recent asked price (bid for purchased options) if no
bid and asked price are available. Over-the-counter written or purchased options
are valued using dealer supplied quotations.
When the Tax Free Fund writes a covered call option, the Tax Free Fund foregoes,
in exchange for the premium, the opportunity to profit during the option period
from an increase in the market value of the underlying security or currency
above the exercise price. When the Tax Free Fund writes a put option it accepts
the risk of a decline in the market value of the underlying security or currency
below the exercise price. Over-the-counter options have the risk of the
potential inability of counterparties to meet the terms of their contracts. The
Tax Free Fund's maximum exposure to purchased options is limited to the premium
initially paid. In addition, certain risks may arise upon entering into option
contracts including the risk that an illiquid secondary market will limit the
Tax Free Fund's ability to close out an option contract prior to the expiration
date and, that a change in the value of the option contract may not correlate
exactly with changes in the value of the securities or currencies hedged.
Amortization and Accretion. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
Federal Income Taxes. The Funds' policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, which are applicable to regulated
investment companies and to distribute all of their taxable and tax-exempt
income
31 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
to their shareholders. Accordingly, the Funds paid no federal income taxes and
no provisions for federal income taxes were required.
As of March 31, 1998, the Tax Free Money Fund had a net tax basis capital loss
carryforward of approximately $52,500, which may be applied against any realized
net taxable capital gains of each succeeding year until full utilized or until
March 31, 2000 ($800), March 31, 2001 ($1,700), March 31, 2002 ($3,500), March
31, 2003 ($43,200) and March 31, 2004 ($3,300), the respective expiration dates,
whichever occurs first.
As of March 31, 1998, the Tax Free Fund had a net tax basis capital loss
carryforward of approximately $5,700,000 which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until March 31, 2003 ($3,320,000) and March 31, 2004 ($2,380,000), the
respective expiration dates, whichever occurs first.
Distribution of Income and Gains. All of the net investment income of the Funds
is declared as dividends to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Funds if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. These differences
primarily relate to investments in options, futures, and certain securities sold
at a loss for the Tax Free Fund. As a result, net investment income and net
realized gain (loss) on investment transactions for a reporting period may
differ significantly from distributions during such period. Accordingly, the
Funds may periodically make reclassifications among certain of their capital
accounts without impacting the net asset value of the Funds.
The Funds use the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
Other. Investment transactions are accounted for on a trade-date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of the call
or maturity date.
B. Purchases and Sales of Securities
For the year ended March 31, 1998, purchases and sales of long-term municipal
securities aggregated $58,882,798 and $50,113,507, respectively, for Tax Free
Fund.
The aggregate face value of futures contracts both opened and closed during the
year ended March 31, 1998 amounted to $19,696,125 and $19,696,125, respectively,
for Tax Free Fund.
Transactions in written call options on interest rate futures for the year ended
March 31, 1998 were as follows:
<TABLE>
<CAPTION>
Number of Contracts Premiums Received ($)
------------------- ---------------------
<S> <C> <C>
Outstanding at March 31, 1997 ..... -- --
Contracts written ................. 300 54,150
Contracts closed .................. (300) (54,150)
-------------------------------------------------------------------------------------
Outstanding at March 31, 1998 ..... -- --
======== ========
</TABLE>
32 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Funds' Investment
Management Agreements with Scudder. However, new Investment Management
Agreements (the "Management Agreements") between the Funds and Scudder Kemper
were approved by the Funds' Board of Trustees and by the Funds' Shareholders.
The Management Agreements, which are effective December 31, 1997, are the same
in all material respects as the corresponding previous Investment Management
Agreements, except that Scudder Kemper is the new investment adviser to the
Funds.
Each Fund has entered into an Investment Advisory Agreement (each an "Agreement"
and collectively the "Agreements") with Scudder Kemper, under which each Fund
agrees to pay the Adviser a fee computed and accrued daily and paid monthly. The
annual rate is 0.50% of the average daily net assets of Tax Free Money Fund and
0.625% of the first $200,000,000 of the average daily net assets, and 0.60% of
such net assets in excess of $200,000,000 for Tax Free Fund. The Adviser
determines the securities, instruments, and other contracts relating to
investments to be purchased, sold or entered into by each Fund. In addition to
portfolio management services, the Adviser provides certain administrative
services in accordance with the Agreements. For the year ended March 31, 1998,
the fee for Tax Free Fund pursuant to the Agreement amounted to $1,184,089,
which was equivalent to an annual effective rate of 0.63% of the Fund's average
daily net assets.
With respect to Tax Free Money Fund, the Adviser has agreed not to impose all or
a portion of its management fee until July 31, 1998 and during such period to
maintain the annualized expenses of the Tax Free Money Fund at not more than
0.60% of average daily net assets. For the year ended March 31, 1998, the
Adviser did not impose a portion of its fee amounting to $122,374 and the
portion imposed amounted to $215,318.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records for the Tax Free Money Fund and Tax
Free Fund. For the year ended March 31, 1998, SFAC imposed fees amounting to
$30,000 and $52,711 of which $2,500 and $4,655 are unpaid at March 31, 1998 for
the Tax Free Money Fund and Tax Free Fund, respectively.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Funds. For the
year ended March 31, 1998, $57,141 and $118,928 were charged by SSC to Tax Free
Money Fund and Tax Free Fund, of which $4,445 and $9,933 were unpaid at March
31, 1998, respectively.
Each Fund pays each Trustee not affiliated with the Adviser an annual retainer,
allocated between the Funds, plus specified amounts for attended board and
committee meetings. For the year ended March 31, 1998, Trustees' fees aggregated
$16,816 and $18,117 for both the Tax Free Money Fund and Tax Free Fund,
respectively.
33 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder State Tax Free Trust and the Shareholders of Scudder
New York Tax Free Money Fund and Scudder New York Tax Free Fund:
We have audited the accompanying statements of assets and liabilities of Scudder
New York Tax Free Money Fund and Scudder New York Tax Free Fund, including the
investment portfolios, as of March 31, 1998 and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1998, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder New York Tax Free Money Fund and Scudder New York Tax Free Fund as of
March 31, 1998, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and their financial highlights for each of the periods indicated therein in
conformity with generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 5, 1998
34 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
Tax Information
Of the dividends paid by Scudder New York Tax Free Money Fund and Scudder New
York Tax Free Fund from net investment income for the taxable year ended March
31, 1998, 100% constituted exempt interest dividends for regular federal income
tax and New York State and New York City income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
35 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder New York Tax Free
Money Fund (the "Fund") was held on October 24, 1997, at the office of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. At the Meeting, as adjourned
and reconvened, the following matters were voted upon by the shareholders (the
resulting votes for each matter are presented below). With regard to certain
proposals, it was recommended that the Meeting be reconvened in order to provide
shareholders with an additional opportunity to return their proxies. The date of
the reconvened meeting at which the matters were decided is noted after the
proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
33,831,980 1,417,392 2,188,301 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 35,314,542 2,123,131
Dawn-Marie Driscoll 35,319,498 2,118,175
Peter B. Freeman 35,314,542 2,123,131
George M. Lovejoy, Jr. 35,311,492 2,126,181
Wesley W. Marple, Jr. 35,242,773 2,194,900
Daniel Pierce 35,174,266 2,263,407
Kathryn L. Quirk 35,316,294 2,121,379
Jean C. Tempel 35,247,729 2,188,857
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
29,460,796 2,744,564 5,232,313 0
36 - Scudder New York Tax Free Money Fund
<PAGE>
4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
29,745,962 2,126,136 5,217,682 0
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<S> <C> <C> <C> <C>
5.1 Diversification 29,389,301 2,342,207 5,706,166 0
5.2 Borrowing 29,353,597 2,377,911 5,706,166 0
5.3 Senior securities 29,389,301 2,342,207 5,706,166 0
5.4 Concentration 29,356,914 2,374,594 5,706,166 0
5.5 Loans 29,351,633 2,379,875 5,706,166 0
5.6 Underwriting of securities 29,389,301 2,342,207 5,706,166 0
5.7 Investment in real estate 29,389,301 2,342,207 5,706,166 0
5.8 Purchase of physical 29,389,301 2,342,207 5,706,166 0
commodities
5.9 Investment in New York 29,372,925 2,358,582 5,706,166 0
municipal securities
5.10 Tax diversification 29,389,301 2,342,207 5,706,166 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
34,767,725 908,667 1,761,281
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
37 - Scudder New York Tax Free Money Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder New York Tax Free
Fund (the "Fund") was held on October 24, 1997, at the office of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, Massachusetts 02110. At the Meeting, as adjourned and reconvened,
the following matters were voted upon by the shareholders (the resulting votes
for each matter are presented below). With regard to certain proposals, it was
recommended that the Meeting be reconvened in order to provide shareholders with
an additional opportunity to return their proxies. The date of the reconvened
meeting at which the matters were decided is noted after the proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
10,162,351 496,495 998,063 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 11,026,957 629,952
Dawn-Marie Driscoll 10,931,362 725,547
Peter B. Freeman 11,028,292 628,617
George M. Lovejoy, Jr. 11,029,367 627,542
Wesley W. Marple, Jr. 11,024,275 632,634
Daniel Pierce 11,026,424 630,486
Kathryn L. Quirk 10,920,216 736,694
Jean C. Tempel 11,021,836 635,073
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,079,306 913,360 1,149,355 514,888
38 - Scudder New York Tax Free Fund
<PAGE>
4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,385,178 740,926 1,112,926 492,217
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<S> <C> <C> <C> <C>
5.1 Diversification 9,384,454 749,031 1,008,536 514,888
5.2 Borrowing 9,365,005 765,746 1,011,270 514,888
5.3 Senior securities 9,371,657 761,828 1,008,538 514,888
5.4 Concentration 9,372,232 758,519 1,011,270 514,888
5.5 Loans 9,375,268 758,217 1,008,536 514,888
5.6 Underwriting of securities 9,385,412 750,069 1,006,540 514,888
5.7 Investment in real estate 9,387,401 748,080 1,006,540 514,888
5.8 Purchase of physical 9,385,218 750,263 1,006,540 514,888
commodities
5.9 Investment in New York 9,387,401 748,080 1,006,540 514,888
municipal securities
5.10 Tax diversification 9,385,412 750,069 1,006,540 514,888
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
10,424,271 371,671 860,967
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
39 - Scudder New York Tax Free Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center
for Business Ethics, Bentley
College; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration,
Northeastern University, College
of Business Administration
Kathryn L. Quirk*
Trustee; Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
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, Secretary and
Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
40 - Scudder New York Tax Free Money Fund
Scudder New York 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
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Growth and Income 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
41 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
42 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
43 - Scudder New York Tax Free Money Fund
Scudder New York Tax Free Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
Shares of the Funds are not insured or guaranteed by the U.S. Government.
Scudder New York Tax Free Money Fund seeks to maintain a constant net asset
value of $1.00 per share but there can be no assurance that the stable net asset
value will be maintained.
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
[LOGO]
Scudder
Ohio
Tax Free Fund
Annual Report
March 31, 1998
Pure No-Load(TM) Funds
For investors seeking double-tax-free income exempt from both Ohio and regular
federal income taxes.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Ohio Tax Free Fund
- --------------------------------------------------------------------------------
Date of Inception: 5/28/87 Total Net Assets as of Ticker Symbol: SCOHX
3/31/98: $94.5 million
- --------------------------------------------------------------------------------
o As of March 31, 1998, Scudder Ohio Tax Free Fund's 30-day net annualized SEC
yield was 4.19%, equivalent to a 7.48% taxable yield for Ohio investors subject
to the 43.95% combined federal and state income tax rate.
o For its most recent fiscal year ended March 31, 1998, Scudder Ohio Tax Free
Fund posted a total return of 10.08%, compared with the 9.59% average return of
52 similar funds tracked by Lipper Analytical Services. The Fund's return placed
it in the top 33% of similar funds over one-, three-, five-, and ten-year
periods. See page for more information on the Fund's rankings.
o Scudder Ohio Tax Free Fund received a four-star rating from Morningstar,
reflecting "above average" risk-adjusted performance through March 31, 1998.*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
30-Day SEC Yield on March 31, 1998
BAR CHART DATA:
Scudder Taxable Yield
Ohio Tax Needed to Equal
Free Fund the Fund's Yield
-------------------------------------------
4.19% 7.48%
Table of Contents
3 Letter from the Fund's President 19 Notes to Financial Statements
4 Performance Update 21 Report of Independent Accountants
5 Portfolio Summary 22 Tax Information
6 Portfolio Management Discussion 22 Officers and Trustees
10 Glossary of Investment Terms 23 Shareholder Meeting Results
11 Investment Portfolio 25 Investment Products and Services
15 Financial Statements 26 Scudder Solutions
18 Financial Highlights
* 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. The Fund received four stars
for three-year performance, four stars for five-year performance, and three
stars for ten-year performance, and was rated among 1525, 782, and 345
municipal funds for the respective periods. Of the funds rated, 10% received
five stars, 22.5% received four stars, and 35% received three stars. Past
performance is no guarantee of future returns.
2 - Scudder Ohio Tax Free Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
We are pleased to report to you concerning Scudder Ohio Tax Free Fund's
performance over its most recent fiscal year ended March 31, 1998. In addition
to the Fund's four-star Morningstar rating as of March 31 (see page 2), the Fund
placed in the top 33% of similar Ohio tax free funds tracked by Lipper over
one-, three-, five-, and ten-year periods as of March 31. Please read the
portfolio management discussion beginning on page 6 for more information.
As of January 1, 1998, the Fund's investment adviser changed its name to
Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc., pursuant
to the acquisition of a majority interest in Scudder, Stevens & Clark by Zurich
Insurance Company, and the combining of Scudder's business with that of Zurich
Kemper Investments, Inc. January 1 also marked changes in your Fund's portfolio
management team. Donald C. Carleton, former Lead Portfolio Manager, retired
after 15 years at Scudder Kemper Investments. We thank Don for his many years of
service, and we welcome the Fund's new portfolio management team: Christopher J.
Mier, Lead Portfolio Manager, and Rebecca L. Wilson, Portfolio Manager, with a
combined 32 years of investment industry experience.
For those of you interested in new Scudder products, we recently introduced
three industry sector funds as a part of our Choice Series: Scudder Financial
Services Fund, which seeks long-term growth by investing in financial services
companies in the U.S. and abroad; Scudder Health Care Fund, which seeks
long-term growth from health care companies located around the world; and
Scudder Technology Fund, which pursues long-term growth by investing in
companies that develop, produce, or distribute technology. In addition, April 6,
1998 marked the debut of our newest entrant in the growth and income category:
Scudder Real Estate Investment Fund, investing in equity securities of companies
in the real estate industry. Please see page 25 for more information on Scudder
products and services.
As always, please call a Scudder Investor Information representative at
1-800-225-2470 if you have questions about your Fund. Page 26 provides more
information on how to contact Scudder. Thank you for choosing Scudder Ohio Tax
Free Fund to help meet your investment needs.
Sincerely,
/s/ Daniel Pierce
Daniel Pierce
President,
Scudder Ohio Tax Free Fund
3 - Scudder Ohio Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of March 31, 1998
- -----------------------------------------------------------------------
Fund Index Comparisons
- -----------------------------------------------------------------------
Total Return
- -------------------------------------------
Period Ended Growth of Average
3/31/98 $10,000 Cumulative Annual
- -------------------------------------------
Scudder Ohio Tax Free Fund
- -------------------------------------------
1 Year $ 11,008 10.08% 10.08%
5 Year $ 13,721 37.21% 6.53%
10 Year $ 22,031 120.31% 8.22%
- -------------------------------------------
Lehman Brothers Municipal Bond Index
- -------------------------------------------
1 Year $ 11,073 10.73% 10.73%
5 Year $ 13,911 39.11% 6.82%
10 Year $ 22,289 122.89% 8.34%
- -----------------------------------------------------------------------
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 March 31
Scudder Ohio Tax Free Fund
Year Amount
- -----------------------
'88 $10,000
'89 $11,082
'90 $11,947
'91 $12,993
'92 $14,204
'93 $16,056
'94 $16,455
'95 $17,577
'96 $18,957
'97 $20,014
'98 $22,031
Lehman Brothers Municipal
Bond Index
Year Amount
- ---------------------
'88 $10,000
'89 $10,719
'90 $11,851
'91 $12,943
'92 $14,238
'93 $16,022
'94 $16,393
'95 $17,611
'96 $19,088
'97 $20,129
'98 $22,289
The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of municipal bonds issued across the United States. Index issues have
a credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly periods ended March 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
--------------------------------------------------------------------------------
Net Asset Value $11.94 $11.97 $12.14 $12.47 $13.13 $12.68 $12.77 $12.95 $12.94 $13.51
Income Dividends $ .84 $ .82 $ .78 $ .75 $ .72 $ .70 $ .70 $ .69 $ .68 $ .68
Capital Gains
Distributions $ .02 $ .07 $ .03 $ .03 $ .19 $ .10 $ .04 $ .12 $ .04 $ .03
Fund Total
Return (%) 10.83 7.80 8.75 9.33 13.04 2.48 6.82 7.83 5.58 10.08
Index Total
Return (%) 7.21 10.56 9.22 10.02 12.52 2.32 4.43 8.38 5.45 10.73
</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
ten year periods would have been lower.
4 - Scudder Ohio Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of March 31, 1998
- -------------------------------
Diversification
- -------------------------------
Hospital/Health 16%
Higher Education 13%
Water/Sewer Revenue 12%
Sales/Special Tax 11%
State General Obligation 10%
Core Cities/Lease 7%
School District/Lease 6%
Electric Utility Revenue 6%
Other General
Obligation/Lease 4%
Miscellaneous Municipal 15%
- -------------------------------
100%
- -------------------------------
The Fund invests in a broad
selection of Ohio tax-free bonds.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- ------------------------------
Quality
- ------------------------------
AAA* 50%
AA 15%
A 11%
BBB 12%
Not Rated 12%
- ------------------------------
100%
- ------------------------------
Weighted average quality: AA
*Includes cash equivalents
Overall portfolio quality remains
high, with over 75% of portfolio
securities rated A or better as of
March 31.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- ------------------------------
Effective Maturity
- ------------------------------
Less than 1 year 2%
1-5 years 33%
5-10 years 18%
10-15 years 37%
Greater than 15 years 10%
- ------------------------------
100%
- ------------------------------
Weighted average effective maturity:
8.5 years
Our continuing goal is to have an
average effective maturity similar
to that of the Lehman Brothers
Municipal Bond Index, but with a
superior, call-protected structure.
For more complete details about the Fund's investment portfolio, see page 11.
5 - Scudder Ohio Tax Free Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
For its most recent fiscal year ended March 31, 1998, Scudder Ohio Tax Free Fund
posted a solid total return as interest rates continued a slow and steady
decline against a backdrop of low inflation and healthy economic growth. The
Fund's 10.08% total return for the period consisted of a $0.57 increase in net
asset value to $13.51, income distributions of $0.68 per share, and a long-term
capital gain distribution of $0.03 per share. This return outpaced the 9.59%
average of 52 similar funds tracked by Lipper over the 12-month period. In
addition, the Fund's return placed it in the top 33% of similar funds over one-,
three-, five-, and ten-year periods ended March 31, 1998.
On March 31, 1998, the Fund's 30-day net annualized SEC yield was 4.19%,
equivalent to a taxable yield of 7.48% for shareholders subject to the 43.95%
maximum combined state and federal income tax rate. The Fund's tax equivalent
yield is significantly higher than current yields available from taxable
investments of similar maturity and credit quality.
Ohio Update
The State of Ohio is enjoying strong economic growth. Ohio is close to recording
its fifth consecutive operating surplus in its General Fund, and the State's
primary revenue sources, income taxes and sales taxes, are ahead of estimates
for fiscal year 1998. Steady job growth, among other positive economic factors,
has translated to increased reserves in Ohio's Budget Stabilization Fund, while
the State has increased spending in areas of need, specifically education.
Scudder Ohio Tax Free Fund:
Performance Exceeding the Averages
(Average annual returns for periods ended March 31, 1998)
----------------------------------------------------------------
Scudder
Ohio Tax
Free Fund Lipper Number Percentile
Period Return Average Rank of Funds Rank
-----------------------------------------------------------------
1 Year 10.08% 9.59% 12 of 52 Top 23%
-----------------------------------------------------------------
3 Years 7.82% 7.08% 7 of 47 Top 15%
-----------------------------------------------------------------
5 Years 6.53% 6.15% 3 of 26 Top 12%
-----------------------------------------------------------------
10 Years 8.22% 7.84% 4 of 12 Top 33%
-----------------------------------------------------------------
Past performance does not guarantee future results.
6 - Scudder Ohio Tax Free Fund
<PAGE>
The strength of Ohio's economy is being supported by employment growth in the
service sector, specifically business and health services. Overall job growth
brought the State's unemployment rate down to 4.0% as of January, 1998, 85% of
the national average. Ohio's per capita income levels have been growing more
than the national average: Per capita income in 1996 was $23,537, or 97% of the
national average, compared with per capita income of $17,548 in 1990. Given the
strength of Ohio's economy and financial position, we believe the State's
economic and credit prospects are stable and should improve over the coming
months.
Steady Growth and
Low Inflation
The long-running U.S. economic scenario of moderate growth and low inflation
forges on. Asia, expected by many to export its way out of economic crisis and
in doing so derail U.S. growth, has so far increased exports only modestly. At
the same time, the U.S. bond market has benefited from Federal Reserve inaction
on interest rates, falling commodity prices, mixed economic statistics, and
portfolio rebalancing by investors who have acted to reduce the overweighting of
stocks in their portfolios. Moreover, the municipal bond market has enjoyed its
first significant increase in investor interest in four years. During the Fund's
most recent fiscal year, yields of 10-year Treasury bonds declined 1.3
percentage points and their prices rose 9.3%, while yields of comparable
municipal bonds declined almost three quarters of a percentage point and their
prices increased 5.2%.
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
Municipal Yields Compared with Inflation
March 31, 1995 - March 31, 1998
LINE CHART DATA:
-----------------------------------------------------
10-year
CPI municipal bonds
-----------------------------------------------------
3/95 2.73% 4.65%
2.90 5.00
2.95 5.15
1/96 2.99 5.00
3.04 4.85
2.50 5.10
2.23 4.75
1/97 2.08 4.50
1.84 4.60
1.60 4.20
1.40 4.30
3/98 1.40 4.50
(Chart indicates a 3.10% spread between the 10-year municipal
bonds at 4.50% (3/98) and the CPI at 1.40% (3/98).)
Municipal yields represented by 10-year, AAA-rated municipal bonds.
Inflation represented by CPI (Consumer Price Index).
Sources: Salomon Brothers; Datastream
- ----------
It's important to note that in the current environment of lower municipal bond
yields, "real" interest rates -- interest rates minus increases in the CPI, a
recognized barometer of inflation -- have rarely been higher. Real interest
rates depict the level of income bondholders actually earn, taking into account
the erosion in value of their principal from inflation. The chart above
illustrates the widening gap between yield levels and inflation since March
1995.
Noncallable Bonds
Remain a Focus
As a means of locking in a substantial income stream for Scudder Ohio Tax Free
Fund over time, we continue to emphasize 10- to 15-year noncallable bonds. As of
March 31, 30% of the Fund's securities had maturities in this range. During the
7 - Scudder Ohio Tax Free Fund
<PAGE>
Fund's most recent fiscal year, we sold bonds with weaker call protection and
purchased additional noncallable bonds that were attractively priced. We also
continue to look for opportunities to add high yielding BBB-rated and non-rated
bonds to the portfolio. Higher yielding bonds, while carrying some additional
credit risk, generally exhibit less interest rate sensitivity than municipal
bonds rated A or above. The Fund purchased additional nonrated issues during its
most recent fiscal year; overall, it held 24% of bonds in the BBB-rated and
nonrated categories as of the end of March. (For a summary of the Fund's
quality, diversification, and maturity structure, see page 5.) Lastly, our
continuing goal is to have an average effective maturity similar to that of the
Lehman Brothers Municipal Bond Index, the Fund's benchmark, but with a superior,
call-protected structure. As of March 31, the Fund's average effective maturity
was approximately 8.5 years.
Overall portfolio quality remains high, with over 75% of portfolio securities
rated A or better at the close of the period. We continue to invest in a broad
selection of Ohio municipal bonds, including hospital/health, higher education,
and water/sewer revenue bonds.
Over the long term, we seek to provide a competitive level of federal and state
tax-exempt income for Fund investors -- with total return as an additional
objective -- by concentrating on three broad categories of Ohio 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 existing "callable" 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.
As of March 31, 55% 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.
Outlook
In the words of Federal Reserve Chairman Greenspan, the U.S. economy delivered
"exemplary performance" in 1997, with real GNP growth of 3.8%. We believe this
level of growth will be difficult to maintain in 1998 because of two current
drags on the economy -- burdensome consumer debt, and a high level of corporate
write-offs -- and one that still looms -- possible economic fallout from Asia's
troubles. Any slowdown from current levels of growth would provide a basis for a
sustained decline in interest rates and favorable bond market performance. At
the same time, we expect that the Fed will stand ready to raise interest rates
at the first sign of runaway growth.
8 - Scudder Ohio Tax Free Fund
<PAGE>
We will continue our focus on 10-15 year noncallable municipal bonds as we seek
to boost yield and achieve attractive long-term returns for our investors. At
the same time, we will attempt to limit volatility by maintaining a neutral
average maturity and high overall credit quality as we pursue double-tax-free
income and competitive total return for Scudder Ohio Tax Free Fund shareholders.
Sincerely,
Your Portfolio Management Team
/s/Christopher Mier /s/Rebecca L. Wilson
Christopher Mier Rebecca L. Wilson
Scudder Ohio Tax Free Fund:
A Team
Approach to Investing
Scudder Ohio Tax Free Fund is managed by a team of Scudder Kemper Investments,
Inc. (the "Adviser") 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 the Adviser's large
staff of economists, research analysts, traders, and other investment
specialists who work in our offices across the United States and abroad. We
believe our team approach benefits Fund investors by bringing together many
disciplines and leveraging our extensive resources.
Lead Portfolio Manager Christopher J. Mier assumed responsibilities for the
Fund's day-to-day management and investment strategies in January 1998. Mr.
Mier, who joined the Adviser in 1986, has more than 20 years of experience in
municipal investing and portfolio management. Rebecca L. Wilson, Portfolio
Manager, became a member of the team in 1998. Ms. Wilson, who joined the Adviser
in 1986, has 12 years of experience in municipal investing and research.
9 - Scudder Ohio Tax Free Fund
<PAGE>
Glossary of Investment Terms
BOND An interest-bearing security issued by the
federal, state, or local government or a
corporation that obligates the issuer to pay
the bondholder a specified amount of interest
for a stated period -- usually a number of
years -- and to repay the face amount of the
bond at its maturity date.
GENERAL OBLIGATION BOND A municipal bond backed by the "full faith
and credit" (including the taxing and further
borrowing power) of the city, state, or
agency that issues the bond. A general
obligation bond is repaid with the issuer's
general revenue and borrowings.
INFLATION An overall increase in the prices of goods
and services, as happens when business and
consumer spending increases relative to the
supply of goods available in the marketplace
-- in other words, when too much money is
chasing too few goods. High inflation has a
negative impact on the prices of fixed-income
securities.
MUNICIPAL BOND An interest-bearing debt security issued by a
state or local government entity.
NET ASSET VALUE (NAV) The price per share of a mutual fund based on
the sum of the market value of all the
securities owned by the fund divided by the
number of outstanding shares.
TAXABLE EQUIVALENT YIELD The level of yield a fully taxable instrument
would have to provide to equal that of a
tax-free municipal bond on an after-tax
basis.
30-DAY SEC YIELD The standard yield reference for bond funds,
based on a formula prescribed by the SEC.
This annualized yield calculation reflects
the 30-day average of the income earnings of
every holding in a given fund's portfolio,
net of expenses, assuming each is held to
maturity.
TOTAL RETURN The most common yardstick to measure the
performance of a fund. Total return
--annualized or compound -- is based on a
combination of share price changes plus
income and capital gain distributions, if
any, expressed as a percentage gain or loss
in value.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
10 - Scudder Ohio Tax Free Fund
<PAGE>
Investment Portfolio as of March 31, 1998
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Municipal Investments 2.3%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OHIO
Cuyahoga County, OH, Health & Education, University Hospital of Cleveland, Daily
Demand Note, 3.95%, 1/1/16* ................................................... 900,000 MIG1 900,000
Franklin County, OH, Health System, St. Anthony's Medical Center, Daily Demand
Note, 3.7%, 7/1/15* ........................................................... 400,000 MIG1 400,000
Ohio Air Quality Development Authority, Cincinnati Gas and Electric, Daily
Demand Note, 4%, 12/1/15* ..................................................... 300,000 A1+ 300,000
Ohio Air Quality Development Authority Revenue, Cincinnati Gas and Electric,
Daily Demand Note, 3.7%, 9/1/30* .............................................. 500,000 A1+ 500,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Investments (Cost $2,100,000) 2,100,000
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Municipal Investments 97.7%
- ------------------------------------------------------------------------------------------------------------------------------
OHIO
Beavercreek, OH, Local School District, General Obligation, 6.6%, 12/1/15 (c) ... 1,000,000 AAA 1,197,476
Butler County, OH, Transportation Improvement District, Series 1997A, 6%,
4/1/10 (c) .................................................................... 1,500,000 AAA 1,661,565
Cleveland, OH, Waterworks Improvement, First Mortgage Revenue, Series 1992 F,
6.25%, 1/1/07 (c) ............................................................. 1,000,000 AAA 1,085,660
Cleveland, OH, Public Power System Improvement Revenue, Series 1994 A, Zero
Coupon, 11/15/09 (c) .......................................................... 2,250,000 AAA 1,309,793
Cleveland, OH, Urban Renewal Tax Increment Rock & Roll Hall of Fame and Museum
Project, 6.75%, 3/15/18 ....................................................... 1,000,000 NR 1,057,800
Cleveland, OH, General Obligation:
5.3%, 9/1/08 (c) .............................................................. 2,000,000 AAA 2,124,980
Series 1993, 5.375%, 9/1/09 (c) ............................................... 1,700,000 AAA 1,811,265
Series A, 6.3%, 7/1/06 (c) .................................................... 1,000,000 AAA 1,100,110
Cleveland, OH, Parking Facility Revenue, 6%, 9/15/09 (c) ........................ 1,385,000 AAA 1,554,815
Cleveland, OH, Public Power System Improvement Revenue, Series B, 7%, 11/15/17 .. 750,000 A 819,728
Cleveland, OH, Public Power System Revenue, Series 1996-1, 6%, 11/15/11 (c) ..... 1,050,000 AAA 1,183,854
Columbus, OH, General Obligation, Unlimited Tax, Sewer Improvement, 6%, 5/1/13 .. 1,000,000 AAA 1,097,920
Cuyahoga County, OH, General Obligation, Jail Facilities, Series 1991, ETM,
Zero Coupon, 10/1/02*** ....................................................... 1,500,000 NR 1,233,735
Cuyahoga County, OH, Hospital Facilities Revenue, Health Cleveland Inc., Series
1993, 6.25%, 8/15/10 .......................................................... 1,000,000 A 1,071,810
Cuyahoga County, Port Authority Revenue, Port Revenue Docks PS-1, Series 1997,
6%, 3/1/07 .................................................................... 1,000,000 NR 1,024,900
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Ohio Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dublin, OH, City School District, Capital Appreciation, Series 1998, Zero
Coupon, 12/1/11 (c) ........................................................... 1,000,000 AAA 513,280
Fairfield, OH, City School District, 7.2%, 12/1/09 (c) .......................... 1,000,000 AAA 1,195,400
Franklin County, OH, Health Care Facilities, Revenue Refunding, Ohio
Presbyterian Services:
Series 1997, 5.25%, 7/1/08 ................................................... 500,000 NR 507,485
Series 1997, 5.5%, 7/1/17 .................................................... 1,000,000 NR 988,800
Franklin County, OH, Riverside United Methodist Hospital, Series A, 5.75%,
5/15/12 ....................................................................... 1,950,000 AA 2,042,547
Gateway Economic Development Corporation of Cleveland, OH, Stadium Revenue,
6.5%, 9/15/14 ................................................................. 4,000,000 NR 4,189,560
Gateway Economic Development Corporation of Cuyahoga County, OH, Excise Tax:
Series 1990, 7.2%, 9/1/01 ..................................................... 2,550,000 A 2,671,890
Series 1990, 7.5%, 9/1/05 ..................................................... 1,500,000 A 1,656,660
Hamilton County, OH, Health System Revenue, Franciscan Sisters of the Poor
Health System, Providence Hospital, Series 1992, 6.8%, 7/1/08 ................. 2,000,000 BBB 2,158,140
Hamilton County, OH, Hospital Facilities Revenue, Christ Hospital, Series
1991 B, 6.625%, 1/1/06 (c) .................................................... 1,000,000 AAA 1,064,950
Hamilton County, OH, Sewer System Revenue:
Series 1991 A, Unrefunded, 6.4%, 12/1/05 ...................................... 530,000 AA 573,540
Series 1991 A, Prerefunded 6/1/01, 6.4%, 12/1/05 .............................. 220,000 AAA 238,711
Improvement and Refunding, 5.45%, 12/1/09 (c) ................................. 1,000,000 AAA 1,075,080
Hilliard, OH, School District, Series 1996A, Zero Coupon, 12/1/12 (c) ........... 1,655,000 AAA 797,528
Huber Heights, OH, Water System Revenue, Capital Appreciation, Zero Coupon,
12/1/12 ....................................................................... 1,005,000 AAA 484,299
Lorain County, OH, Hospital Refunding Revenue:
EMH Regional Medical Center, 5%, 11/1/07 (c) .................................. 1,000,000 AAA 1,040,120
Humility of Mary Health Care System, Series A, 5.9%, 12/15/08 ................. 1,000,000 A 1,095,220
Lorain, OH, Hospital Authority Refunding Revenue, Lakeland Community Hospital
Inc., 6.5%, 11/15/12 .......................................................... 1,000,000 A 1,131,730
Lucas County, OH, Hospital Revenue, Flower Hospital, Series 1993, 6.125%,
12/1/13 ....................................................................... 1,375,000 BBB 1,524,311
Mahoning County, OH, General Obligation, Limited Tax, 6.6%, 12/1/06 (c) ......... 1,100,000 AAA 1,209,241
Miami County, OH, Hospital Facilities, Revenue Refunding, Upper Valley Medical
Center, 6.25%, 5/15/13 ........................................................ 1,000,000 BBB 1,064,340
North Olmstead, OH, General Obligation, 6.2%, 12/1/11 (c) ....................... 1,000,000 AAA 1,125,650
North Olmstead, OH, General Obligation, 6.25%, 12/15/12 (c) ..................... 1,500,000 AAA 1,637,760
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Ohio Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Northeast Ohio Regional Sewer District, Wastewater Improvement Revenue Refunding:
5.5%, 11/15/12 (c) ............................................................ 1,550,000 AAA 1,626,245
5.6%, 11/15/13 (c) ............................................................ 1,000,000 AAA 1,054,980
Ohio Air Quality Development Authority, Pollution Control Revenue, Cleveland
Electric Company, 8%, 12/1/13 (c) ............................................. 1,250,000 AAA 1,440,388
Ohio General Obligation, Series 1994, 6%, 8/1/10 ................................ 1,000,000 AA 1,127,560
Ohio Higher Education Facilities Revenue:
Case Western Reserve University, Refunding, 6.5%, 10/1/20 ..................... 2,250,000 AA 2,695,950
Oberlin College Project, Prerefunded 10/1/99, 7.1%, 10/1/12** ................. 485,000 AAA 517,364
Ohio Higher Educational Facility Commission, Refunding Revenue, Case Western
Reserve University, 6%, 10/1/14 ............................................... 1,000,000 AA 1,128,360
Ohio Housing Finance Agency, Single-Family Mortgage Revenue, Series 1990 F,
7.6%, 9/1/16 .................................................................. 1,230,000 AAA 1,306,617
Ohio Liquor Profits Refunding Bonds, Economic Development Revenue, Series 1989,
6.85%, 3/1/00 (c) ............................................................. 1,000,000 AAA 1,054,590
Ohio Public Facilities Commission, Higher Educational Capital Facilities
Revenue, Series 2B, 5.4%, 11/1/07 (c) ......................................... 2,000,000 AAA 2,108,040
Ohio State Building Authority:
Correctional Facilities Revenue, Series 1991 A, 6.5%, 10/1/04 ................. 1,000,000 A 1,091,090
Juvenile Correction Facilities, 6%, 10/1/06 ................................... 1,555,000 A 1,725,195
Toledo Government Office Building, Series A, 8%, 10/1/07 ...................... 500,000 AAA 584,645
Worker's Compensation Facilities, William Green Building, Series 1993 A,
4.75%, 4/1/14 .............................................................. 1,000,000 A 960,970
Ohio State Higher Education Facility:
Prerefunded on 12/1/00, 7.25%, 12/1/12 (c)** .................................. 800,000 AAA 880,384
Series 1997a, Step-up Coupon 0% to 7/1/00, 6.5% to 7/1/08 ..................... 2,325,000 AA 2,384,102
Unrefunded, 7.25%, 12/1/12 (c) ................................................ 200,000 AAA 218,536
Ohio Water Development Authority:
5.875%, 9/1/20 ................................................................ 1,000,000 AAA 1,008,890
Pollution Control Revenue, Ohio Edison Company Project, Series 1989 A, 7.625%,
07/1/23 .................................................................... 1,140,000 BBB 1,195,917
Olmsted Falls, OH, City School District, General Obligation, Series 1991, 7.05%,
12/15/11 (c) .................................................................. 1,000,000 AAA 1,119,060
Rocky River, OH, City School District, School Improvement, Series 1998, 5.375%,
12/1/17 ....................................................................... 1,000,000 AAA 1,042,690
Strongsville, OH, City School District, General Obligation, 5.35%, 12/1/11 (c) .. 1,000,000 AAA 1,064,930
Summit County, OH, General Obligation, 6.4%, 12/1/14 (c) ........................ 1,000,000 AAA 1,123,180
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Ohio Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
University of Cincinnati, OH, General Receipts, Series 1998T, 5.5%, 6/1/11 ...... 1,110,000 AA 1,182,872
Warren County, OH, Water Improvement, General Obligation, The P&G Project,
Series 1995, 5.25%, 12/1/16 ................................................... 1,720,000 AA 1,736,564
PUERTO RICO
Puerto Rico Aqueduct and Sewer Authority, Revenue Refunding, 6%, 7/1/09 ......... 1,000,000 A 1,106,960
Puerto Rico Commonwealth, Highway & Transportation Authority, Series W, 5.5%,
7/1/13 (c) .................................................................... 1,000,000 AAA 1,073,880
Puerto Rico Electric Power Authority, Series 1994S, 6.125%, 7/1/09 (c) .......... 2,000,000 AAA 2,272,900
Puerto Rico, General Obligation:
Public Improvement, Prerefunded 7/1/02, 6.6%, 7/1/13 (c)** .................... 1,000,000 AAA 1,109,560
Public Improvement Refunding, 5.4%, 7/1/07 .................................... 1,500,000 A 1,591,785
University of Puerto Rico, University Systems, Series N, 6.25%, 6/1/08 (c) ...... 1,000,000 AAA 1,142,320
VIRGIN ISLANDS
Virgin Islands Public Finance Authority:
General Obligation, Matching Fund Loan Notes, Series A, 7.25%, 10/1/18 ........ 1,000,000 NR 1,119,440
Highway Revenue, Series 1989, 7.7%, 10/1/04 ................................... 1,000,000 BBB 1,056,530
- ------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $84,629,327) 91,174,147
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $86,729,327) (a) 93,274,147
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $86,729,327. At March 31,
1998, net unrealized appreciation for all securities based on tax cost was
$6,544,820. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $6,562,599 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$17,779.
(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 by the Investment Adviser to be of
comparable quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, FSA or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand
notes are securities whose yields are periodically reset at levels that
are generally comparable to exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit from a major bank. These notes are carried,
for purposes of calculating average weighted maturity, at the longer of
the period remaining until the next rate change or to the extent of the
demand period.
** Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest on the tax-exempt issue and to retire the bonds in full at
the earliest refunding date.
*** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.
The accompanying notes are an integral part of the financial statements.
14 - Scudder Ohio Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of March 31, 1998
<TABLE>
<CAPTION>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments, at market (identified cost $86,729,327) ................. $ 93,274,147
Cash ................................................................. 3,707
Interest receivable .................................................. 1,361,495
Receivable for Fund shares sold ...................................... 4,783
Other assets ......................................................... 1,141
----------------
Total assets ......................................................... 94,645,273
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Dividends payable .................................................... 133,796
Payable for Fund shares redeemed ..................................... 1,984
Accrued management fee ............................................... 27,896
Other payables and accrued expenses .................................. 30,815
----------------
Total liabilities .................................................... 194,491
-------------------------------------------------------------------------------------------
Net assets, at market value $ 94,450,782
-------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation on investments ........................... 6,544,820
Accumulated net realized loss ........................................ (47,600)
Paid-in capital ...................................................... 87,953,562
-------------------------------------------------------------------------------------------
Net assets, at market value $ 94,450,782
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($94,450,782 / 6,989,251 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ........................................................ $13.51
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Ohio Tax Free Fund
<PAGE>
Statement of Operations
year ended March 31, 1998
<TABLE>
<CAPTION>
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Interest ............................................................. $ 4,986,967
-----------------
Expenses:
Management fee ....................................................... 532,714
Services to shareholders ............................................. 84,079
Custodian and accounting fees ........................................ 58,231
Trustees' fees and expenses .......................................... 16,447
Auditing ............................................................. 33,712
Reports to shareholders .............................................. 24,879
Legal ................................................................ 3,449
Registration fees .................................................... 5,942
Other ................................................................ 7,069
-----------------
Total expenses before reductions ..................................... 766,522
Expense reductions ................................................... (306,335)
-----------------
Expenses, net ........................................................ 460,187
--------------------------------------------------------------------------------------------
Net investment income 4,526,780
--------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from investment transactions ................ 306,818
Net unrealized appreciation (depreciation) on investments
during the period .................................................. 3,652,599
--------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions 3,959,417
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 8,486,197
--------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Ohio Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended March 31,
Increase (Decrease) in Net Assets 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ........................................... $ 4,526,780 $ 4,446,028
Net realized gain (loss) from investment transactions ........... 306,818 192,252
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ 3,652,599 (39,047)
---------------- ---------------
Net increase (decrease) in net assets resulting from
operations .................................................... 8,486,197 4,599,233
---------------- ---------------
Distributions to shareholders:
From net investment income ...................................... (4,526,780) (4,446,028)
---------------- ---------------
From net realized gains from investment transactions ............ (199,673) (249,065)
---------------- ---------------
Fund share transactions:
Proceeds from shares sold ....................................... 16,384,923 15,734,963
Net asset value of shares issued to shareholders in
reinvestment of distributions ................................. 3,073,201 3,010,355
Cost of shares redeemed ......................................... (12,876,095) (18,190,160)
---------------- ---------------
Net increase (decrease) in net assets from Fund share
transactions .................................................. 6,582,029 555,158
---------------- ---------------
Increase (decrease) in net assets ............................... 10,341,773 459,298
Net assets at beginning of period ............................... 84,109,009 83,649,711
---------------- ---------------
Net assets at end of period ..................................... $ 94,450,782 $ 84,109,009
---------------- ---------------
Other Information
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ....................... 6,502,200 6,457,717
---------------- ---------------
Shares sold ..................................................... 1,228,133 1,211,448
Shares issued to shareholders in reinvestment of
distributions ................................................. 229,548 230,889
Shares redeemed ................................................. (970,630) (1,397,854)
---------------- ---------------
Net increase (decrease) in Fund shares .......................... 487,051 44,483
---------------- ---------------
Shares outstanding at end of period ............................. 6,989,251 6,502,200
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Ohio 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>
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of ---------------------------------------------------------------------------------------------
period .......................... $12.94 $12.95 $12.77 $12.68 $13.13 $12.47 $12.14 $11.97 $11.94 $11.65
Income from investment operations: ---------------------------------------------------------------------------------------------
Net investment income .............. .68 .68 .69 .70 .70 .72 .75 .78 .82 .79
Net realized and unrealized gain
(loss) on investment transactions .60 .03 .30 .13 (.35) .85 .36 .23 .10 .36
---------------------------------------------------------------------------------------------
Total from investment operations ... 1.28 .71 .99 .83 .35 1.57 1.11 1.01 .92 1.15
---------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .............. (.68) (.68) (.69) (.70) (.70) (.72) (.75) (.78) (.82) (.84)
Net realized gains on investment
transactions .................... (.03) (.04) (.12) -- (.08) (.19) (.03) (.06) (.07) (.02)
In excess of net realized gains .... -- -- -- (.04) (.02) -- -- -- -- --
---------------------------------------------------------------------------------------------
Total distributions ................ (.71) (.72) (.81) (.74) (.80) (.91) (.78) (.84) (.89) (.86)
---------------------------------------------------------------------------------------------
Net asset value, end of ---------------------------------------------------------------------------------------------
period .......................... $13.51 $12.94 $12.95 $12.77 $12.68 $13.13 $12.47 $12.14 $11.97 $11.94
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ............... 10.08 5.58 7.85 6.82 2.48 13.04 9.33 8.75 7.80 10.83
Ratios and Supplemental Data
Net assets, end of period
($ millions) .................... 94 84 84 78 80 69 51 37 25 12
Ratio of operating expenses, net to
average daily net assets (%) .... .52 .50 .50 .50 .50 .50 .50 .50 .50 .50
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............ .86 .88 .89 .91 .90 .95 1.03 1.21 1.62 2.14
Ratio of net investment income to
average daily net assets (%) .... 5.09 5.23 5.30 5.59 5.23 5.61 6.05 6.50 6.74 7.13
Portfolio turnover rate (%) ........ 4.9 9.7 19.6 19.9 12.2 34.7 13.2 22.6 15.9 35.7
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
18 - Scudder Ohio Tax Free Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Ohio Tax Free Fund (the "Fund") is a non-diversified series of Scudder
State Tax Free Trust (the "Trust"). The Trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. There are currently six
series in the Trust.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which quotations reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Money market instruments purchased with an original 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, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable and tax-exempt income
to its shareholders. Accordingly, the Fund paid no federal income taxes and no
provision for federal income taxes was required.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. As a result, net
investment income and net realized gain (loss) on investment transactions for a
reporting period may differ significantly from distributions during such period.
Accordingly, the Fund may periodically make reclassifications among certain of
its capital accounts without impacting the net asset value of the Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
Other. Investment security transactions are accounted for on a trade date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of the call
or maturity date.
19 - Scudder Ohio Tax Free Fund
<PAGE>
B. Purchases and Sales of Securities
For the year ended March 31, 1998, purchases and sales of long-term municipal
securities aggregated $9,671,839 and $4,189,480, respectively.
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, the Fund agrees to pay the
Adviser a fee equal to an annual rate of approximately 0.60% of the Fund's
average daily net assets, computed and accrued daily and payable monthly. The
Adviser determines the securities, instruments, and other contracts relating to
investments to be purchased, sold or entered into by the Fund. In addition to
portfolio management services, the Adviser provides certain administrative
services in accordance with the Management Agreement. The Adviser had agreed not
to impose all or a portion of its management fee and to maintain the annualized
expenses of the Fund at not more than 0.50% of average daily net assets until
January 31, 1998 and at not more than 0.60% of average daily net assets for the
period from February 1, 1998 to July 31, 1998. For the year ended March 31,
1998, the Adviser imposed fees amounting to $226,379 of which $27,896 was unpaid
at March 31, 1998 and the portion not imposed amounted to $306,335 for the year
ended March 31, 1998.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Fund. For the
year ended March 31, 1998, the amount charged to the Fund by SSC aggregated
$58,657 of which $4,622 was unpaid at March 31, 1998.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
March 31, 1998, the amount charged to the Fund by SFAC aggregated $36,000, of
which $3,000 was unpaid at March 31, 1998.
The Trust pays each Trustee not affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1998,
Trustees' fees and expenses charged to the Fund aggregated $16,447.
20 - Scudder Ohio Tax Free Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder State Tax Free Trust and the Shareholders of Scudder
Ohio Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Scudder
Ohio Tax Free Fund, including the investment portfolio, as of March 31, 1998,
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 ten years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1998, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Ohio Tax Free Fund as of March 31, 1998, 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 ten years
in the period then ended, in conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 4, 1998
21 - Scudder Ohio Tax Free Fund
<PAGE>
Tax Information
The Fund paid distributions of $.03 per share from net long-term capital gains
during its year ended March 31, 1998, of which 0% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$220,000 as capital gain dividends for its year ended March 31, 1998, of which
100% represents 20% rate gains.
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 1998, 100% constituted exempt interest dividends for regular federal
income tax and Ohio personal income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center
for Business Ethics, Bentley
College; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration
Kathryn L. Quirk*
Trustee; Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
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, Secretary and
Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
22 - Scudder Ohio Tax Free Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Ohio Tax Free Fund
(the "Fund") was held on October 24, 1997, at the office of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, Massachusetts 02110. At the Meeting, as adjourned and reconvened,
the following matters were voted upon by the shareholders (the resulting votes
for each matter are presented below). With regard to certain proposals, it was
recommended that the Meeting be reconvened in order to provide shareholders with
an additional opportunity to return their proxies. The date of the reconvened
meeting at which the matters were decided is noted after the proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
4,851,509 131,162 244,363 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 5,060,557 166,476
Dawn-Marie Driscoll 5,051,769 175,265
Peter B. Freeman 5,070,845 156,188
George M. Lovejoy, Jr. 5,042,824 184,209
Wesley W. Marple, Jr. 5,048,655 178,378
Daniel Pierce 5,073,300 153,733
Kathryn L. Quirk 5,058,650 168,383
Jean C. Tempel 5,073,735 153,298
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
4,402,425 341,021 281,052 202,537
23 - Scudder Ohio Tax Free Fund
<PAGE>
4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
4,556,029 310,075 280,949 148,151
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<S> <C> <C> <C> <C>
5.1 Diversification 4,482,289 231,875 310,334 202,537
5.2 Borrowing 4,472,343 241,821 310,334 202,537
5.3 Senior securities 4,459,340 254,824 310,334 202,537
5.4 Concentration 4,467,204 246,960 310,334 202,537
5.5 Loans 4,482,289 231,875 310,334 202,537
5.6 Underwriting of securities 4,482,289 231,875 310,334 202,537
5.7 Investment in real estate 4,482,289 231,875 310,334 202,537
5.8 Purchase of physical 4,481,736 232,428 310,334 202,537
commodities
5.9 Investment in Ohio 4,482,289 231,875 310,334 202,537
municipal securities
5.10 Tax diversification 4,482,289 231,875 310,334 202,537
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
4,935,109 64,556 227,368
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
24 - Scudder Ohio 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
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Growth and Income 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
25 - Scudder Ohio Tax Free Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
26 - Scudder Ohio Tax Free Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
27 - Scudder Ohio Tax Free Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a
current prospectus.
Portfolio changes should not be considered recommendations
for action by individual investors.
SCUDDER
[LOGO]
<PAGE>
Scudder
Pennsylvania
Tax Free Fund
Annual Report
March 31, 1998
Pure No-Load(TM) Funds
For investors seeking double-tax-free income exempt from both Pennsylvania and
regular federal income taxes.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Pennsylvania Tax Free Fund
- --------------------------------------------------------------------------------
Date of Inception: 5/28/87 Total Net Assets as of Ticker Symbol: SCPAX
3/31/98: $78.7 million
- --------------------------------------------------------------------------------
o As of March 31, 1998, Scudder Pennsylvania Tax Free Fund's 30-day net
annualized SEC yield was 4.19%, equivalent to a 7.14% taxable yield for
Pennsylvania investors subject to the 41.29% combined federal and state income
tax rate.
o For its most recent fiscal year ended March 31, 1998, Scudder Pennsylvania Tax
Free Fund posted a total return of 10.08%, compared with the 10.24% average
return of 67 similar funds tracked by Lipper Analytical Services.
o Scudder Pennsylvania Tax Free Fund received a four-star rating from
Morningstar, reflecting "above average" risk-adjusted performance through March
31, 1998.*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
30-Day SEC Yield on March 31, 1998
BAR CHART DATA:
-----------------------------------
Scudder Taxable Yield
Pennsylvania Needed to Equal
Tax Free Fund the Fund's Yield
-----------------------------------
4.19% 7.14%
-----------------------------------
Table of Contents
3 Letter from the Fund's President 18 Notes to Financial Statements
4 Performance Update 20 Report of Independent Accountants
5 Portfolio Summary 21 Tax Information
6 Portfolio Management Discussion 22 Shareholder Meeting Results
9 Glossary of Investment Terms 24 Officers and Trustees
10 Investment Portfolio 25 Investment Products and Services
14 Financial Statements 26 Scudder Solutions
17 Financial Highlights
* 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. The Fund received four stars
for three-year performance, four stars for five-year performance, and three
stars for ten-year performance, and was rated among 1525, 782, and 345
municipal funds for the respective periods. Of the funds rated, 10% received
five stars, 22.5% received four stars, and 35% received three stars. Past
performance is no guarantee of future returns.
2 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
We are pleased to report to you concerning Scudder Pennsylvania Tax Free
Fund's performance over its most recent fiscal year ended March 31, 1998. In
addition to the Fund's four-star Morningstar rating as of March 31 (see page 2),
the Fund posted a 10.08% total return for its most recent fiscal year ended
March 31, 1998. Please read the portfolio management discussion beginning on
page 6 for more information about the Fund's performance, investment
environment, and outlook.
As of January 1, 1998, the Fund's investment adviser changed its name to
Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc., pursuant
to the acquisition of a majority interest in Scudder, Stevens & Clark by Zurich
Insurance Company, and the combining of Scudder's business with that of Zurich
Kemper Investments, Inc. January 1 also marked changes in your Fund's portfolio
management team. Donald C. Carleton, former Lead Portfolio Manager, retired
after 15 years at Scudder Kemper Investments. We thank Don for his many years of
service, and we welcome the Fund's new portfolio management team: Philip G.
Condon, Lead Portfolio Manager, and Rebecca L. Wilson, Portfolio Manager, with a
combined 30 years of investment industry experience.
For those of you interested in new Scudder products, we recently introduced
three industry sector funds as a part of our Choice Series: Scudder Financial
Services Fund, which seeks long-term growth by investing in financial services
companies in the U.S. and abroad; Scudder Health Care Fund, which seeks
long-term growth from health care companies located around the world; and
Scudder Technology Fund, which pursues long-term growth by investing in
companies that develop, produce, or distribute technology. In addition, April 6,
1998 marked the debut of our newest entrant in the growth and income category:
Scudder Real Estate Investment Fund, investing in equity securities of companies
in the real estate industry. Please see page 25 for more information on Scudder
products and services.
As always, please call a Scudder Investor Information representative at
1-800-225-2470 if you have questions about your Fund. Page 26 provides more
information on how to contact Scudder. Thank you for choosing Scudder
Pennsylvania Tax Free Fund to help meet your investment needs.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Pennsylvania Tax Free Fund
3 - Scudder Pennsylvania Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of March 31, 1998
- ----------------------------------------------------------------
Fund Index Comparisons
- ----------------------------------------------------------------
Total Return
- ---------------------------------------------
Period Ended Growth of Average
3/31/98 $10,000 Cumulative Annual
- ---------------------------------------------
SCUDDER PENNSYLVANIA TAX FREE FUND
- ---------------------------------------------
1 Year $ 11,008 10.08% 10.08%
5 year $ 13,699 36.99% 6.50%
10 Year $ 22,179 121.79% 8.29%
- ---------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- ---------------------------------------------
1 Year $ 11,073 10.73% 10.73%
5 Year $ 13,911 39.11% 6.82%
10 Year $ 22,289 122.89% 8.34%
- ---------------------------------------------
- -----------------------------------------------------------------
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 March 31
SCUDDER PENNSYLVANIA TAX FREE FUND
Year Amount
- ----------------------
88 $10,000
89 $11,044
90 $12,011
91 $12,921
92 $14,304
93 $16,190
94 $16,627
95 $17,806
96 $19,133
97 $20,148
98 $22,179
LEHMAN BROTHERS MUNICIPAL BOND INDEX
Year Amount
- ----------------------
88 $10,000
89 $10,719
90 $11,851
91 $12,943
92 $14,238
93 $16,022
94 $16,393
95 $17,611
96 $19,088
97 $20,129
98 $22,289
The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of municipal bonds issued across the United States. Index issues have a
credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly Periods Ended March 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------------------------------------------------------------------------------------------------
NET ASSET VALUE... $ 12.08 $ 12.27 $ 12.35 $ 12.80 $ 13.46 $ 13.01 $ 13.13 $ 13.31 $ 13.27 $ 13.85
INCOME DIVIDENDS.. $ .85 $ .84 $ .82 $ .77 $ .76 $ .75 $ .73 $ .71 $ .71 $ .70
CAPITAL GAINS
DISTRIBUTIONS..... $ .06 $ .01 $ -- $ .21 $ .21 $ .09 $ .03 $ .07 $ .02 $ .03
FUND TOTAL
RETURN (%)........ 11.00 8.75 7.58 10.70 13.19 2.70 7.45 7.45 5.30 10.08
INDEX TOTAL
RETURN (%)........ 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38 5.45 10.73
</TABLE>
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may be
worth more or less than when purchased. If the Adviser had not temporarily
capped expenses, the average annual total return for the Fund for the one year,
five year, and ten year periods would have been lower.
4 - Scudder Pennsylvania Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of March 31, 1998
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------
Hospital/Health 24%
Water/Sewer Revenue 19%
General Obligations 12%
Pollution Control/
Industrial Development 11%
Sales & Specialty Tax 6%
Port/Airport Revenue 5%
Higher Education 5%
Housing Finance Authority 4%
Country General Obligation/Lease 4%
Miscellaneous Municipal 10%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The Fund invests in a broad
selection of Pennsylvania tax-free
bonds.
- --------------------------------------------------------------------------
Quality
- --------------------------------------------------------------------------
AAA* 77%
AA 4%
A 6%
BBB 8%
Not Rated 5%
- --------------------------------------
100%
- --------------------------------------
Weighted average quality: AA
*Contains cash equivalents
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Overall portfolio quality remains
high, with over 85% of portfolio
securities rated A or better as of
March 31.
- --------------------------------------------------------------------------
Effective Maturity
- --------------------------------------------------------------------------
Less than 1 year 7%
1-5 years 27%
5-8 years 14%
8-15 years 35%
Greater than 15 years 17%
- --------------------------------------
100%
- --------------------------------------
Weighted average effective maturity:
8.9 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Our continuing goal is to have an
average effective maturity similar
to that of the Lehman Brothers
Municipal Bond Index, but with a
superior, call-protected structure.
- -----------------------------------------------------------------------------
For more complete details about the Fund's investment portfolio,
see page 10.
5 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
For its most recent fiscal year ended March 31, 1998, Scudder Pennsylvania Tax
Free Fund posted a solid total return as interest rates continued a slow and
steady decline against a backdrop of low inflation and healthy economic growth.
The Fund's 10.08% total return for the period consisted of a $0.58 increase in
net asset value to $13.85, income distributions of $0.70 per share, and a
long-term capital gain distribution of $0.03 per share. This return is in
keeping with the 10.24% average of 67 similar funds tracked by Lipper over the
12-month period. On March 31, 1998, the Fund's 30-day net annualized SEC yield
was 4.19%, equivalent to a taxable yield of 7.14% for shareholders subject to
the 41.29% maximum combined state and federal income tax rate. The Fund's tax
equivalent yield is significantly higher than current yields available from
taxable investments of similar maturity and credit quality.
Pennsylvania Update
After a slowdown in 1996, the Commonwealth of Pennsylvania experienced stronger
economic growth in 1997. Pennsylvania is expecting to finish its 1998 fiscal
year with a sixth consecutive operating surplus in its General Fund. Revenue
growth exceeded the Commonwealth's estimates by $216 million as of February
1998, with personal income tax collections contributing the majority of the
increase. During its 1997 economic resurgence, job growth in the service and
trade sectors boosted the Commonwealth's employment growth ranking from 44th in
the nation to 17th. Pennsylvania's unemployment rate in January 1998 was 4.6%,
slightly below the national average. The Commonwealth has a low debt burden,
benefiting from a favorable economy which has led to stronger finances,
increases in reserves, and job growth.
Steady Growth and
Low Inflation
The long-running U.S. economic scenario of moderate growth and low inflation
forges on. Asia, expected by many to export its way out of economic crisis and
in doing so derail U.S. growth, has so far increased exports only modestly. At
the same time, the U.S. bond market has benefited from Federal Reserve inaction
on interest rates, falling commodity prices, mixed economic statistics, and
portfolio rebalancing by investors who have acted to reduce the overweighting of
stocks in their portfolios. Moreover, the municipal bond market has enjoyed its
first significant increase in investor interest in four years. During the Fund's
most recent fiscal year, yields of 10-year Treasury bonds declined 1.3
percentage points and their prices rose 9.3%, while yields of comparable
municipal bonds declined almost three quarters of a percentage point and their
prices increased 5.2%.
It's important to note that in the current environment of lower municipal bond
yields, "real" interest rates -- interest rates minus increases in the CPI, a
recognized barometer of inflation -- have rarely been higher. Real interest
rates depict the level of income bondholders actually earn, taking into account
the erosion in value of their principal from inflation. The chart on the
following page illustrates the widening gap between yield levels and inflation
since March 1995.
6 - Scudder Pennsylvania Tax Free Fund
<PAGE>
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
Municipal Yields Compared with Inflation
March 31, 1995 - March 31, 1998
LINE CHART DATA:
-----------------------------------------------------
10-year
CPI municipal bonds
-----------------------------------------------------
3/95 2.73% 4.65%
2.90 5.00
2.95 5.15
1/96 2.99 5.00
3.04 4.85
2.50 5.10
2.23 4.75
1/97 2.08 4.50
1.84 4.60
1.60 4.20
1.40 4.30
3/98 1.40 4.50
(Chart indicates a 3.10% spread between the 10-year municipal
bonds at 4.50% (3/98) and the CPI at 1.40% (3/98).)
Municipal yields represented by 10-year, AAA-rated municipal bonds.
Inflation represented by CPI (Consumer Price Index).
Sources: Salomon Brothers; Datastream
- ----------
Noncallable Bonds
Remain a Focus
As a means of locking in a substantial income stream for Scudder Pennsylvania
Tax Free Fund over time, we continue to emphasize 10- to 20-year noncallable
bonds. As of March 31, over 40% of the Fund's securities had maturities in this
range. During the Fund's most recent fiscal year, we sold bonds with weaker call
protection and purchased additional noncallable bonds that were attractively
priced. We also continue to look for opportunities to add high yielding
BBB-rated and non-rated bonds to the portfolio. Higher yielding bonds, while
carrying some additional credit risk, generally exhibit less interest rate
sensitivity than municipal bonds rated A or above. Overall, the Fund held 13% of
bonds in the BBB-rated and nonrated categories as of the end of March. (For a
summary of the Fund's quality, diversification, and maturity structure, see page
5.) Lastly, our continuing goal is to have an average effective maturity similar
to that of the Lehman Brothers Municipal Bond Index, the Fund's benchmark, but
with a superior, call-protected structure. As of March 31, the Fund's average
effective maturity was approximately 8.9 years.
Overall portfolio quality remains high, with over 85% of portfolio securities
rated A or better at the close of the period. We continue to invest in a broad
selection of Pennsylvania municipal bonds, including hospital/health,
water/sewer revenue, and general obligation bonds.
Over the long term, we seek to provide a competitive level of federal and state
tax-exempt income for Fund investors -- with total return as an additional
objective -- by concentrating on three broad categories of Pennsylvania
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 existing "callable" 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.
As of March 31, 64% 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.
7 - Scudder Pennsylvania Tax Free Fund
<PAGE>
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.
Outlook
In the words of Federal Reserve Chairman Greenspan, the U.S. economy delivered
"exemplary performance" in 1997, with real GNP growth of 3.8%. We believe this
level of growth will be difficult to maintain in 1998 because of two current
drags on the economy -- burdensome consumer debt, and a high level of corporate
write-offs -- and one that still looms -- possible economic fallout from Asia's
troubles. Any slowdown from current levels of growth would provide a basis for a
sustained decline in interest rates and favorable bond market performance. At
the same time, we believe that the Fed will stand ready to raise interest rates
at the first sign of runaway growth.
We will continue our focus on 10-20 year noncallable municipal bonds as we seek
to boost yield and achieve attractive long-term returns for our investors. At
the same time, we will attempt to limit volatility by maintaining a neutral
average maturity and high overall credit quality as we pursue double-tax-free
income and competitive total return for Scudder Pennsylvania Tax Free Fund
shareholders.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Rebecca L. Wilson
Philip G. Condon Rebecca L. Wilson
Scudder Pennsylvania
Tax Free Fund:
A Team Approach to Investing
Scudder Pennsylvania Tax Free Fund is managed by a team of Scudder Kemper
Investments, Inc. (the "Adviser") 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
the Adviser's large staff of economists, research analysts, traders, and other
investment specialists who work in our offices across the United States and
abroad. We believe our team approach benefits Fund investors by bringing
together many disciplines and leveraging our extensive resources.
Lead Portfolio Manager Philip G. Condon assumed responsibility for the Fund's
day-to-day management in 1998 and became a member of the team in 1987. Mr.
Condon has been with the Adviser since 1983. Mr. Condon has 18 years of
experience in municipal investing and portfolio management. Rebecca L. Wilson,
Portfolio Manager, became a member of the team in 1998. Ms. Wilson, who joined
the Adviser in 1986, has 12 years of experience in municipal investing and
research.
8 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Glossary of Investment Terms
BOND An interest-bearing security issued by the
federal, state, or local government or a
corporation that obligates the issuer to pay
the bondholder a specified amount of interest
for a stated period -- usually a number of
years -- and to repay the face amount of the
bond at its maturity date.
GENERAL OBLIGATION BOND A municipal bond backed by the "full faith
and credit" (including the taxing and further
borrowing power) of the city, state, or
agency that issues the bond. A general
obligation bond is repaid with the issuer's
general revenue and borrowings.
INFLATION An overall increase in the prices of goods
and services, as happens when business and
consumer spending increases relative to the
supply of goods available in the marketplace
-- in other words, when too much money is
chasing too few goods. High inflation has a
negative impact on the prices of fixed-income
securities.
MUNICIPAL BOND An interest-bearing debt security issued by a
state or local government entity.
NET ASSET VALUE (NAV) The price per share of a mutual fund based on
the sum of the market value of all the
securities owned by the fund divided by the
number of outstanding shares.
TAXABLE EQUIVALENT YIELD The level of yield a fully taxable instrument
would have to provide to equal that of a
tax-free municipal bond on an after-tax
basis.
30-DAY SEC YIELD The standard yield reference for bond funds,
based on a formula prescribed by the SEC.
This annualized yield calculation reflects
the 30-day average of the income earnings of
every holding in a given fund's portfolio,
net of expenses, assuming each is held to
maturity.
TOTAL RETURN The most common yardstick to measure the
performance of a fund. Total return --
annualized or compound -- is based on a
combination of share price changes plus
income and capital gain distributions, if
any, expressed as a percentage gain or loss
in value.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
9 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Investment Portfolio as of March 31, 1998
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Municipal Investments 3.6%
- ------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Allegheny County, PA, Industrial Development Authority, LC Longwood at Oakmont:
Daily Demand Note, 3.9%, 7/1/27* ............................................. 100,000 AA 100,000
Series 1997, Daily Demand Note, 3.9%, 7/1/27* ................................ 400,000 AA1 400,000
Series 1997B, Daily Demand Note, 3.9%, 7/1/27* ............................... 100,000 AA1 100,000
Delaware County, PA, Airport Facilities Revenue, United Parcel Service,
Daily Demand Note, 3.7%, 12/1/15* ............................................ 2,000,000 AAA 2,000,000
Pennsylvania Higher Educational Facilities Authority, Carnegie Mellon
University, Daily Demand Note, Series 1995 D, 3.75%, 11/1/30* ................ 200,000 A1+ 200,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Investments (Cost $2,800,000) 2,800,000
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Municipal Investments 96.4%
- ------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Allegheny County, PA, Airport Revenue, Pittsburgh International Airport, Series
1997A, 5.75%, 1/1/13 (c) ..................................................... 1,500,000 AAA 1,613,009
Allegheny County, PA, Higher Education Building Authority, Community College,
Series 1993A, 5.8%, 6/1/13 (c) ............................................... 2,000,000 AAA 2,146,480
Allegheny County, PA, Sanitary Authority, Sewer Revenues, Series 1986 B,
Prerefunded 6/1/99, 7.5%, 12/1/16 (c) ........................................ 500,000 AAA 521,580
Armstrong County, PA, Hospital Authority, St. Frances Medical Center,
Series A, 6.25%, 6/1/13 (c) .................................................. 1,000,000 AAA 1,080,370
Berks County, PA, Municipal Authority Hospital Revenue, Reading Hospital and
Medical Center Project:
5.5%, 10/1/08 (c) ........................................................... 1,000,000 AAA 1,076,010
5.7%, 10/1/14 (c) ........................................................... 1,000,000 AAA 1,088,630
Bethlehem, PA, Water Authority, Refunding, 4.875%, 11/15/14 (c) ................ 1,000,000 AAA 971,650
Bethlehem, PA, Water Revenue, Series 1992, Prerefunded 11/15/01, 6.25%,
11/15/11 (c)*** .............................................................. 1,000,000 AAA 1,071,980
Blair County, PA, Hospital Authority, Altoona Hospital Project, 5.5%,
7/1/07 (c) ................................................................... 1,000,000 AAA 1,074,130
Bucks County, PA, Water and Sewer Authority Revenue, ETM, 6.375%, 12/1/08** .... 425,000 NR 470,781
Clearfield, PA, Hospital Authority Revenue, Clearfield Hospital, 6.875%,
6/1/16 ....................................................................... 1,450,000 BBB 1,583,676
Commonwealth of Pennsylvania, Certificate of Participation, Lease Revenue,
Series A, 5.25%, 7/1/10 (c) .................................................. 1,890,000 AAA 1,917,140
Delaware County Authority, Commonwealth of Pennsylvania, University Revenue,
Villanova University, Prerefunded 8/1/98, 7.75%, 8/1/18*** ................... 200,000 AAA 206,636
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder Pennsylvania Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware County, PA, Health Facilities Revenue, Mercy Health Corporation of
Southeastern Pennsylvania, Series B, 6%, 11/15/07 ............................ 1,500,000 BBB 1,650,840
Delaware County, PA, Hospital Revenue, Memorial Hospital, 5.5%, 8/15/13 ........ 1,750,000 AAA 1,817,375
Delaware County, PA, Industrial Development Authority, Resource Recovery
Revenue, Series A, Refunding Bond, 6.5%, 1/1/08 .............................. 1,000,000 A 1,124,410
Delaware County, PA, White Horse Village, NC Series 1996 A, 6.6%, 7/1/06 ....... 1,000,000 NR 1,045,750
Erie County, PA, Pollution Control, 5.3%, 4/1/12 ............................... 1,000,000 A 1,025,690
Erie County, PA, Prison Authority, Commonwealth Lease Revenue, Prerefunded
11/1/01, 6.25%, 11/1/11 (c)*** ............................................... 1,000,000 AAA 1,071,280
Harrisburg, PA, General Obligation, Refunding, Zero Coupon, Series D,
9/15/11 (c) .................................................................. 1,000,000 AAA 517,240
Harrisburg, PA, Series 1997F, Zero Coupon, 3/15/12 ............................. 1,770,000 AAA 881,265
Harrisburg, PA, Water Authority Revenue, Series 1993 B, Inverse Floater,
7.72%, 6/18/15 (c)**** ....................................................... 700,000 AAA 791,000
Indiana County, PA, Industrial Development Authority, Pennsylvania Electric
Company, Pollution Control Revenue, 5.35%, 11/1/10 (c) ....................... 1,000,000 AAA 1,064,110
Lebanon County, PA, Good Samaritan Hospital Authority Revenue, Series 1989 B,
Prerefunded 11/1/99, 8.25%, 11/1/18*** ....................................... 600,000 AAA 651,858
Lehigh County, PA, General Purpose, Hospital Authority Revenue, Lehigh Valley
Health Network, 5%, 7/1/13 (c) ............................................... 1,315,000 AAA 1,298,326
Montgomery County, PA, Holy Redeemer Hospital, 6.75%, 2/1/09 (c) ............... 500,000 AAA 512,725
Montgomery County, PA, Redevelopment Authority, Multi-Family Housing Revenue
Refunding, KBF Associates, LP Project, 6.375%, 7/1/12 ........................ 1,500,000 BBB 1,560,180
Pennsylvania Convention Center Authority, Funding Revenue, 6%, 9/1/19 (c) ...... 2,200,000 AAA 2,434,718
Pennsylvania General Obligation:
10%, 4/15/02 (c) ............................................................. 2,500,000 AAA 3,035,300
6.25%, 7/1/10 ................................................................ 1,000,000 AA 1,146,040
Prerefunded 12/15/98, Zero Coupon, 12/15/02*** ............................... 2,040,000 AAA 1,452,031
Pennsylvania Higher Education Facilities Authority, Health Services,
Series 1996 A, 5.6%, 11/15/10 (c) ............................................ 2,480,000 AAA 2,690,552
Pennsylvania Housing Finance Agency, Single Family Mortgage Revenue:
Series 1991-32, 7.15%, 4/1/15 ................................................ 865,000 AA 919,919
Series 1992-33, 6.85%, 10/1/09 ............................................... 840,000 AA 901,580
Pennsylvania Industrial Development Authority, Economic Development Revenue:
5.8%, 1/1/08 (c) ............................................................. 1,000,000 AAA 1,088,430
Series 1996, 6%, 7/1/08 (c) .................................................. 1,000,000 AAA 1,108,140
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Pennsylvania Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pennsylvania Intergovernmental Cooperation Authority, Special Tax Revenue,
City of Philadelphia, Prerefunded 6/15/02, 6.8%, 6/15/12*** .................. 1,000,000 AAA 1,101,460
Philadelphia, PA, Authority for Industrial Development, Commercial
Development Revenues, Series 1997 A, 6.5%, 10/1/27 ........................... 1,000,000 NR 1,075,210
Philadelphia, PA, General Obligation:
11.5%, 8/1/98 (c) ............................................................ 500,000 AAA 512,655
Refunding Revenue, Series A, 11.5%, 8/1/99 (c) ............................... 710,000 AAA 779,218
School District, Series A, 6.25%, 9/1/09 (c) ................................. 1,000,000 AAA 1,136,640
Series 1993 A, 5.5%, 9/1/14 (c) .............................................. 1,500,000 AAA 1,602,390
Philadelphia, PA, Hospital and Higher Education Facilities Authority:
Hospital Revenue:
Albert Einstein Medical Center, 7.5%, 4/1/99 ................................ 275,000 A 284,235
Children's Seashore House, Series A, 7%, 8/15/12 ............................ 1,000,000 A 1,098,270
Temple University, Series 1997, 5.5%, 11/15/27 ............................... 1,000,000 A 1,000,730
Temple University Hospital, Series 1993 A, 6.625%, 11/15/23 .................. 1,100,000 BBB 1,199,858
Philadelphia, PA, Municipal Authority, Lease Revenue Refunding,
Series A, 5.625%, 11/15/14 (c) .............................................. 1,000,000 AAA 1,046,890
Philadelphia, PA, Port Authority Lease Revenue, Series 1993, 6.2%, 9/1/13 (c) .. 2,000,000 AAA 2,172,520
Philadelphia, PA, Water & Wastewater Refunding Revenue, 5.625%, 6/15/09 (c) .... 2,000,000 AAA 2,168,660
Philadelphia, PA, Water and Waste Revenue, 5.625%, 6/15/08 (c) ................. 2,000,000 AAA 2,168,720
Philadelphia, PA, Water Revenue, 6.25%, 8/1/10 (c) ............................. 1,000,000 AAA 1,139,720
Pittsburgh, PA, Water and Sewer System Revenue:
ETM, 7.25%, 9/1/14 (c)** ..................................................... 150,000 AAA 183,428
Series A, 4.75%, 9/1/16 (c) .................................................. 2,000,000 AAA 1,896,360
Series A, Prerefunded 9/1/01, 6.5%, 9/1/14 (c)*** ............................ 1,250,000 AAA 1,366,875
Somerset County, PA, General Authority, Commonwealth Lease Revenue,
Prerefunded 10/15/01, 6.25%, 10/15/11 (c)*** ................................. 1,000,000 AAA 1,070,480
Union County, PA, Higher Education Facilities Authority, University Revenue,
Bucknell University, 6.2%, 4/1/07 (c) ........................................ 1,000,000 AAA 1,076,820
University Area, PA, Sewer Revenue, 5.25%, 11/1/14 (c) ......................... 1,750,000 AAA 1,822,958
Washington County, PA, Lease Revenue, Shadyside Hospital Project, Prerefunded
6/15/00, 7.375%, 12/15/09 (c)*** ............................................. 1,000,000 AAA 1,098,630
Wilson, PA, Area School District, Zero Coupon, 5/15/09 (c) ..................... 2,000,000 AAA 1,189,100
PUERTO RICO
Puerto Rico Public Building Authority, Government Facilities Revenue, 6.25%,
7/1/13 (c) ................................................................... 1,000,000 AAA 1,154,270
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Pennsylvania Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VIRGIN ISLANDS
Virgin Islands Public Finance Authority, General Obligation, Matching
Fund Loan Notes, Series A, 7.25%, 10/1/18 .................................... 1,500,000 NR 1,679,160
- ------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $70,410,998) 75,636,088
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $73,210,998) (a) 78,436,088
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $73,210,998. At March 31,
1998, net unrealized appreciation for all securities based on tax cost was
$5,225,090. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $5,264,428 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$39,338.
(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 by the Investment Adviser to be of
comparable quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, MBIA or BIG.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand
notes are securities whose yields are periodically reset at levels that
are generally comparable to tax-exempt commercial paper. These securities
are payable on demand within seven calendar days and normally incorporate
an irrevocable letter of credit from a major bank. These notes are
carried, for purposes of calculating average weighted maturity, at the
longer of the period remaining until the next rate change or to the extent
of the demand period.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.
*** Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest, if any, on the tax-exempt issue and to retire the bonds in
full at the earliest refunding date.
**** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of March 31, 1998.
The accompanying notes are an integral part of the financial statements.
13 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of March 31, 1998
<TABLE>
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $73,210,998) ................. $ 78,436,088
Receivable for investments sold ...................................... 260,000
Interest receivable .................................................. 1,254,399
Receivable for Fund shares sold ...................................... 269,846
Other assets ......................................................... 1,208
----------------
Total assets ......................................................... 80,221,541
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Due to custodian bank ................................................ 19,567
Payable for investments purchased .................................... 1,294,406
Dividends payable .................................................... 121,400
Payable for Fund shares redeemed ..................................... 39,845
Accrued management fee ............................................... 20,932
Other payables and accrued expenses .................................. 29,986
----------------
Total liabilities .................................................... 1,526,136
--------------------------------------------------------------------------------------------
Net assets, at market value $ 78,695,405
--------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation on investments ........................... 5,225,090
Accumulated net realized gain ........................................ 422,774
Paid-in capital ...................................................... 73,047,541
--------------------------------------------------------------------------------------------
Net assets, at market value $ 78,695,405
--------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($78,695,405 / 5,680,795 outstanding shares of beneficial ----------------
interest, $.01 par value, unlimited number of shares authorized) $13.85
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Statement of Operations
year ended March 31, 1998
<TABLE>
<S> <C>
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------
Income:
Interest ............................................................. $ 4,240,429
-----------------
Expenses:
Management fee ....................................................... 450,978
Services to shareholders ............................................. 87,721
Custodian and accounting fees ........................................ 58,471
Trustees' fees and expenses .......................................... 15,067
Auditing ............................................................. 31,683
Reports to shareholders .............................................. 20,102
Registration fees .................................................... 3,926
Legal ................................................................ 5,345
Other ................................................................ 7,132
-----------------
Total expenses before reductions ..................................... 680,425
Expense reductions ................................................... (292,000)
-----------------
Expenses, net ........................................................ 388,425
---------------------------------------------------------------------------------------------
Net investment income 3,852,004
---------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from investment transactions ................ 588,571
Net unrealized appreciation (depreciation) on investments during the
period ............................................................ 2,760,257
---------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions 3,348,828
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 7,200,832
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended March 31,
Increase (Decrease) in Net Assets 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income gain (loss) ......................... $ 3,852,004 $ 4,007,012
Net realized gain (loss) from investment transactions ..... 588,571 84,346
Net unrealized appreciation (depreciation) on investments
during the period ...................................... 2,760,257 (190,591)
---------------- ---------------
Net increase (decrease) in net assets resulting from
operations ............................................. 7,200,832 3,900,767
---------------- ---------------
Distributions to shareholders:
From net investment income ................................ (3,852,004) (4,007,012)
---------------- ---------------
From net realized gains from investment transactions ...... (164,742) (130,973)
---------------- ---------------
Fund share transactions:
Proceeds from shares sold ................................. 13,083,990 13,660,695
Net asset value of shares issued to shareholders in
reinvestment of distributions .......................... 2,523,349 2,572,041
Cost of shares redeemed ................................... (14,274,017) (17,335,755)
---------------- ---------------
Net increase (decrease) in net assets from Fund share
transactions ........................................... 1,333,322 (1,103,019)
---------------- ---------------
Increase (decrease) in net assets ......................... 4,517,408 (1,340,237)
Net assets at beginning of period ......................... 74,177,997 75,518,234
---------------- ---------------
Net assets at end of period ............................... $78,695,405 $74,177,997
---------------- ---------------
Other Information
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ................. 5,591,548 5,674,116
---------------- ---------------
Shares sold ............................................... 956,693 1,024,372
Shares issued to shareholders in reinvestment of
distributions .......................................... 184,079 192,785
Shares redeemed ........................................... (1,051,525) (1,299,725)
---------------- ---------------
Net increase (decrease) in Fund shares .................... 89,247 (82,568)
---------------- ---------------
Shares outstanding at end of period ....................... 5,680,795 5,591,548
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Financial Highlights
The following table included selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of -----------------------------------------------------------------------------------
period ............................. $13.27 $13.31 $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income ................. .70 .71 .71 .73 .75 .76 .77 .82 .84 .79
Net realized and unrealized gain
(loss) on investment transactions .. .61 (.02) .25 .15 (.36) .87 .52 .08 .20 .40
Total from investment
operations ......................... 1.31 .69 .96 .88 .39 1.63 1.29 .90 1.04 1.19
-----------------------------------------------------------------------------------
Less distributions:
From net investment
income ............................. (.70) (.71) (.71) (.73) (.75) (.76) (.77) (.82) (.84) (.85)
From net realized gains on -----------------------------------------------------------------------------------
investment transactions ............ (.03) (.02) (.07) (.03) (.09) (.21) (.07) -- (.01) (.06)
-----------------------------------------------------------------------------------
Total distributions ................... (.73) (.73) (.78) (.76) (.84) (.97) (.84) (.82) (.85) (.91)
-----------------------------------------------------------------------------------
Net asset value, end of -----------------------------------------------------------------------------------
period ............................. $13.85 $13.27 $13.31 $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) .................. 10.08 5.30 7.45 7.09 2.70 13.19 10.70 7.58 8.75 11.00
Ratios and Supplemental Data
Net assets, end of period
($ millions) ....................... 79 74 76 72 74 61 39 26 18 11
Ratio of operating expenses, net to
average daily net assets (%) ....... .52 .50 .50 .50 .50 .50 .50 .50 .50 .50
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............... .91 .92 .91 .94 .95 1.02 1.13 1.43 1.84 2.43
Ratio of net investment income to
average daily net assets (%) ....... 5.12 5.32 5.30 5.74 5.42 5.79 6.05 6.67 6.78 7.09
Portfolio turnover rate (%) ........... 20.4 11.6 11.1 26.2 17.4 29.2 11.2 7.8 2.0 13.5
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
17 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Pennsylvania Tax Free Fund (the "Fund") is a non-diversified series of
Scudder State Tax Free Trust (the "Trust"). The Trust is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. There are
currently six series in the Trust.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio debt securities with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which quotations reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
Amortization and Accretion. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable and tax-exempt income
to its shareholders. Accordingly, the Fund paid no federal income taxes and no
provision for federal income taxes was required.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations which
may differ from generally accepted accounting principles. As a result, net
investment income and net realized gain (loss) on investment transactions for a
reporting period may differ significantly from distributions during such period.
Accordingly, the Fund may periodically make reclassifications among certain of
its capital accounts without impacting the net asset value of the Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
Other. Investment security transactions are accounted for on a trade date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of the call
or maturity date.
B. Purchases and Sales of Securities
For the year ended March 31, 1998, purchases and sales of long-term municipal
securities aggregated $14,726,861 and $17,033,468, respectively.
18 - Scudder Pennsylvania Tax Free Fund
<PAGE>
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, the Fund agrees to pay the
Adviser a fee equal to an annual rate of approximately 0.60% of the Fund's
average daily net assets, computed and accrued daily and payable monthly. The
Adviser determines the securities, instruments, and other contracts relating to
investments to be purchased, sold or entered into by the Fund. In addition to
portfolio management services, the Adviser provides certain administrative
services in accordance with the Management Agreement. The Adviser had agreed not
to impose all or a portion of its management fee and to maintain the annualized
expenses of the Fund at not more than 0.50% of average daily net assets until
January 31, 1998 and at not more than 0.60% of average daily net assets for the
period from February 1, 1998 to July 31, 1998. For the year ended March 31,
1998, the Adviser imposed fees amounting to $158,978 of which $20,932 was unpaid
at March 31, 1998 and the portion not imposed amounted to $292,000 for the year
ended March 31, 1998.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Fund. For the
year ended March 31, 1998, the amount charged to the Fund by SSC aggregated
$61,715, of which $5,020 was unpaid at March 31, 1998.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
March 31, 1998, the amount charged to the Fund by SFAC aggregated $36,000, of
which $3,000 was unpaid at March 31, 1998.
The Trust pays each Trustee not affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1998,
Trustees' fees and expenses charged to the Fund aggregated $15,067.
19 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder State Tax Free Trust and the Shareholders of Scudder
Pennsylvania Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Scudder
Pennsylvania Tax Free Fund, including the investment portfolio, as of March 31,
1998, 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 ten years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1998, 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 Pennsylvania Tax Free Fund as of March 31, 1998, 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 ten years in the period then ended, in conformity with generally accepted
accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 4, 1998
20 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Tax Information
The Fund paid distributions of $.03 per share from net long-term capital gains
during its year ended March 31, 1998, of which 47.0% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$610,000 as capital gain dividends for its year ended March 31, 1998, of which
54.0% represents 20% rate gains.
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 1998, 100% constituted exempt interest dividends for regular federal
income tax and Pennsylvania personal income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
21 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Pennsylvania Tax
Free Fund (the "Fund") was held on October 24, 1997, at the office of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. At the Meeting, as adjourned
and reconvened, the following matters were voted upon by the shareholders (the
resulting votes for each matter are presented below). With regard to certain
proposals, it was recommended that the Meeting be reconvened in order to provide
shareholders with an additional opportunity to return their proxies. The date of
the reconvened meeting at which the matters were decided is noted after the
proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
3,350,032 171,092 137,390 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 3,519,153 139,363
Dawn-Marie Driscoll 3,519,153 139,363
Peter B. Freeman 3,517,736 140,780
George M. Lovejoy, Jr. 3,517,653 140,863
Wesley W. Marple, Jr. 3,517,493 141,023
Daniel Pierce 3,517,583 140,934
Kathryn L. Quirk 3,516,290 142,226
Jean C. Tempel 3,519,080 139,436
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
3,018,015 231,459 264,041 145,001
22 - Scudder Pennsylvania Tax Free Fund
<PAGE>
4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
3,121,056 208,759 194,995 142,782
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<S> <C> <C> <C> <C>
5.1 Diversification 3,061,248 197,391 254,876 145,001
5.2 Borrowing 3,048,139 210,499 254,876 145,001
5.3 Senior securities 3,059,460 199,178 254,876 145,001
5.4 Concentration 3,062,691 198,497 252,326 145,001
5.5 Loans 3,060,360 198,279 254,876 145,001
5.6 Underwriting of securities 3,061,248 200,589 251,678 145,001
5.7 Investment in real estate 3,061,248 200,589 251,678 145,001
5.8 Purchase of physical 3,058,711 203,126 251,678 145,001
commodities
5.9 Investment in Pennsylvania 3,064,851 193,788 254,876 145,001
municipal securities
5.10 Tax diversification 3,061,248 197,391 254,876 145,001
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
3,409,862 75,495 173,157
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
23 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center
for Business Ethics, Bentley
College; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration,
Northeastern University, College
of Business Administration
Kathryn L. Quirk*
Trustee; Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
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, Secretary and
Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
24 - Scudder Pennsylvania 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
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
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
Scudder S&P 500 Index Fund
Scudder Real Estate Investment 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 Growth and Income 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, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal 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. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. +++ +++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 Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
25 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
26 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
27 - Scudder Pennsylvania Tax Free Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a
current prospectus.
Portfolio changes should not be considered recommendations
for action by individual investors.
SCUDDER
[LOGO]
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SCUDDER STATE TAX FREE TRUST
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a. Financial Statements
Included in Part A of this Registration Statement:
Financial Highlights for Scudder New York Tax Free Fund for
the ten fiscal years ended March 31, 1998.
Financial Highlights for each of Scudder New York Tax Free
Money Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund for the ten fiscal years ended
March 31, 1998.
Financial Highlights for Scudder Massachusetts Limited Term
Tax Free Fund for the period February 15, 1994 (commencement
of operations) to October 31, 1994 and for the three fiscal
years ended October 31, 1997.
Financial Highlights for Scudder Massachusetts Tax Free Fund
for the ten fiscal years ended March 31, 1998.
Included in Part B of this Registration Statement:
For Scudder New York Tax Free Fund:
Investment Portfolio as of March 31, 1998
Statement of Assets and Liabilities as of March 31, 1998
Statement of Operations for the fiscal year ended March 31,
1998
Statements of Changes in Net Assets for the two fiscal years
ended March 31, 1998
Financial Highlights for the ten fiscal years ended March
31, 1998
Notes to Financial Statements
Report of Independent Accountants
For each of Scudder New York Tax Free Money Fund, Scudder Ohio Tax
Free Fund and Scudder Pennsylvania Tax Free Fund:
Investment Portfolio as of March 31, 1998
Statement of Assets and Liabilities as of March 31, 1998
Statement of Operations for the year ended March 31, 1998
Statements of Changes in Net Assets for the two fiscal years
ended March 31, 1998 Financial Highlights for the ten fiscal
years ended March 31, 1998
Notes to Financial Statements
Report of Independent Accountants
For Scudder Massachusetts Limited Term Tax Free Fund:
Investment Portfolio as of April 30, 1998
Statement of Assets and Liabilities as of April 30, 1998
Statement of Operations for the six months ended April 30,
1998
Statements of Changes in Net Assets for the six months ended
October 31, 1997
Financial Highlights for the period February 15, 1994
(commencement of operations) to October 31, 1994, for the
three fiscal years ended October 31, 1997 and for the six
month period ended April 30, 1998
Notes to Financial Statements
Report of Independent Accountants
Part C - Page 1
<PAGE>
For Scudder Massachusetts Tax Free Fund:
Investment Portfolio as of March 31, 1998
Statement of Assets and Liabilities as of March 31, 1998
Statement of Operations for the six months ended March 31,
1998
Statements of Changes in Net Assets for the two fiscal years
ended March 31, 1998
Financial Highlights for the ten fiscal years ended March
31, 1998.
Notes to Financial Statements
Statements, schedules and historical information other than those
listed have been omitted since they are either not applicable or are
not required.
b. Exhibits:
1. (a) Amended and Restated Declaration of Trust dated as of December 8,
1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(b) Amended Establishment and Designation of Series of Beneficial
Interest, $.01 Par Value.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
2. (a) By-laws of the Registrant dated as of May 25, 1983.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(b) Amendment to By-Laws dated December 10, 1991.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
3. Inapplicable.
4. Specimen certificate representing shares of beneficial interest,
$.01 par value.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(a) Investment Management Agreement between the Registrant (on behalf of
New York Tax Free Fund) and Scudder, Stevens & Clark, Inc. dated
January 1, 1988.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
5. (a)(1) Investment Management Agreement between the Registrant (on behalf of
Scudder New York Tax Free Fund) and Scudder, Stevens & Clark, Inc.
dated December 12, 1990.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(a)(2) Investment Management Agreement between the Registrant (on behalf of
Scudder New York Tax Free Fund) and Scudder Kemper Investments, Inc.
dated December 31, 1997.
(Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement.)
Part C - Page 2
<PAGE>
(b) Investment Advisory Agreement between the Registrant (on behalf of
Scudder New York Tax Free Money Fund) and Scudder, Stevens & Clark
Ltd. dated June 1, 1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(b)(1) Investment Management Agreement between the Registrant (on behalf of
Scudder New York Tax Free Money Fund) and Scudder Kemper
Investments, Inc. dated December 31, 1997.
(Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement.)
(c) Investment Advisory Agreement between the Registrant (on behalf of
Scudder Massachusetts Tax Free Fund) and Scudder, Stevens & Clark
Ltd. dated June 1, 1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(c)(1) Investment Management Agreement between the Registrant (on behalf of
Scudder Massachusetts Tax Free Fund) and Scudder Kemper Investments,
Inc. dated December 31, 1997.
(Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement.)
(d) Investment Advisory Agreement between the Registrant (on behalf of
Scudder Ohio Tax Free Fund) and Scudder, Stevens & Clark Ltd. dated
June 1, 1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(d)(1) Investment Management Agreement between the Registrant (on behalf of
Scudder Ohio Tax Free Fund) and Scudder Kemper Investments, Inc.
dated December 31, 1997.
(Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement.)
(e) Investment Advisory Agreement between the Registrant (on behalf of
Scudder Pennsylvania Tax Free Fund) and Scudder, Stevens & Clark
Ltd. dated June 1, 1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(e)(1) Investment Management Agreement between the Registrant (on behalf of
Scudder Pennsylvania Tax Free Fund) and Scudder Kemper Investments,
Inc. dated December 31, 1997.
(Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement.)
(f) Investment Management Agreement between the Registrant (on behalf of
Scudder Massachusetts Limited Term Tax Free Fund) and Scudder,
Stevens & Clark, Inc. dated February 2, 1994.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
Part C - Page 3
<PAGE>
(g) Investment Management Agreement between the Registrant (on behalf of
Scudder Massachusetts Tax Free Fund) and Scudder, Stevens & Clark,
Inc. dated December 11, 1996.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(h) Investment Management Agreement between the Registrant (on behalf of
Scudder Massachusetts Limited Term Tax Free Fund) and Scudder Kemper
Investments, Inc. dated December 31, 1997.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement.)
(h)(1) Investment Management Agreement between the Registrant (on behalf of
Scudder Massachusetts Limited Term Tax Free Fund) and Scudder Kemper
Investments, Inc. dated December 31, 1997.
(Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement.)
6. (a) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., dated June 1, 1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
7. Inapplicable.
8. (a)(1) Custodian Agreement between the Registrant and State Street Bank and
Trust Company dated June 14, 1983.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(a)(2) Fee schedule for Exhibit 8(a)(1).
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(a)(3) Amendment No. 1 to the Custodian Agreement between the Registrant
and State Street Bank and Trust Company dated June 14, 1983.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(a)(4) Amendment to the Custodian Agreement between the Registrant and
State Street Bank and Trust Company dated August 9, 1988.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(a)(5) Amendment to Custodian Contract between the Registrant and State
Street Bank and Trust Company dated December 11, 1990.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(b) Subcustodian Agreement between State Street Bank and Trust Company
and Morgan Guaranty Trust Company of New York dated November 25,
1985.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
Part C - Page 4
<PAGE>
(b)(1) Subcustodian Agreement between State Street Bank and Trust Company
and Irving Trust Company dated November 25, 1985.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(c) Subcustodian Agreement between Irving Trust Company and State Street
Bank and Trust Company dated November 30, 1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(d) Subcustodian Agreement between Chemical Bank and State Street Bank
and Trust Company dated October 6, 1988.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(e) Subcustodian Agreement between Security Pacific National Trust
Company (New York) and State Street Bank and Trust Company dated
February 18, 1988.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(f) Fee schedule for Exhibit 8(a)(1).
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(f)(1) Form of a Fee Schedule for Exhibit 8(a)(1).
(Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement.)
9. (a)(1) Transfer Agency and Service Agreement between the Registrant and
Scudder Service Corporation dated October 2, 1989.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(a)(2) Fee schedule for Exhibit 9(a)(l).
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(b) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Massachusetts Limited Term Tax Free Fund, and Scudder
Fund Accounting Corporation dated February 15, 1994.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(c) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder New York Tax Free Fund, and Scudder Fund Accounting
Corporation dated December 7, 1994.
(Incorporated by reference to Exhibit 9(c) to Post-Effective
Amendment No. 17 to the Registration Statement.)
(d) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder New York Tax Free Money Fund, and Scudder Fund Accounting
Corporation dated September 22, 1994.
(Incorporated by reference to Exhibit 9(d) to Post-Effective
Amendment No. 17 to the Registration Statement.)
Part C - Page 5
<PAGE>
(e) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Massachusetts Tax Free Fund, and Scudder Fund Accounting
Corporation dated November 14, 1994.
(Incorporated by reference to Exhibit 9(e) to Post-Effective
Amendment No. 17 to the Registration Statement.)
(f) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Ohio Tax Free Fund, and Scudder Fund Accounting
Corporation dated November 21, 1994.
(Incorporated by reference to Exhibit 9(f) to Post-Effective
Amendment No. 17 to the Registration Statement.)
(g) Fund Accounting Services Agreement between the Registrant, on behalf
of Scudder Pennsylvania Tax Free Fund, and Scudder Fund Accounting
Corporation dated November 16, 1994.
(Incorporated by reference to Exhibit 9(g) to Post-Effective
Amendment No. 17 to the Registration Statement.)
(h) Account Application.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
10. Inapplicable.
11. Consent of Independent Accountants is filed herein.
12. Inapplicable.
13. Inapplicable.
14. Inapplicable.
15. Inapplicable.
16. Schedule for Computation of Performance Quotations.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
17. Article 6 Financial Data Schedules are filed herein.
18. Inapplicable.
19. Power of Attorney.
(Filed as part of the signature page of Post-Effective Amendment No.
11 to the Registration Statement and as part of the signature page
of Post-Effective Amendment No. 17 to the Registration Statement and
as part of the signature page of PEA No. 20.)
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement.)
</TABLE>
Part C - Page 6
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant.
None
Item 26. Number of Holders of Securities (as of July 17, 1998).
<TABLE>
<CAPTION>
<S> <C>
(1) (2)
Title of Class Number of Record Shareholders
Shares of beneficial interest
$.01 par value
Scudder New York Tax Free Fund 3,890
Scudder New York Tax Free Money Fund 1,510
Scudder Ohio Tax Free Fund 1,880
Scudder Pennsylvania Tax Free Fund 1,987
Scudder Massachusetts Tax Free Fund 6,499
Scudder Massachusetts Limited Term Tax Free Fund 1,388
</TABLE>
Item 27. Indemnification.
A policy of insurance covering Scudder Kemper Investments,
Inc. its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
Trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV, Sections 4.1 - 4.3 of Registrant's Declaration of
Trust provide as follows:
Section 4.1 No Personal Liability of Shareholders, Trustees,
Etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2 Non-Liability of Trustees Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Part C - Page 7
<PAGE>
Section 4.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is, or has been, a
Trustee or officer of the Trust shall be
indemnified by the Trust to the fullest
extent permitted by law against all
liability and against all expenses
reasonably incurred or paid by him in
connection with any claim, action, suit or
proceeding in which he becomes involved as a
party or otherwise by virtue of his being or
having been a Trustee or officer and against
amounts paid or incurred by him in the
settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims,
actions, suits or proceedings (civil,
criminal, or other, including appeals),
actual or threatened; and the words
"liability" and "expenses" shall include,
without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Trust, a
Series thereof, or the Shareholders by
reason of a final adjudication by a court or
other body before which a proceeding was
brought that he engaged in willful
misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in
the conduct of his office;
(ii) with respect to any matter as to which
he shall have been finally adjudicated not
to have acted in good faith in the
reasonable belief that his action was in the
best interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final
adjudication as provided in paragraph (b)(i)
or (b)(ii) resulting in a payment by a
Trustee or officer, unless there has been a
determination that such Trustee or officer
did not engage in willful misfeasance, bad
faith, gross negligence or reckless
disregard of the duties involved in the
conduct of his office;
(A) by the court or other body
approving the settlement or other
disposition; or
(B) based upon a review of readily
available facts (as opposed to a
full trial-type inquiry) by (x) vote
of a majority of the Disinterested
Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees then in
office act on the matter) or (y)
written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may
be insured against by policies maintained by the
Trust, shall be severable, shall not affect any other
rights to which any Trustee or officer may now or
hereafter be entitled, shall continue as to a person
who has ceased to be such Trustee or officer and
shall inure to the benefit of the heirs, executors,
administrators and assigns of such a person. Nothing
contained herein shall affect any rights to
indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of a
defense to any claim, action, suit or proceeding of
the character described in paragraph (a) of this
Section 4.3 shall be advanced by the Trust prior to
final disposition thereof upon receipt of an
undertaking by or on behalf of the recipient to repay
such amount if it is ultimately determined that he is
not entitled to indemnification under this Section
4.3 provided that either:
Part C - Page 8
<PAGE>
(i) such undertaking is secured by a surety
bond or some appropriate security provided
by the recipient, or the Trust shall be
insured against losses arising out of any
such advances; or (ii) a majority of the
Disinterested Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees act on the matter) or
an independent legal counsel in a written
opinion shall determine, based upon a review
of readily available facts (as opposed to a
full trial-type inquiry), that there is
reason to believe that the recipient
ultimately will be found entitled to
indemnification.
As used in this Section 4.3, a
"Disinterested Trustee" is one who is not
(i) an "Interested Person" of the Trust
(including anyone who has been exempted from
being an "Interested Person" by any rule,
regulation or order of the Commission), or
(ii) involved in the claim, action, suit or
proceeding.
Item 28. Business or Other Connections of Investment Adviser
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 28.
<TABLE>
<CAPTION>
<S> <C>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Steven Gluckstern Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Zurich Holding Company of Americao
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of Americao
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Director, Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Part C - Page 9
<PAGE>
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporationoo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Markus Rohrbasser Director, Scudder Kemper Investments, Inc.**
Member Corporate Executive Board, Zurich Insurance Company of Switzerland##
President, Director, Chairman of the Board, ZKI Holding Corporation xx
Cornelia M. Small Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporationoo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 29. Principal Underwriters.
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the Registrant's
shares and also acts as principal underwriter for other funds managed by Scudder
Kemper Investments, Inc.
</TABLE>
Part C - Page 10
<PAGE>
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 29.
<TABLE>
<CAPTION>
<S> <C> <C>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
William S. Baughman Vice President None
Two International Place
Boston, MA 02110
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Treasurer and Vice President
Two International Place Assistant Clerk
Boston, MA 02110
Part C - Page 11
<PAGE>
Thomas F. McDonough Clerk Vice President, Treasurer
Two International Place and Secretary
Boston, MA 02110
Daniel Pierce Director, Vice President President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President and Trustee, Vice President
345 Park Avenue Assistant Clerk and Assistant Secretary
New York, NY 10154
Robert A. Rudell Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President None
Two International Place
Boston, MA 02110
</TABLE>
(c)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other Compensation
Underwriter Commissions and Repurchases Commissions
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments, Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian (on behalf of Scudder New York Tax Free Money Fund,
Scudder New York Tax Free Fund, Scudder Massachusetts Tax Free
Fund, Scudder Massachusetts Limited Term Tax Free Fund,
Scudder Ohio Tax Free Fund and Scudder Pennsylvania Tax Free
Fund) are maintained by State Street Bank and Trust Company,
Heritage Drive, North Quincy, Massachusetts. Records relating
to the duties of the Registrant's transfer agent are
Part C - Page 12
<PAGE>
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings.
Inapplicable.
Part C - Page 13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Boston and the
Commonwealth of Massachusetts on the 27th day of July, 1998.
SCUDDER STATE TAX FREE TRUST
By /s/Thomas F. McDonough
---------------------------
Thomas F. McDonough,
Vice President, Secretary and Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Daniel Pierce
- --------------------------------------
Daniel Pierce* President and Trustee July 27, 1998
/s/Henry P. Becton, Jr.
- --------------------------------------
Henry P. Becton, Jr.* Trustee July 27, 1998
/s/Dawn-Marie Driscoll
- --------------------------------------
Dawn-Marie Driscoll* Trustee July 27, 1998
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee July 27, 1998
/s/George M. Lovejoy, Jr.
- --------------------------------------
George M. Lovejoy, Jr.* Trustee July 27, 1998
/s/Wesley W. Marple, Jr.
- --------------------------------------
Wesley W. Marple, Jr.* Trustee July 27, 1998
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Kathryn L. Quirk
- --------------------------------------
Kathryn L. Quirk* Vice President, Assistant Secretary July 27, 1998
and Trustee
/s/Jean C. Tempel
- --------------------------------------
Jean C. Tempel* Trustee July 27, 1998
</TABLE>
*By: /s/Thomas F. McDonough
--------------------------
Thomas F. McDonough**
** Attorney-in-fact pursuant to a power of attorney
contained in the signature page of the Post-
Effective Amendment No. 11 to the Registration
Statement filed June 1, 1992, a power of attorney
contained in the signature page of Post-Effective
Amendment No. 17 to the Registration Statement
filed February 21, 1995, a power of attorney
contained in the signature page of Post-Effective
Amendment No. 20 to the Registration Statement
filed February 26, 1997, a power of attorney
contained in the signature page of Post-Effective
Amendment No. 22 to the Registration Statement and
a power of attorney contained in the signature
page of Post-Effective Amendment No. 23 to the
Registration Statement.
2
<PAGE>
File No. 2-84021
File No. 811-3749
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 26
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 27
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER STATE TAX FREE TRUST
<PAGE>
SCUDDER STATE TAX FREE TRUST
EXHIBIT INDEX
Exhibit 11
Exhibit 17
PricewaterhouseCoopers [LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
To the Trustees of Scudder State Tax Free Trust:
We consent to the incorporation by reference in Post-Effective Amendment No. 26
to the Registration Statement of Scudder State Tax Free Trust on Form N-1A of
our reports dated May 4, 1998, May 4, 1998, May 4, 1998, May 5, 1998 and May 5,
1998 on our audits of the financial statements and financial highlights of
Scudder Massachusetts Tax Free Fund, Scudder Pennsylvania Tax Free Fund, Scudder
Ohio Tax Free Fund, Scudder New York Tax Free Fund, and Scudder New York Tax
Free Money Fund, respectively, which reports are included in the Annual Reports
to Shareholders for the year ended March 31, 1998 which are incorporated by
reference in the Post-Effective Amendment to the Registration Statement.
We also consent to the reference to our Firm under the caption "Experts".
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts PricewaterhouseCoopers LLP
July 29, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Massachusetts Tax Free Fund Annual Report for the fiscal year ended March 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> SCUDDER MASSACHUSETTS TAX FREE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 341,585,927
<INVESTMENTS-AT-VALUE> 369,002,871
<RECEIVABLES> 5,821,347
<ASSETS-OTHER> 154,939
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 374,979,157
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,073,331
<TOTAL-LIABILITIES> 1,073,331
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 348,654,443
<SHARES-COMMON-STOCK> 26,075,571
<SHARES-COMMON-PRIOR> 24,047,228
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,165,561)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 27,416,944
<NET-ASSETS> 373,905,826
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 20,136,913
<OTHER-INCOME> 0
<EXPENSES-NET> 2,673,009
<NET-INVESTMENT-INCOME> 17,463,904
<REALIZED-GAINS-CURRENT> 1,438,854
<APPREC-INCREASE-CURRENT> 13,722,609
<NET-CHANGE-FROM-OPS> 32,625,367
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,463,904)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,700,172
<NUMBER-OF-SHARES-REDEEMED> (4,407,093)
<SHARES-REINVESTED> 735,264
<NET-CHANGE-IN-ASSETS> 44,063,657
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,511,682)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,110,713
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,673,009
<AVERAGE-NET-ASSETS> 351,606,035
<PER-SHARE-NAV-BEGIN> 13.72
<PER-SHARE-NII> 0.70
<PER-SHARE-GAIN-APPREC> 0.62
<PER-SHARE-DIVIDEND> (0.70)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.34
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Massachusetts Limited Term Tax Free Fund Semi-Annual Report for the period ended
4/30/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> Scudder Massachusetts Limited Term Tax Free Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 90,355,340
<INVESTMENTS-AT-VALUE> 91,706,688
<RECEIVABLES> 1,496,617
<ASSETS-OTHER> 136,115
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 93,339,420
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 378,913
<TOTAL-LIABILITIES> 378,913
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 91,757,896
<SHARES-COMMON-STOCK> 7,707,010
<SHARES-COMMON-PRIOR> 6,573,339
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (148,737)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,351,348
<NET-ASSETS> 92,960,507
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,191,384
<OTHER-INCOME> 0
<EXPENSES-NET> 332,612
<NET-INVESTMENT-INCOME> 1,858,772
<REALIZED-GAINS-CURRENT> (1,200)
<APPREC-INCREASE-CURRENT> (375,545)
<NET-CHANGE-FROM-OPS> 1,482,027
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,858,772)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,722,942
<NUMBER-OF-SHARES-REDEEMED> (1,695,963)
<SHARES-REINVESTED> 106,692
<NET-CHANGE-IN-ASSETS> 13,433,851
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (147,537)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 266,090
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 377,021
<AVERAGE-NET-ASSETS> 89,437,225
<PER-SHARE-NAV-BEGIN> 12.10
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> (0.04)
<PER-SHARE-DIVIDEND> (0.25)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.06
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
New York Tax Free Fund Annual Report for the fiscal year ended March 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> SCUDDER NEW YORK TAX FREE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 179,331,640
<INVESTMENTS-AT-VALUE> 192,828,842
<RECEIVABLES> 3,240,241
<ASSETS-OTHER> 398,900
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 196,467,983
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 736,587
<TOTAL-LIABILITIES> 736,587
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188,843,321
<SHARES-COMMON-STOCK> 17,368,966
<SHARES-COMMON-PRIOR> 16,986,861
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,609,127)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,497,202
<NET-ASSETS> 195,731,396
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,294,704
<OTHER-INCOME> 0
<EXPENSES-NET> 1,559,045
<NET-INVESTMENT-INCOME> 8,735,659
<REALIZED-GAINS-CURRENT> 653,107
<APPREC-INCREASE-CURRENT> 10,291,177
<NET-CHANGE-FROM-OPS> 19,679,943
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,735,659)
<DISTRIBUTIONS-OF-GAINS> (254,878)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,258,999
<NUMBER-OF-SHARES-REDEEMED> (4,407,178)
<SHARES-REINVESTED> 53,028,376
<NET-CHANGE-IN-ASSETS> 15,084,239
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (7,233,210)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,184,089
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,559,045
<AVERAGE-NET-ASSETS> 187,858,030
<PER-SHARE-NAV-BEGIN> 10.63
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.66
<PER-SHARE-DISTRIBUTIONS> 0.51
<RETURNS-OF-CAPITAL> 0.02
<PER-SHARE-NAV-END> 11.27
<EXPENSE-RATIO> 0.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
New York Tax Free Money Fund Annual Report for the fiscal year ended March 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> SCUDDER NEW YORK TAX FREE MONEY FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 97,940,458
<INVESTMENTS-AT-VALUE> 97,940,458
<RECEIVABLES> 807,790
<ASSETS-OTHER> 254,952
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 99,003,200
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,489,160
<TOTAL-LIABILITIES> 6,489,160
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 92,566,540
<SHARES-COMMON-STOCK> 92,516,860
<SHARES-COMMON-PRIOR> 59,542,322
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (52,500)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 92,514,040
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,439,038
<OTHER-INCOME> 0
<EXPENSES-NET> 406,909
<NET-INVESTMENT-INCOME> 2,032,129
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2,032,129
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,032,129)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 133,210,045
<NUMBER-OF-SHARES-REDEEMED> (102,004,740)
<SHARES-REINVESTED> 177,008,262
<NET-CHANGE-IN-ASSETS> 32,975,388
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (52,501)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 337,692
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 529,283
<AVERAGE-NET-ASSETS> 67,817,159
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.03
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
Scudder Ohio Tax Free Fund Annual Report for the fiscal year ended March 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> SCUDDER OHIO TAX FREE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 86,729,327
<INVESTMENTS-AT-VALUE> 93,274,147
<RECEIVABLES> 1,361,495
<ASSETS-OTHER> 9,631
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 94,645,273
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 194,491
<TOTAL-LIABILITIES> 194,491
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 87,953,562
<SHARES-COMMON-STOCK> 6,989,251
<SHARES-COMMON-PRIOR> 6,502,200
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (47,600)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,544,820
<NET-ASSETS> 94,450,782
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,986,967
<OTHER-INCOME> 0
<EXPENSES-NET> 460,187
<NET-INVESTMENT-INCOME> 4,526,780
<REALIZED-GAINS-CURRENT> 306,818
<APPREC-INCREASE-CURRENT> 3,652,599
<NET-CHANGE-FROM-OPS> 8,486,197
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,526,780)
<DISTRIBUTIONS-OF-GAINS> (199,673)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,228,133
<NUMBER-OF-SHARES-REDEEMED> (970,630)
<SHARES-REINVESTED> 229,548
<NET-CHANGE-IN-ASSETS> 10,341,773
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (151,178)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 532,714
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 766,522
<AVERAGE-NET-ASSETS> 89,006,568
<PER-SHARE-NAV-BEGIN> 12.94
<PER-SHARE-NII> 0.68
<PER-SHARE-GAIN-APPREC> 0.60
<PER-SHARE-DIVIDEND> (0.68)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.51
<EXPENSE-RATIO> 0.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Pennsylvania Tax Free Fund Annual Report for the fiscal year ended March 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> SCUDDER PENNSYLVANIA TAX FREE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 73,210,998
<INVESTMENTS-AT-VALUE> 78,436,088
<RECEIVABLES> 1,784,245
<ASSETS-OTHER> 1,208
<OTHER-ITEMS-ASSETS> 0
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</TABLE>
