Filed electronically with the Securities and
Exchange Commission on February 27, 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. 24
-----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25
-----
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, Stevens & Clark, 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 March 1, 1998 pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)(1)
-----
on March 1, 1998 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
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description SCUDDER NEW YORK TAX FREE MONEY FUND--
of Registrant Investment objectives and policies
SCUDDER NEW YORK TAX FREE FUND--
Investment objective and policies
ADDITIONAL INFORMATION ABOUT POLICIES
AND INVESTMENTS
FUND ORGANIZATION
5. Management of the A MESSAGE FROM SCUDDER'S CHAIRMAN
Fund FUND ORGANIZATION--Investment adviser,
Transfer agent
SHAREHOLDER BENEFITS--A team approach to
investing
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and DISTRIBUTION AND PERFORMANCE
Other Securities INFORMATION--Dividends and Capital
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 PURCHASES
Securities Being TRANSACTION INFORMATION--Purchasing shares
Offered INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION--Underwriter
8. Redemption or EXCHANGES AND REDEMPTIONS
Repurchase TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal NOT APPLICABLE
Proceedings
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 FUND ORGANIZATION
and History
13. Investment Objectives THE FUNDS' INVESTMENT OBJECTIVES AND
and Policies POLICIES
PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER
and Other Services ADDITIONAL INFORMATION--Experts, Other
Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and FUND ORGANIZATION
Other Securities
19. Purchase, Redemption PURCHASES
and Pricing of EXCHANGES AND REDEMPTIONS
Securities Being FEATURES AND SERVICES OFFERED BY THE
Offered FUNDS--Dividend and Capital Gain
Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of PERFORMANCE AND OTHER INFORMATION
Performance
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 FINANCIAL HIGHLIGHTS
Information
4. General Description INVESTMENT OBJECTIVE AND POLICIES
of 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 NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and DISTRIBUTION AND PERFORMANCE
Other Securities INFORMATION--Dividends and capital
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 PURCHASES
Securities Being TRANSACTION INFORMATION--Purchasing shares
Offered INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION--Underwriter
8. Redemption or EXCHANGES AND REDEMPTIONS
Repurchase TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal NOT APPLICABLE
Proceedings
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 FUND ORGANIZATION
and History
13. Investment Objectives THE FUNDS' INVESTMENT OBJECTIVE AND
and Policies POLICIES
PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER
and Other Services ADDITIONAL INFORMATION--Experts, Other
Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and FUND ORGANIZATION
Other Securities
19. Purchase, Redemption PURCHASES
and Pricing of EXCHANGES AND REDEMPTIONS
Securities Being FEATURES AND SERVICES OFFERED BY THE
Offered FUND--Dividend and Capital Gain
Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of PERFORMANCE INFORMATION
Performance
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 INVESTMENT OBJECTIVE AND POLICIES
of Registrant ADDITIONAL INFORMATION ABOUT POLICIES AND
INVESTMENTS
FUND ORGANIZATION
5. Management of the A MESSAGE FROM SCUDDER'S CHAIRMAN
Fund FUND ORGANIZATION--Investment adviser,
transfer agent
SHAREHOLDER BENEFITS--A team approach to
investing
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and DISTRIBUTION AND PERFORMANCE
Other Securities INFORMATION--Dividends and capital 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 PURCHASES
Securities Being TRANSACTION INFORMATION--Purchasing shares
Offered INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION--Underwriter
8. Redemption or EXCHANGES AND REDEMPTIONS
Repurchase TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal NOT APPLICABLE
Proceedings
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 FUND ORGANIZATION
and History
13. Investment Objectives THE FUNDS' INVESTMENT OBJECTIVE AND
and Policies POLICIES
PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER
and Other Services ADDITIONAL INFORMATION--Experts, Other
Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and FUND ORGANIZATION
Other Securities
19. Purchase, Redemption PURCHASES
and Pricing of EXCHANGES AND REDEMPTIONS
Securities Being FEATURES AND SERVICES OFFERED BY THE
Offered FUND--Dividend and Capital Gain
Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of PERFORMANCE INFORMATION
Performance Data
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 INVESTMENT OBJECTIVE AND POLICIES
of Registrant ADDITIONAL INFORMATION ABOUT POLICIES AND
INVESTMENTS
FUND ORGANIZATION
5. Management of the A MESSAGE FROM SCUDDER'S CHAIRMAN
Fund FUND ORGANIZATION--Investment adviser,
Transfer agent
SHAREHOLDER BENEFITS--A team approach to
investing
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and DISTRIBUTION AND PERFORMANCE
Other Securities INFORMATION--Dividends and capital 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 PURCHASES
Securities Being TRANSACTION INFORMATION--Purchasing shares
Offered INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION -- Underwriter
8. Redemption or EXCHANGES AND REDEMPTIONS
Repurchase TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal NOT APPLICABLE
Proceedings
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 FUND ORGANIZATION
and History
13. Investment Objectives THE FUNDS' INVESTMENT OBJECTIVE AND
and Policies POLICIES
PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER
and Other Services ADDITIONAL INFORMATION--Experts, Other
Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and FUND ORGANIZATION
Other Securities
19. Purchase, Redemption PURCHASES
and Pricing of EXCHANGES AND REDEMPTIONS
Securities Being FEATURES AND SERVICES OFFERED BY THE
Offered FUND--Dividend and Capital Gain
Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of PERFORMANCE INFORMATION
Performance
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 INVESTMENT OBJECTIVE AND POLICIES
of Registrant ADDITIONAL INFORMATION ABOUT POLICIES AND
INVESTMENTS
FUND ORGANIZATION
5. Management of the A MESSAGE FROM SCUDDER'S CHAIRMAN
Fund FUND ORGANIZATION--Investment adviser,
Transfer agent
SHAREHOLDER BENEFITS--A team approach to
investing
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and DISTRIBUTION AND PERFORMANCE
Other Securities INFORMATION--Dividends and capital 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 PURCHASES
Securities Being TRANSACTION INFORMATION--Purchasing shares
Offered INVESTMENT PRODUCTS AND SERVICES
FUND ORGANIZATION--Underwriter
8. Redemption or EXCHANGES AND REDEMPTIONS
Repurchase TRANSACTION INFORMATION--Redeeming shares
9. Pending Legal NOT APPLICABLE
Proceedings
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 FUND ORGANIZATION
and History
13. Investment Objectives THE FUNDS' INVESTMENT OBJECTIVE AND
and Policies POLICIES
PORTFOLIO TRANSACTIONS
14. Management of the Fund TRUSTEES AND OFFICERS
REMUNERATION
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER
and Other Services ADDITIONAL INFORMATION--Experts, Other
Information
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and FUND ORGANIZATION
Other Securities
19. Purchase, Redemption PURCHASES
and Pricing of EXCHANGES AND REDEMPTIONS
Securities Being FEATURES AND SERVICES OFFERED BY THE
Offered FUND--Dividend and Capital Gain
Distribution Options
SPECIAL PLAN ACCOUNTS
NET ASSET VALUE
20. Tax Status TAXES
21. Underwriters DISTRIBUTOR
22. Calculation of PERFORMANCE INFORMATION
Performance
Information
23. Financial Statements FINANCIAL STATEMENTS
Cross Reference - Page 10
<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 March 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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Contents--see page 6.
- --------------------------------
NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE
- --------------------------------
- --------------------------------
[SOY INK LOGO] PRINTED WITH [RECYCLE LOGO] Printed on recycled paper
SOY INK
- --------------------------------
50/105-2--38
M1S41P
PR410398
SCUDDER [LOGO]
Scudder Massachusetts
Limited Term Tax Free Fund
- ------------------------------
Scudder Massachusetts
Tax Free Fund
Prospectus
March 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
0.44%**
12b-1 fees NONE
Other expenses 0.31%
----
Total Fund operating expenses 0.75%**
====
Example
Based on the level of total Fund operating expenses listed above, the total
expenses relating to a $1,000 investment, assuming a 5% annual return and
redemption at the end of each period, are listed below. Investors do not pay
these expenses directly; they are paid by the Fund before it distributes its net
investment income to shareholders. (As noted above, the Fund has no redemption
fees of any kind.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$8 $24 $42 $93
See "Fund organization--Investment adviser" for further information about the
investment management fee. This example assumes reinvestment of all dividends
and distributions and that the percentage amounts listed under "Annual Fund
operating expenses" remain the same each year. This example should not be
considered a representation of past or future expenses or return. Actual Fund
expenses and return vary from year to year and may be higher or lower than those
shown.
* You may redeem by writing or calling the Fund or by Write-A-Check. If you
wish to receive your redemption proceeds via wire, there is a $5 wire
service fee. For additional information, please refer to "Transaction
information--Redeeming shares."
** Until 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 0.31% and total operating
expenses 0.91% 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, 1997.
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 audited financial statements are available in the
Fund's Annual Report dated October 31, 1997, which may be obtained without
charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
For the
Period
February 15,
1994
(commencement
of
operations)
to October
Years Ended October 31, 31,
1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............ $11.99 $12.02 $11.64 $12.00
Income from investment operations: -----------------------------------------------------------------
Net investment income ........................... .53 .50 .54 .36
Net realized and unrealized gain (loss) on
investment transactions ...................... .11 (.03) .38 (.36)
-----------------------------------------------------------------
Total from investment operations ................ .64 .47 .92 .00
-----------------------------------------------------------------
Less distributions from net investment income ... (.53) (.50) (.54) (.36)
-----------------------------------------------------------------
Net asset value, end of period .................. $12.10 $11.99 $12.02 $11.64
- --------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ............................ 5.44 3.98 8.08 0.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......... 80 66 55 36
Ratio of operating expenses, net to average
daily net assets (%) ......................... .75 .67 .24 --
Ratio of operating expenses before expense
reductions, to average daily net
assets (%) ................................... .93 .90 .92 1.44*
Ratio of net investment income to average daily
net assets (%) ............................... 4.40 4.16 4.56 4.45*
Portfolio turnover rate (%) ..................... 9.77 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, 1997, which may be
obtained without charge by writing or calling Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Six Months
Ended
September 30, Years Ended March 31,
1997
(Unaudited) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(c)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of ------------------------------------------------------------------------------------------------------
period ................ $13.72 $13.70 $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28 $12.00
Income from ------------------------------------------------------------------------------------------------------
investment
operations:
Net investment income .... .35 .70 .72 .74 .81 .84 .81 .83 .82 .81 .69
Net realized and
unrealized gain
(loss) on
investment
transactions .......... .45 .02 .37 .18 (.33) .96 .46 .19 .13 .22 .21
Total from investment ------------------------------------------------------------------------------------------------------
operations ............ .80 .72 1.09 .92 .48 1.80 1.27 1.02 .95 1.03 .90
------------------------------------------------------------------------------------------------------
Less distributions:
From net investment
income ................ (.35) (.70) (.72) (.74) (.81) (.84) (.81) (.83) (.82) (.88) (.62)
From net realized
gains on
investment
transactions .......... -- -- -- -- (.08) (.16) (.09) -- (.11)(a) (.20) --
In excess of net
realized gains ........ -- -- -- (.01) (.04) -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Total distributions ...... (.35) (.70) (.72) (.75) (.93) (1.00) (.90) (.83) (.93) (1.08) (.62)
------------------------------------------------------------------------------------------------------
Net asset value, end ------------------------------------------------------------------------------------------------------
of period ............. $14.17 $13.72 $13.70 $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) ..... 5.90** 5.39 8.28 7.37 3.37 14.59 10.46 8.60 7.89 9.50 7.73**
Ratios and Supplemental
Data
Net assets, end of
period ($ millions) ... 351 330 314 296 332 267 120 67 46 31 16
Ratio of operating
expenses, net to
average daily net
assets (%) ............ .77* .76 .75 .47 .07 -- .48 .60 .60 .51 .50*
Ratio of operating
expenses before
expense
reductions, to
average daily net
assets (%) ............ .77* .76 .76 .77 .77 .83 .93 1.05 1.16 1.20 2.25*
Ratio of net
investment income
to average daily
net assets (%) ........ 5.03* 5.12 5.23 5.73 5.80 6.36 6.38 6.72 6.60 7.23 7.55*
Portfolio turnover
rate (%) .............. 9.39* 11.51 20.9 10.2 17.0 29.6 23.2 27.1 45.5 110.5 95.9*
</TABLE>
(a) Includes $.01 per share distributions in excess of realized gains pursuant
to Internal Revenue Code Section 4982.
(b) Total returns would have been lower had certain expenses not been reduced
through March 31, 1996.
(c) For the period May 28, 1987 (commencement of operations) to March 31,
1988.
* Annualized **Not annualized
- --------------------------------------------------------------------------------
--
5
<PAGE>
- ---------------------------------------
A message from the President
- ---------------------------------------
[Photo Omitted]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
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 45 no-load mutual fund portfolios. 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 the professional
service representatives of Scudder Investor Relations, easy exchange among
funds, shareholder reports, informative newsletters and the walk-in convenience
of Scudder Investor Centers.
The Scudder Family of Funds includes those Funds, or classes of Funds, advised
by Scudder Kemper Investments, Inc., that 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
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The Funds
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o seek to provide double tax-free income exempt from both Massachusetts
personal and regular federal income tax
o active portfolio management by Scudder's professional team of credit
analysts and municipal bond market experts
o dividends declared daily and paid monthly
Scudder Massachusetts Limited Term
Tax Free Fund
o average portfolio maturity limited to between one and five years
o invests primarily in shorter-term, investment-grade municipal securities
o free checkwriting
Scudder Massachusetts Tax Free Fund
o invests primarily in long-term investment-grade municipal securities
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Contents
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Investment objectives and policies .................................. 8
Summary of important features ....................................... 11
Tax-exempt vs. taxable income ....................................... 11
Why invest in these Funds? .......................................... 12
Additional information about policies
and investments ................................................... 13
Distribution and performance information ............................ 18
Fund organization ................................................... 20
Transaction information ............................................. 21
Shareholder benefits ................................................ 26
Purchases ........................................................... 28
Exchanges and redemptions ........................................... 30
Trustees and Officers ............................................... 32
Investment products and services
How to contact Scudder .............................................. 33
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6
<PAGE>
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Investment objectives and policies
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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 loadO funds designed for Massachusetts residents seeking
income exempt from both state and regular federal income tax. Because these
Funds are intended for investors subject to Massachusetts personal income tax,
they may not be appropriate for all investors and are not available in all
states.
The two Funds have different investment objectives and characteristics. Their
two prospectuses are presented together so you can understand their important
differences and decide which Fund or combination of the two is most suitable for
your investment needs.
Except as otherwise indicated, each Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether that Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that either Fund's objective will
be met.
Scudder Massachusetts Limited Term
Tax Free Fund
Scudder Massachusetts Limited Term Tax Free Fund seeks a higher and more stable
level of income than normally provided by tax-free money market investments, yet
more price stability than investments in intermediate- and long-term municipal
bonds.
The Fund's objective is to provide as high a level of income exempt from
Massachusetts state personal income and regular federal income tax as is
consistent with a high degree of price stability. The dollar-weighted average
effective maturity of the Fund's portfolio will range between one and five
years. Within this limitation, Scudder Massachusetts Limited Term Tax Free Fund
may not purchase individual securities with effective maturities greater than 10
years at the time of purchase or issuance, whichever is later.
Scudder Massachusetts Tax Free Fund
Scudder Massachusetts Tax Free Fund seeks a higher level of income than normally
provided by tax-free money market or tax-free short-term investments. Typically,
however, it will experience less price stability than Scudder Massachusetts
Limited Term Tax Free Fund because the investments will be principally in
municipal securities with long-term maturities (i.e., more than 10 years).
Scudder Massachusetts Tax Free Fund has the flexibility, however, to invest in
Massachusetts municipal securities with short- and medium-term maturities as
well.
Quality standards of both Funds
Normally, at least 75% of the municipal securities purchased by each Fund will
be investment-grade quality which are those rated Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") or AAA, AA, A or BBB by Standard & Poor's
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.
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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, 1997, 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 (or if unrated, considered
by the Adviser to be equivalent to rated securities) in the categories
indicated: 32.4% AAA, 28.3% A+, 17.1% A, 1.0% A1+, 4.8% A-, 4.3% BBB+, 2.7% BBB,
1.9% BBB- and 7.6% 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
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8
<PAGE>
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Summary of important features
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Investment objectives
and characteristics Investments Maturity Quality Dividends
<S> <C> <C> <C> <C> <C>
Scudder o prices expected to o focus on o primarily o 75% of o declared
Massachusetts fluctuate moderately investment- shorter-term investments rated daily and
Limited Term with changes in grade bonds, average within top four paid monthly
Tax Free Fund interest rates Massachusetts maturity quality ratings, o option to
o income exempt from municipal between one including 50% receive in
both Massachusetts securities and five years within top three, cash or
state personal income or judged to be reinvest in
tax and regular of comparable additional
federal income tax quality shares
Scudder o prices will fluctuate o Focus on o primarily o 75% of o declared
Massachusetts with changes in investment- long-term investments rated daily and
Tax Free Fund interest rates grade bonds, within top four paid monthly
o income exempt from Massachusetts generally with quality ratings o option to
both Massachusetts municipal maturities of or judged to be receive in
state personal income securities more than ten of comparable cash or
tax and regular years quality reinvest in
federal income tax additional
shares
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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Tax-exempt vs. taxable income
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Tax Free Yields and Corresponding Taxable Equivalents. The table below shows
Massachusetts taxpayers what an investor would have to earn from a comparable
taxable investment to equal Scudder Massachusetts Limited Term Tax Free Fund's
or Scudder Massachusetts Tax Free Fund's double tax-free yield. Today many
investors may find that federal tax and Massachusetts personal income tax rates
make either Fund an attractive alternative to investments paying taxable income.
<TABLE>
<CAPTION>
TO EQUAL HYPOTHETICAL TAX-FREE YIELDS OF 5%, 7%
COMBINED AND 9%, A TAXABLE INVESTMENT WOULD HAVE TO EARN*:
1998 TAXABLE INCOME: MARGINAL TAX RATE: 5% 7% 9%
INDIVIDUAL
--------------------------------------------
<S> <C> <C> <C> <C>
$ 25,351-61,400 36.64% 7.89% 11.05% 14.20%
61,401-128,100 39.28 8.23 11.53 14.82
128,101-278,450 43.68 8.88 12.43 15.98
OVER 278,450 46.85 9.41 13.17 16.93
JOINT RETURN
--------------------------------------------
$ 42,351-102,300 36.64% 7.89% 11.05% 14.20%
102,301-155,950 39.28 8.23 11.53 14.82
155,951-278,450 43.68 8.88 12.43 15.98
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.
- --------------------------------------------------------------------------------
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9
<PAGE>
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.
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 municipal
securities subject to the alternative minimum tax, such as private activity
bonds, will be a preference item for purposes of calculating individual and
corporate alternative minimum taxes, depending upon investors' particular
situations. In addition, state and local taxes may apply, depending upon your
state and local tax laws.
Each Fund may invest in third party puts, and when-issued or forward delivery
securities, which may involve certain expenses and risks, including credit
risks. 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 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.
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Why invest in these Funds?
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The Funds are professionally managed portfolios consisting primarily of
investment-grade municipal securities. The Adviser believes that investment
results can be enhanced by active professional management. Professional
management distinguishes the Funds from unit investment trusts, which cannot be
actively managed.
Tax-free income
As illustrated by the chart on the preceding page, depending on your tax bracket
and individual situation, you may earn a substantially higher after-tax return
from these Funds than from comparable investments that pay income subject to
both Massachusetts personal income tax and regular federal income tax. For
example, if your regular federal marginal tax rate is 36% and your Massachusetts
tax rate is 12%, your effective combined marginal tax rate is 43.68% when
adjusted for the deductibility of state taxes. This means, for example, you
would need to earn a taxable return of 8.94% to receive after-tax income equal
to the 4.75% tax-free yield provided by Scudder Massachusetts Tax Free Fund for
the 30-day period ended March 31, 1997, 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
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10
<PAGE>
October 31, 1997. In other words, it would be necessary to earn $1,775 from a
taxable investment to equal $1,000 of tax-free income you receive from either
Fund. The yield levels of tax-free and taxable investments continually change.
Before 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.
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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. A complete listing of
investment restrictions is contained under "Investment Restrictions" in the
Funds' Statement of Additional Information.
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.
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
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11
<PAGE>
significantly below the national average and an economic recession in 1990 and
1991 caused negative growth rates in Massachusetts. All sectors of the economy
experienced job losses, including high technology, construction and financial
industries. In addition, the economy 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%, 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 March 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
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<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 their assets in the securities of a
smaller number of issuers than a diversified investment company could. The
investment of a large percentage of each Fund's assets in the securities of a
small number of issuers may cause a Fund's share price to fluctuate more than
that of a diversified investment company.
Investing in Massachusetts. If either Massachusetts or any of its local
governmental entities or public instrumentalities were to be unable to meet its
financial obligations, the income derived by the Funds, their net asset value or
liquidity and the ability to preserve or realize appreciation of the Funds'
capital could be adversely affected.
The persistence of serious financial difficulties could adversely affect the
market value and marketability of, or result in default in payment on,
outstanding municipal securities. Beginning in fiscal 1987 through fiscal 1991,
the Commonwealth experienced operating deficits and lower than anticipated tax
revenues resulting in an extended period of serious financial difficulties. The
Commonwealth ended 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
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14
<PAGE>
addition, the trading market for these securities is generally less liquid than
for higher rated securities and a Fund may have difficulty disposing of these
securities at the time it wishes to. The lack of a liquid secondary market for
certain securities may also make it more difficult for a Fund to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its net
asset value.
Third party puts. In connection with a third party put, the financial
institution granting the option does not provide credit enhancement, and
typically if there is a default on or significant downgrading of the bond or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Funds will be that of holding a long-term bond.
Municipal lease obligations. Municipal lease obligations and participation
interests in such obligations frequently have risks distinct from those
associated with general obligation or revenue bonds. Municipal lease obligations
are not secured by the governmental issuer's credit, and if funds are not
appropriated for lease payments, the lease may terminate, with the possibility
of default on the lease obligation and significant loss to the Funds. Although
"non-appropriation" obligations are secured by the leased property, disposition
of that property in the event of foreclosure might prove difficult, time
consuming and costly. In addition, the tax treatment of such obligations in the
event of non-appropriation is unclear. In evaluating the credit quality of a
municipal lease obligation that is unrated, the Adviser will consider a number
of factors including the likelihood that the governmental issuer will
discontinue appropriating funding for the leased property.
Indexed securities. Indexed securities may be positively or negatively indexed,
so that appreciation of the reference instrument may produce an increase or a
decrease in the interest rate or value at maturity of the security. In addition,
the change in the interest rate or value at maturity of the security may be some
multiple of the change in the value of the reference instrument. Thus, in
addition to the credit risk of the security's issuer, a Fund will bear the
market risk of the reference instrument.
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
--
15
<PAGE>
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized. The Strategic Transactions that each Fund may use and some of
their risks are described more fully in the Funds' Statement of Additional
Information.
- ---------------------------------------
Distribution and performance
information
- ---------------------------------------
Dividends and capital gains distributions
The Funds' dividends from net investment income are declared daily and
distributed monthly. The Funds intend to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in November or December
to prevent application of federal excise tax, although an additional
distribution may be made if necessary. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. According to preference, shareholders may receive
distributions in cash or have them reinvested in additional shares of the Funds.
Distributions derived from interest on Massachusetts municipal securities are
not subject to regular federal income taxes, except for the possible
applicability of the federal alternative minimum tax. For federal income tax
purposes, a portion of the Funds' income may be taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable 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
- --
16
<PAGE>
net assets will normally be invested in Massachusetts municipal securities whose
interest income is not treated as a tax preference item under the individual
alternative minimum tax. Tax-exempt income may also subject a corporate investor
to liability (or increased liability) under the corporate alternative minimum
tax.
Each Fund sends detailed tax information to shareholders about the amount and
type of their distributions by January 31 of the following year.
Performance information
From time to time, quotations of each Fund's performance may be included in
advertisements, sales literature, or shareholder reports. All performance
figures are historical, show the performance of a hypothetical investment and
are not intended to indicate future performance. The "SEC yield" of a Fund is an
annualized expression of the net income generated by a Fund over a specified
30-day (one month) period, as a percentage of a Fund's share price on the last
day of that period. This yield is calculated according to methods required by
the SEC, and therefore may not equate to the level of income paid to
shareholders. A Fund's "tax-equivalent yield" is calculated by determining the
rate of return that would have to be achieved on a fully taxable investment to
produce the after-tax equivalent of a Fund's yield, assuming certain tax
brackets for a Fund shareholder. Yields are expressed as annualized percentages.
"Total return" is the change in value of an investment in a Fund for a specified
period. The "average annual total return" of a Fund is the average annual
compound rate of return of an investment in a Fund assuming the investment has
been held for one year, five years and the life of the Fund as of a stated
ending date. (If a Fund has not been in operation for at least ten years, the
life of the Fund is used where applicable.) "Cumulative total return" represents
the cumulative change in value of an investment in a Fund for various periods.
All types of total return calculations assume that all dividends and capital
gains distributions during the period were reinvested in shares of a Fund.
Performance will vary based upon, among other things, changes in market
conditions and the level of each Fund's expenses.
- ---------------------------------------
Fund organization
- ---------------------------------------
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts Tax
Free Fund are series of Scudder State Tax Free Trust (the "Trust"), an open-end
management investment company registered under the 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.,
to manage its daily investment and business affairs subject to the policies
established by the Board of Trustees.
--
17
<PAGE>
The Trustees have overall responsibility for the management of the Fund under
Massachusetts law.
Scudder, Stevens & Clark, Inc. ("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 agreed to maintain the 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.
For the fiscal year ended March 31, 1997, the Adviser received an investment
management fee of 0.60% of Scudder Massachusetts Tax Free 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.
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,
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.
- --
18
<PAGE>
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
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"
- --
19
<PAGE>
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
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.
- --
20
<PAGE>
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
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
--
21
<PAGE>
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 Scudder Kemper 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.
Scudder Kemper believes its team approach benefits Fund investors by bringing
together many disciplines and leveraging its 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.
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.
- --
22
<PAGE>
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 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 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
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.
--
23
<PAGE>
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>
- ------------------------------------------------------------------------------------------------------------------------
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.
<S> <C> <C>
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.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Purchasing Minimum additional investment: $100; IRAs $50
additional Group retirement plans (401(k), 403(b), etc.) have similar or lower minimums.
shares See appropriate plan literature.
<S> <C> <C>
Make checks o By Mail Send a check with a Scudder investment slip, or with a
payable to "The instruction including your account number and the
Scudder Funds." complete Fund name, to the appropriate address listed above.
o By Wire Please see Transaction information--Purchasing shares--
By wire for details, including the ABA wire transfer number.
o In Person Visit one of our 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 aregular basis regular basis
Investment Plan through automatic deductions from your bank checking
($50 minimum) account. Please call 1-800-225-5163 for more information and an
enrollment form.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
--
25
<PAGE>
- ---------------------------------------
Exchanges and redemptions
- ---------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Exchanging Minimum investments: $2,500 to establish a new account;
shares $100 to exchange among existing accounts
<S> <C> <C>
o By Telephone To speak with a service representative, call 1-800-225-5163 from
8 a.m. to 8 p.m. eastern time or to access SAIL(TM), Scudder's Automated
Information Line, call 1-800-343-2890 (24 hours a day).
o By Mail Print or type your instructions and include:
or Fax - the name of the Fund and the account number you are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the Fund you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions
by regular mail to: or by express, registered, or by fax to:
or certified mail to:
The Scudder Funds The Sudder Funds 1-800-821-6234
P.O. Box 2291 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
- ------------------------------------------------------------------------------------------------------------------------
</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.
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*
Treasurer, Vice President and Secretary
Caroline Pearson*
Assistant Secretary
John Hebble*
Assistant Treasurer
*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 Growth and Income Fund
Scudder S&P 500 Index Fund
U.S. Growth
Value
Scudder Large Company Value Fund
Value Fund Scudder Shares
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Classic Growth Fund Scudder Shares
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
Global Discovery Fund Scudder Shares
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. ++++ 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>
- --------------------------------------------------------------------------------
How to contact Scudder
- --------------------------------------------------------------------------------
Account Service and Information:
For existing account service and transactions
Scudder Investor Relations -- 1-800-225-5163
For 24 hour account information, fund information, exchanges, and an
overview of all the services available to you
Scudder Electronic Account Services -- http://funds.scudder.com
For personalized information about your Scudder accounts, exchanges and
redemptions
Scudder Automated Information Line (SAIL) -- 1-800-343-2890
Investment Information:
For information about the Scudder funds, including additional applications
and prospectuses, or for answers to investment questions
Scudder Investor Relations -- 1-800-225-2470
[email protected]
Scudder's World Wide Web Site -- http://funds.scudder.com
For establishing 401(k) and 403(b) plans
Scudder Defined Contribution Services -- 1-800-323-6105
Scudder Brokerage Services:
To receive information about this discount brokerage service and to
obtain an application
Scudder Brokerage Services* -- 1-800-700-0820
Personal Counsel(SM) -- A Managed Fund Portfolio Program:
To receive information about this mutual fund portfolio guidance and
management program
Personal Counsel from Scudder -- 1-800-700-0183
Please address all correspondence to:
The Scudder Funds
P.O. Box 2291
Boston, Massachusetts
02107-2291
Or Stop by a Scudder 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.
* Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA
02061--Member NASD/SIPC.
- --
30
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
and
SCUDDER MASSACHUSETTS TAX FREE FUND
Two Pure No-Load(TM) (No Sales Charges) Diversified Mutual Funds
Specializing in the Management
of Massachusetts Municipal
Security Portfolios
- -------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 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 March 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
Page
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES..................................1
Master/Feeder Structure..................................................1
General Investment Objective and Policies of Scudder Massachusetts
Limited Term Tax Free Fund...............................................1
General Investment Objective and Policies of Scudder Massachusetts Tax
Free Fund................................................................2
Municipal Obligations....................................................4
Management Strategies....................................................7
Special Considerations...................................................8
Trustees' Power to Change Objective and Policies........................22
Investment Restrictions.................................................22
PURCHASES.....................................................................27
Additional Information About Opening an Account.........................27
Checks..................................................................27
Wire Transfer of Federal Funds..........................................27
Additional Information About Making Subsequent Investments by QuickBuy..28
Share Price.............................................................29
Share Certificates......................................................29
Other Information.......................................................29
EXCHANGES AND REDEMPTIONS.....................................................30
Exchanges...............................................................30
Redemption by Telephone.................................................31
Redemption By QuickSell.................................................32
Redemption by Mail or Fax...............................................32
Redemption by Write-a-Check.............................................33
Redemption-in-Kind......................................................33
Other Information.......................................................33
FEATURES AND SERVICES OFFERED BY THE FUNDS....................................34
The Pure No-Load(TM) Concept............................................34
Internet access.........................................................35
Dividend and Capital Gain Distribution Options..........................36
Scudder Investor Centers................................................36
Reports to Shareholders.................................................37
Transaction Summaries...................................................37
THE SCUDDER FAMILY OF FUNDS...................................................37
SPECIAL PLAN ACCOUNTS.........................................................45
Automatic Withdrawal Plan...............................................46
Cash Management System--Group Sub-Accounting Plan.......................46
Automatic Investment Plan...............................................46
Uniform Transfers/Gifts to Minors Act...................................47
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................48
PERFORMANCE INFORMATION.......................................................49
Average Annual Total Return.............................................49
Cumulative Total Return.................................................49
Total Return............................................................50
SEC Yield...............................................................50
Tax-Equivalent Yield....................................................50
Comparison of Fund Performance..........................................51
ORGANIZATION OF THE FUNDS.....................................................57
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
INVESTMENT ADVISER............................................................58
Personal Investments by Employees of the Adviser........................62
TRUSTEES AND OFFICERS.........................................................62
REMUNERATION..................................................................64
Responsibilities of the Board--Board and Committee Meetings.............64
Compensation of Officers and Trustees...................................65
DISTRIBUTOR...................................................................66
TAXES.........................................................................66
Federal Taxation........................................................66
State Taxation..........................................................70
PORTFOLIO TRANSACTIONS........................................................70
Brokerage Commissions...................................................70
Portfolio Turnover......................................................71
NET ASSET VALUE...............................................................71
ADDITIONAL INFORMATION........................................................72
Experts.................................................................72
Shareholder Indemnification.............................................72
Ratings of Municipal Obligations........................................72
Commercial Paper Ratings................................................73
Glossary................................................................74
Other Information.......................................................75
FINANCIAL STATEMENTS..........................................................76
Massachusetts Limited Term Tax Free Fund................................76
Massachusetts Tax Free Fund.............................................76
ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See "Investment objective and policies" and "Additional information about
policies and investments" in the Funds' prospectus.)
Scudder Massachusetts Limited Term Tax Free Fund and Scudder Massachusetts
Tax Free Fund (each a "Fund," collectively the "Funds") are series of Scudder
State Tax Free Trust (the "Trust"). The Trust is a pure no-load(TM) open-end
management investment company presently consisting of six series. Master/Feeder
Structure
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 Investor Services, Inc. ("Moody's"), BBB or
better by Standard and Poor's Corporation ("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.
<PAGE>
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.
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
2
<PAGE>
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.
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, 1997, 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 (or if unrated, considered by the Adviser to be equivalent to
rated securities) in the categories indicated: 32.4% AAA, 28.3% A+, 17.1% A,
1.0% A1+, 4.8% A-, 4.3% BBB+, 2.7% BBB, 1.9% BBB- and 7.6% unrated.
3
<PAGE>
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.
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
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projects are secured by annual lease rental payments from the state or locality
to the authority sufficient to cover debt service on the authority's
obligations.
Industrial development and pollution control bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Under federal tax legislation, certain
types of Industrial Development Bonds and Pollution Control Bonds may no longer
be issued on a tax-exempt basis, although previously-issued bonds of these types
and certain refundings of such bonds are not affected. Each Fund may invest more
than 25% of its assets in industrial development or other private activity
bonds, subject to each Fund's fundamental investment policies, and also subject
to each Fund's current intention not to invest in municipal securities whose
investment income is taxable or subject to each Fund's 20% limitation on
investing in municipal securities the interest income from which is subject to
the alternative minimum tax ("AMT bonds"). For the purposes of each Fund's
investment limitation regarding concentration of investments in any one
industry, industrial development or other private activity bonds ultimately
payable by companies within the same industry will be considered as if they were
issued by issuers in the same industry.
3. Other Municipal Obligations. There is, in addition, a variety of hybrid
and special types of municipal obligations as well as numerous differences in
the security of municipal obligations both within and between the two principal
classifications above.
Each Fund may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. Each Fund intends to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to a Fund, or (3) to maintain an
investment grade investment portfolio. A bank that issues a repurchase
commitment may receive a fee from a Fund for this arrangement. The issuer of a
variable rate demand instrument may have a corresponding right to prepay in its
discretion the outstanding principal of the instrument plus accrued interest
upon notice comparable to that required for the holder to demand payment.
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.
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The maturity of the variable rate demand instrument held by a Fund will
ordinarily be deemed to be the longer of (1) the notice period required before a
Fund is entitled to receive payment of the principal amount of the instrument or
(2) the period remaining until the instrument's next interest rate adjustment.
4. General Considerations. An entire issue of municipal obligations may be
purchased by one or a small number of institutional investors such as either
Fund. Thus, the issue may not be said to be publicly offered. Unlike securities
which must be registered under the Securities Act of 1933 (the "1933 Act") prior
to offer and sale unless an exemption from such registration is available,
municipal obligations which are not publicly offered may nevertheless be readily
marketable. A secondary market exists for municipal obligations which were not
publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in a Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. In addition,
Stand-by Commitments and demand obligations also enhance marketability.
For the purpose of a Fund's investment restrictions, the identification of
the "issuer" of municipal obligations which are not general obligation bonds is
made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. Government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments, which might affect all
municipal obligations of a similar type. However, each Fund believes that the
most important consideration affecting risk is the quality of particular issues
of municipal obligations, rather than factors affecting all, or broad classes
of, municipal obligations.
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.
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It is expected that a significant portion of the junk bonds acquired by a
Fund will be purchased upon issuance, which may involve special risks because
the securities so acquired are new issues. In such instances a Fund may be a
substantial purchaser of the issue and therefore have the opportunity to
participate in structuring the terms of the offering. Although this may enable a
Fund to seek to protect itself against certain of such risks, the considerations
discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely a Fund's net asset
value. In addition, a Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
During the fiscal year ended October 31, 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 _%.
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
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Fund will limit its voluntary short-term trading to the extent such limitation
is necessary for it to qualify as a "regulated investment company" under the
Internal Revenue Code.
Special Considerations
Income Level and Credit Risk. Yield on municipal obligations depends on a
variety of factors, including money market conditions, municipal bond market
conditions, the size of a particular offering, the maturity of the obligation
and the quality of the issue. Because each Fund holds primarily investment grade
municipal obligations, the income earned on shares of a Fund will tend to be
less than it might be on a portfolio emphasizing lower quality securities;
investment grade securities, however, may include securities with some
speculative characteristics. Municipal obligations are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the federal bankruptcy laws, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected. Each Fund may
invest in municipal securities rated B by S&P, Fitch or Moody's although it
intends to invest principally in securities rated in higher grades. Although
each Fund's quality standards are designed to reduce the credit risk of
investing in a Fund, that risk cannot be entirely eliminated. Shares of a Fund
are not insured by any agency of Massachusetts or of the U.S. Government.
Investing in Massachusetts. The following information as to certain
Massachusetts risk factors is given to investors in view of each Fund's policy
of concentrating its investments in Massachusetts issuers. Such information
constitutes only a brief summary, does not purport to be a complete description
and is based on information from official statements relating to securities
offerings of Massachusetts issuers and other sources believed to be reliable. No
independent verification has been made of the following information.
State Economy. Throughout much of the 1980's, the Commonwealth had a
strong economy which was evidenced by low unemployment and high personal income
growth as compared to national trends. Economic growth in the Commonwealth has
slowed since 1988. All sectors of the economy have experienced job losses,
including the high technology, construction and financial industries. In
addition, the economy has experienced shifts in employment from labor-intensive
manufacturing industries to technology and service-based industries. While
economic growth in Massachusetts slowed considerably during the recession of
1990-1991, indicators such as retail sales, housing permits, construction, and
employment levels suggest a strong and continued economic recovery. The
unemployment rate for the Commonwealth as of May 1997 was 4.2% compared to the
U.S. rate of 4.8%. Although real income levels in Massachusetts declined between
1989 and 1991, per capita personal income has increased faster than the national
average since 1994, and still remains among the highest in the nation.
Major infrastructure projects are anticipated in the Commonwealth over the
next decade. It is currently anticipated that the federal government will assume
responsibility for approximately 90% of the estimated $7.7 billion cost of
projects which consist of the depression of the central artery which traverses
the City of Boston and the construction of a third harbor tunnel linking
downtown Boston to Logan Airport. The Massachusetts Water Resource Authority is
undertaking capital projects for the construction and rehabilitation of sewage
collection and treatment facilities in order to bring wastewater discharges into
Boston Harbor into compliance with federal and state pollution control
requirements. The harbor cleanup project is estimated to cost $3.584 billion in
current dollars. Work on the project began in 1988 and is expected to be
completed in 1999, with the most significant expenditures occurring between 1990
and 1999. The majority of the project's expenditures will be paid for by local
communities, in the form of user fees, with federal and state sources making up
the difference; the assumptions regarding the amounts to be supplied through
federal aid are subject to change.
The fiscal viability of the Commonwealth's authorities and municipalities
is inextricably linked to that of the Commonwealth. The Commonwealth guarantees
the debt of several authorities, most notably the Massachusetts Bay
Transportation Authority and the University of Massachusetts Building Authority.
Their ratings are based on this guarantee and can be expected to move in tandem.
Several other authorities are funded in part or in whole by the Commonwealth and
their debt ratings may be adversely affected by a negative change in those of
the Commonwealth.
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Commonwealth spending exceeded revenues in each of the five fiscal years
commencing fiscal 1987. In particular, from 1987 to 1990, spending in five major
expenditure categories--Medicaid, debt service, public assistance, group health
insurance and transit subsidies--grew at rates in excess of the rate of
inflation for the comparable period. In addition, the Commonwealth's tax
revenues during this period repeatedly failed to meet official forecasts. For
the budgeted funds, operating losses in fiscal 1987 and 1988, of $349 million
and $370 million, respectively, were covered by surpluses carried forward from
prior years. The operating losses in fiscal 1989 and 1990, which totaled $672
million and $1.251 billion, respectively, were covered primarily through deficit
borrowings. During that period, operating fund balances declined from a budget
surplus of $1.072 billion in fiscal 1987 to a deficit of $1.104 billion for the
fiscal year ending 1990.
For the fiscal year ending June 30, 1991, total operating revenues of the
Commonwealth increased by 13.5% over the prior year, to $13.878 billion. This
increase was due chiefly to state tax increases enacted in July, 1990 and to a
substantial federal reimbursement for uncompensated patient care under the
Medicaid program. 1991 expenditures also increased over the prior year to
$13.899 billion resulting in an operating loss in the amount of $21.2 million.
However, after applying the opening fund balances created from proceeds of the
borrowing that financed the fiscal 1990 deficit, no deficit borrowing was
required to close-out fiscal 1991.
For the fiscal year ended June 30, 1992, the budgeted operating funds
ended with an excess of revenues and other sources over expenditures and other
uses of $312.3 million and with a surplus of $549.4 million, when such excess is
added to the fund balances carried forward from fiscal 1991.
The budgeted operating funds of the Commonwealth ended fiscal 1993 with a
surplus of revenues and other sources over expenditures and other uses of $13.1
million and aggregate ending fund balances in the budgeted operating funds of
the Commonwealth of approximately $562.5 million. Budgeted revenues and other
sources for fiscal 1993 totaled approximately $14.710 billion, including tax
revenues of $9.930 billion. Total revenues and other sources increased by
approximately 6.9% from fiscal 1992 to 1993, while tax revenues increased by
4.7% for the same period. In July 1992, tax revenues had been estimated to be
approximately $9.685 billion for fiscal 1993. This amount was subsequently
revised during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other uses in fiscal 1993 totaled
approximately $14.696 billion, which is $1.280 billion or approximately 9.6%
higher than fiscal 1992 expenditures and other uses. Fiscal 1993 budgeted
expenditures were $23 million lower than the initial July 1992 estimates of
fiscal 1993 budgeted expenditures.
As of June 30, 1993, after payment of all Local Aid and retirement of
short-term debt, the Commonwealth showed a year-end cash position of
approximately $622.2 million, as compared to a projected position of $485.1
million.
The budgeted operating funds of the Commonwealth ended fiscal 1994 with a
surplus of revenues and other sources over expenditures and other uses of $26.8
million and aggregate ending fund balances in the budgeted operating funds of
the Commonwealth of approximately $589.3 million. Budgeted revenues and other
sources for fiscal 1994 totaled approximately $15.550 billion, including tax
revenues of $10.607 billion, $87 million below the Department of Revenue's
fiscal 1994 tax revenue estimate of $10.694 billion. Total revenues and other
sources increased by approximately 5.7% from fiscal 1993 to fiscal 1994 while
tax revenues increased by 6.8% for the same period.
Commonwealth budgeted expenditures and other uses in fiscal 1994 totaled
$15.523 billion, which is $826.5 million or approximately 5.6% higher than
fiscal 1993 budgeted expenditures and other uses.
As of June 30, 1994, the Commonwealth showed a year-end cash position of
approximately $757 million, as compared to a projected position of $599 million.
Since 1989, S&P and Moody's had lowered their ratings of the
Commonwealth's general obligation bonds from AA+ and Aa, respectively, to BBB
and Baa, respectively. In March 1992, S&P placed the Commonwealth's general
obligation and related guaranteed bond ratings on CreditWatch with positive
implications, citing such factors as continued progress towards balanced
financial operations and reduced short-term borrowing as the basis for the
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positive forecast. As of the date hereof, the Commonwealth's general obligation
bonds are rated A+ by S&P and A1 by Moody's. From time to time, the rating
agencies may further change their ratings.
Fiscal 1995 tax revenue collections totaled $11.163 billion, approximately
$12 million above the Department of Revenue's revised fiscal year 1995 tax
revenue estimate of $11.151 billion, and approximately $556 million, or 5.2%,
above fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and other
sources, including non-tax revenues collected in fiscal 1995 totaled $16.387
billion, approximately $837 million, or 5.4%, above fiscal 1994 budgeted
revenues of $15.550 billion. Budgeted expenditures and other uses of funds in
fiscal 1995 were approximately $16.251 billion, approximately $728 million, or
4.7% above fiscal 1994 budgeted expenditures and uses of $15.523 billion. The
Commonwealth ended fiscal 1995 with an operating gain of $137 million and an
ending fund balance of $726 million.
The 1996 Comptroller's Preliminary Financial Report indicates that the
budgeted operating funds of the Commonwealth ended fiscal 1996 with a surplus of
revenues and other sources over expenditures and other uses of $426.4 million
resulting in aggregate ending fund balances in the budgeted operating funds of
the Commonwealth of approximately $1.153 billion. Budgeted revenues and other
sources for fiscal 1996 totaled approximately $17.323 billion, including tax
revenues of approximately $12.049 billion, approximately $365 million higher
than the most recent official estimate in May, 1996. Budgeted revenues and other
sources increased by approximately 5.7% from fiscal 1995 to fiscal 1996, while
tax revenues increased by approximately 7.9% for the same period. Income tax
withholding payments increased by approximately 8.0% from fiscal 1995, and total
income tax collections by approximately 12.3%. (The Department of Revenue
believes that the strong tax revenue growth in fiscal 1996 was due partly to
one-time factors that may not recur in fiscal 1997. These include the rise in
the stock and bond markets in calendar 1995, which may have created unusually
large capital gains and thus increases in personal income tax payments in fiscal
1996. These factors have been incorporated into the Department's forecast for
fiscal 1997 tax revenues.) Budgeted expenditures and other uses in fiscal 1996
totaled approximately $16.896 billion, an increase of approximately $645.7
million, or 4.0%, over fiscal 1995.
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $179.4 million, bringing the Stabilization Fund balance to
approximately $627.1 million, which exceeded the amount that can remain in the
Stabilization Fund by law, $543.3 million. Under state finance law, year-end
surplus amounts (as defined in the law) in excess of the amount that can remain
in the Stabilization Fund are transferred to the Tax Reduction Fund, to be
applied, subject to legislative appropriation, to the reduction of personal
income taxes. The balance in the Tax Reduction Fund, as reflected in the 1996
Comptroller's Preliminary Financial Report, is approximately $233.8 million.
Legislation approved by the Governor on July 30, 1996 appropriated $150 million
from the Tax Reduction Fund for personal income tax reductions in fiscal 1997,
to be implemented by a temporary increase in the amount of the personal
exemption allowable for the 1996 taxable year. The legislation was subsequently
passed to appropriate the remaining balance of approximately $83.8 million in
the Tax Reduction Fund for an additional temporary personal exemption increase.
State Budget. On June 30, 1996, the Governor signed the budget for the
1997 fiscal year. When signed, the budget marked the seventh consecutive year in
which the Commonwealth's budget has been balanced without new taxes or deficit
borrowing. Budgeted revenues and other sources to be collected in fiscal 1997
are estimated by the Executive Office for Administration and Finance to be
approximately $17.242 billion. This amount includes estimated fiscal 1996 tax
revenues of $12.123 billion, which is approximately $73.8 million, or 0.6%,
higher than fiscal 1996 tax revenues. The tax revenue projection is based upon
the consensus revenue estimate of approximately $12.177 billion, adjusted for
actual fiscal 1996 tax collections and various changes in law enacted after May,
1996, including a $233.8 million reduction in fiscal 1997 tax revenues funded by
a fiscal 1996 transfer from the General Fund to the Tax Reduction Fund, a change
in the way state tax liability is calculated for certain mutual fund service
corporations, an increase in the cigarette tax passed by the Legislature over
the Governor's veto and a provision in the fiscal 1997 budget increasing the
number of auditors in the Department of Revenue. Through October, 1996, tax
revenue collections have totaled approximately $2.874 billion, approximately
$71.9 million, or 2.6%, greater than tax revenue collections for the same period
in fiscal 1996. Collections through October, 1996, are approximately $20 million
below the midpoint of the benchmark range ($2.807 billion to $2.982 billion)
contemplated by the Department of Revenue's estimates.
Fiscal 1997 non-tax revenues are projected to total approximately $5.119
billion, approximately $28 million, or 0.7%, less than fiscal 1996 non-tax
revenues after adjusting for the shifts to and from certain non-budgeted items.
Federal reimbursements are projected to decrease by approximately $1 million,
from approximately $2.970 billion in
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fiscal 1995 to $2.969 billion in fiscal 1996, primarily as a result of increased
reimbursements for Medicaid spending, offset by a reduction in reimbursements
received in fiscal 1995 for one-time Medicaid expenses incurred in fiscal 1994
and fiscal 1995. The fiscal 1997 budget is based on numerous spending and
revenue estimates, the achievement of which cannot be assured. As of the date of
this Statement of Additional Information, final data for fiscal 1997 were
unavailable. On July 11, 1997, the Governor signed the budget for the 1998
fiscal year. The budget for fiscal year 1998 represents the Commonwealth's
eighth consecutive balanced budget. The fiscal year 1998 budget provides for
approximately $18.4 billion in expenditures. Revenues to the Commonwealth for
fiscal year 1998 are projected to include approximately $12.8 billion in tax
revenues, $3.3 billion in federal reimbursements, $1.2 billion in departmental
revenues and $907 million in transfers and other receipts.
Debt Limits and Outstanding Debt. Growth of tax revenues in the
Commonwealth is limited by law. Tax revenues in each of fiscal years 1988 to
1992 were lower than the limits set by law. In addition, during each of the
fiscal years 1989 through 1991, the official tax revenue forecasts made at the
beginning of the year proved to be substantially more optimistic than the actual
results. The fiscal 1992 budget initially was based on the joint revenue
estimate of $8.292 billion, a 7% decrease from 1991, while actual tax revenues
were $9.484 billion, a 5.4% increase over fiscal 1991. The fiscal 1993 budget
initially was based on the joint revenue estimate of $9.685 billion, an increase
of 2.1% over 1992. The actual 1993 tax revenues were $9.930 billion, a 4.7%
increase over 1992. On May 13, 1993, the tax revenue forecast of the
Chairpersons of the House and Senate Ways and Means Committees and the Secretary
for Administration and Finance for fiscal 1994 was $10.540 billion, an increase
of 6.1% over 1993. Actual fiscal 1994 tax revenues were $10.607 billion, a 6.8%
increase over fiscal 1993.
In May, 1994, the Chairpersons of the House and Senate Ways and Means
Committees and the Secretary for Administration and Finance jointly endorsed an
estimate of tax revenues for fiscal 1994 of $11.328 billion, an increase of $634
million, or 5.9%, from then expected tax revenues for fiscal 1994 of $10.694
billion. The fiscal 1995 budget was based upon this tax revenue estimate, less
$19.3 million of tax cuts signed by the Governor in the fiscal 1995 budget.
Fiscal 1995 tax revenue collections were approximately $11.163 billion.
Preliminary fiscal 1996 tax revenue collections are estimated to be $12.049
billion. Fiscal 1997 tax revenue collections are projected to be approximately
$12.123 billion. Fiscal 1998 tax revenue collections are projected to be
approximately $12.8 billion.
Effective July 1, 1990, limitations were placed on the amount of direct
bonds the Commonwealth may have outstanding in a fiscal year, and the amount of
the total appropriation in any fiscal year that may be expended for payment of
principal of and interest on general obligation debt of the Commonwealth was
limited to 10 percent of such appropriation. Bonds in the aggregate principal
amount of $1.399 billion issued in October and December, 1990, under Chapter 151
of the Acts of 1990 to meet the fiscal 1990 deficit are excluded from the
computation of these limitations, and principal of and interest on such bonds
are to be repaid from up to 15% of the Commonwealth's income receipts and tax
receipts in each year that such principal or interest is payable.
Furthermore, certain of the Commonwealth's cities and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. For example, due in large part to prior year cutbacks, the City
of Chelsea was forced into receivership in September 1991. The recurrence of
such financial difficulties, or financial difficulties of the Commonwealth,
could adversely affect the market values and marketability, or result in default
in payment on, outstanding obligations issued by the Commonwealth or its public
authorities or municipalities. In addition, recent developments regarding the
Massachusetts statutes which limit the taxing authority of the Commonwealth or
certain Massachusetts governmental entities may impair the ability of issuers of
some Massachusetts obligations to maintain debt service on their obligations.
The Commonwealth currently has three types of bonds and notes outstanding:
general obligation debt, dedicated income tax debt and special obligation debt.
Dedicated income tax debt consists of general obligation bonds or notes issued
pursuant to Chapter 151 of the Acts of 1990, to which a portion of the
Commonwealth's income tax receipts is dedicated for the payment of debt service.
Special obligation revenue debt consists of special obligation revenue bonds
("Special Obligation Bonds") issued under Section 20 of Chapter 29 of the
Massachusetts General Laws (the "Special Obligation Act") which may be secured
by all or a portion of the revenues credited to the Commonwealth's Highway Fund.
The Commonwealth has issued Special Obligation Bonds secured by a pledge of 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
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(a) Commonwealth-supported debt; (b) Commonwealth-guaranteed debt; or (c)
indirect obligations. Indirect obligations consist of (i) obligations of the
Commonwealth to fund capital reserve funds pledged to certain Massachusetts
Housing Finance Agency bonds, (ii) the obligation of the Commonwealth, acting
through the Higher Education Coordinating Council ("HECC"), to fund debt
service, solely from moneys otherwise appropriated to HECC, on certain community
college program bonds issued by the Massachusetts Health and Educational
Facilities Authority, (iii) the obligation of the Commonwealth, acting through
the Executive Office of Public Safety ("EOPS"), to fund debt service from
amounts appropriated by the Legislature to EOPS, on certificates of
participation issued to finance the new Plymouth County Correctional Facility,
and (iv) the obligation of the Commonwealth to make lease payments from amounts
appropriated by the Legislature with respect to the Massachusetts Information
Technology Center in the city of Chelsea, Massachusetts. In addition, the
Commonwealth has liabilities under certain tax-exempt capital leases.
Commonwealth-guaranteed debt consists of certain liabilities arising out of the
Commonwealth's guarantees of the bonds of the two higher education building
authorities and certain bond anticipation notes of the Massachusetts Turnpike
Authority. Commonwealth-supported debt arises from statutory requirements from
payments by the Commonwealth with respect to debt service of the Massachusetts
Bay Transportation Authority (including the Boston Metropolitan District), the
Massachusetts Convention Center Authority, the Massachusetts Government Land
Bank, the Steamship Authority and certain regional transit authorities. Hence,
the Commonwealth's fiscal condition could adversely affect the market values and
marketability of, or result in default in payment on, obligations of certain
authorities and agencies.
Local Governments. Proposition 2 1/2, an initiative petition adopted by
the voters of the Commonwealth of Massachusetts on November 4, 1980, constraints
levels of property taxation and limits the charges and fees imposed on cities
and towns by certain governmental entities, including county governments. At the
time Proposition 2 1/2 was enacted, many cities and towns had property tax
levels in excess of the limit and were therefore required to roll back property
taxes with a concurrent loss of revenues. While many communities have responded
to the limits of Proposition 2 1/2 through statutorily permitted overrides and
exclusions (such as exclusion of debt service on specific bonds and notes),
Proposition 2 1/2 has and will continue to restrain significantly the ability of
cities and towns to pay for local services, including certain debt service. To
mitigate the impact of Proposition 2 1/2 on local programs and services since
1980, the Commonwealth has increased payments to its cities, towns and regional
school districts.
A statute adopted by voter initiative petition in November, 1990 regulates
the distribution of Local Aid to cities and towns. Direct Local Aid decreased
from $2.937 billion in fiscal 1990 to $2.360 billion in fiscal 1992; increased
to $2.547 billion in fiscal 1993 and increased to $2.727 billion in fiscal 1994.
Fiscal 1995 expenditures for direct Local Aid were $2.976 billion. Fiscal 1996
expenditures for direct Local Aid were $3.246 billion. It is estimated that
fiscal 1997 expenditures for direct Local Aid will be $3.534 billion, which is
an increase of approximately 8.9% above fiscal 1996 level. Under the November,
1990 law, new Local Aid distribution formulas would have called for a
substantial increase in direct Local Aid in fiscal 1992, and would call for such
an increase in fiscal 1993 and in subsequent years. Local Aid payments
explicitly remain subject to annual appropriation, and fiscal 1992, 1993, 1994,
1995 and 1996 appropriations for Local Aid did not meet, and fiscal 1997
appropriations for Local Aid do not meet, the levels set forth in the initiative
law. Reductions in, failure to fund or delays in the payment of Local Aid may
create financial difficulties for certain municipalities or other local
government entities.
Medicaid. The Medicaid program provides health care to low-income children
and families, the disabled and the elderly. The program, which is administered
by the Division of Medical Assistance (an agency within the Executive Office of
Health and Human Services), is 50% funded by federal reimbursements.
During fiscal years 1992, 1993, 1994, 1995 and 1996 Medicaid expenditures
were $2.818 billion, $3.151 billion, $3.313 billion, $3.398 billion and $3.416
billion, respectively. The average annual growth rate from fiscal 1992 to fiscal
1996 was 3.9%, compared to an average annual growth of approximately 17% between
fiscal 1987 and fiscal 1991. There was virtually no growth from fiscal 1995 to
fiscal 1996. The Executive Office for Administration and Finance estimates that
fiscal 1997 Medicaid expenditures will be approximately $3.394 billion.
Factoring out one-time payments in fiscal 1996 to settle bills from hospitals
and nursing homes dating back to the 1980's, and adjusting for a change in the
account structure of the Medicaid program, Medicaid expenditures are projected
to remain flat from fiscal 1996 to fiscal 1997. The decrease in the rate of
growth after 1991 is due to a number of savings and cost control initiatives
that the Division of Medical Assistance continues to implement and refine,
including managed care, utilization review and the identification of third party
liabilities.
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Fiscal 1997 is projected by the Executive Office for Administration and
Finance to be the fourth year with no need for supplemental Medicaid
appropriations for current year expenses. Decreased reliance on supplemental
appropriations reflects an effective management of Medicaid expenditures by the
Commonwealth. Prior to fiscal 1994, substantial Medicaid expenditures were
provided through supplemental appropriations because program requirements
consistently exceeded initial appropriations. In addition, substantial amounts
have been required to cover retroactive settlement of provider payments.
Medicaid expenditures for fiscal 1992 of $2.818 billion included $50.0 million
for prior year provider settlements. Fiscal 1994 and fiscal 1995 Medicaid
expenditures included a total of approximately $123.0 million in retroactive
rate settlements funded through the final fiscal 1994 supplemental budget to pay
pre-1992 liabilities to hospitals and nursing homes. Fiscal 1996 expenditures
included $9.4 million for final settlement of these hospital and nursing home
liabilities. The Executive Office for Administration and Finance estimates that
all current Medicaid costs as well as all remaining prior year bills will be
covered within the current appropriation for fiscal 1997. Current spending
estimates project a $61 million Medicaid surplus, as well.
Pensions. The Commonwealth is responsible for the payment of pension
benefits for state employees and school teachers throughout the state and for
the cost-of-living increases payable to local government retirees. In 1988, the
Commonwealth adopted a funding schedule under which it is required to fund
future pension liabilities currently and to amortize the accumulated unfunded
liabilities over 40 years. Since the adoption of this schedule, the amount of
the unfunded liability has been reduced significantly. Total pension
expenditures have increased at an average annual rate of 8% per year, rising
from $751.5 million in fiscal 1992 to $1.005 billion in fiscal 1996. Total
pension expenses include the costs associated with an early retirement program
for elementary and secondary school teachers mandated by the 1993 education
reform legislation. In fiscal 1997, the anticipated pension expenditure is
$1.074 billion, an increase of 6.9% over fiscal 1996 costs. In fiscal 1996, a
number of reform measures affecting pensions were enacted into law. Among the
most notable were a measure consolidating the assets of the state employees' and
teachers' retirement systems into a single investment fund and another that will
reform the disability pension system. As of August 31, 1996, the Commonwealth's
state pension reserves were approximately $7.7 billion.
When-Issued Securities. Each Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During 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
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obligations purchased subject to such commitments may be sold to a third party
at any time, even though the commitment is outstanding; and (5) their exercise
price will be (i) the Fund's acquisition cost (excluding the cost, if any, of
the stand-by commitment) of the municipal obligations which are subject to the
commitment (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date. The Fund expects to refrain from exercising a stand-by commitment in the
event that the amount receivable upon exercise of the stand-by commitment is
significantly greater than the then current market value of the underlying
municipal obligations, determined as described below under "Net Asset Value," in
order to avoid imposing a loss on a seller and thus jeopardizing the Fund's
business relationship with that seller.
The Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by the Fund in either manner for outstanding stand-by commitments will
not exceed 1/2 of 1% of the value of the total assets of the Fund calculated
immediately after any stand-by commitment is acquired. If the Fund pays
additional consideration for a stand-by commitment, the yield on the security to
which the stand-by commitment relates will, in effect, be lower than if the Fund
had not acquired such stand-by commitment.
It is difficult to evaluate the likelihood of use or the potential benefit
of a stand-by commitment. Therefore, it is expected that the Trustees will
determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where the Fund has paid for a stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held.
Management understands that the Internal Revenue Service (the "IRS") has
issued a revenue ruling to the effect that, under specified circumstances, a
registered investment company will be the owner of tax-exempt municipal
obligations acquired subject to a put option. The IRS has also issued private
letter rulings to certain taxpayers (which do not serve as precedent for other
taxpayers) to the effect that tax-exempt interest received by a regulated
investment company with respect to such obligations will be tax-exempt in the
hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Fund intends to take the position that it is the owner of any
municipal obligations acquired subject to a stand-by commitment and that
tax-exempt interest earned with respect to such municipal obligations will be
tax-exempt in its hands. There is no assurance that the IRS will agree with such
position in any particular case. There is no assurance that stand-by commitments
will be available to the Fund nor has the Fund assumed that such commitments
would continue to be available under all market conditions.
Third Party Puts. Each Fund may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals to tender (or "put") the bonds to the
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.
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Additionally, the federal income tax treatment of certain other aspects of these
investments, including the treatment of tender fees and swap payments, in
relation to various regulated investment company tax provisions is unclear.
However, the Adviser intends to manage a Fund's portfolio in a manner designed
to minimize any adverse impact from these investments.
Municipal Lease Obligations and Participation Interests. A municipal lease
obligation may take the form of a lease, installment purchase contract or
conditional sales contract which is issued by a state or local government and
authorities to acquire land, equipment and facilities. Income from such
obligations is generally exempt from state and local taxes in the state of
issuance. Municipal lease obligations frequently involve special risks not
normally associated with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title in the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the obligations may be
secured by the leased equipment or facilities, the disposition of the property
in the event of nonappropriation or foreclosure might prove difficult, time
consuming and costly, and result in a delay in recovery or the failure to fully
recover a Fund's original investment.
Participation interests represent undivided interests in municipal leases,
installment purchase contracts, conditional sales contracts or other
instruments. These are typically issued by a trust or other entity which has
received an assignment of the payments to be made by the state or political
subdivision under such leases or contracts.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Adviser to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Adviser will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Adviser will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
Each Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. Each Fund will
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 or restricted securities may be sold only to
qualified institutional buyers, or in a privately negotiated transaction to a
limited number of purchasers, or in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration, or in a public offering for which a registration
statement is in effect under the 1933 Act. A Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public, and in such event the Fund
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may be liable to purchasers of such securities if the registration statement
prepared by the issuer, or the prospectus forming a part of it, is materially
inaccurate or misleading.
Repurchase Agreements. Massachusetts Tax Free Fund may enter into repurchase
agreements with any member bank of the Federal Reserve System or any
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness has been determined by the Adviser to be at least equal to
that of issuers of commercial paper rated within the two highest quality ratings
categories assigned by Moody's, S&P or Fitch.
A repurchase agreement provides a means for the Fund to earn taxable
income on funds for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Fund) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and the value of such securities kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price on the date of repurchase. In either
case, the income to the Fund (which is taxable) is unrelated to the interest
rate on the Obligation itself. Obligations will be held by the Custodian or in
the Federal Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund may be required to return the Obligation to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, the
Fund would be at risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt obligation purchased for the
Fund, the Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
Obligation, in which case the Fund may incur a loss if the proceeds to the Fund
of the sale to a third party are less than the repurchase price. However, if the
market value of the Obligation subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. 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
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which the instrument is denominated). The reference instrument need not be
related to the terms of the indexed security. For example, the principal amount
of a U.S. dollar denominated indexed security may vary based on the exchange
rate of two foreign currencies. An indexed security may be positively or
negatively indexed; that is, its value may increase or decrease if the value of
the reference instrument increases. Further, the change in the principal amount
payable or the interest rate of an indexed security may be a multiple of the
percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates and broad or specific market movements), to
manage the effective maturity or duration of a Fund's portfolio, or to enhance
potential gain. These strategies may be executed through the use of derivative
contracts. Such strategies are generally accepted as a part of modern portfolio
management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, a Fund may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used without limit (except to the extent that 80% of each Fund's net assets
are required to be invested in tax-exempt Massachusetts municipal securities,
and as limited by each Fund's other investment restrictions) to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets
fluctuations, to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of a Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of a Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of a
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. Each Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not 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
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position, at the same time they tend to limit any potential gain which might
result from an increase in value of such position. Finally, the daily variation
margin requirements for futures contracts would create a greater ongoing
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
Each Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
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
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Counterparty to sell the option back to a Fund at a formula price within seven
days. A Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing no
more than 10% of its assets in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by a Fund must be "covered" (i.e.,
a Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes a Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require a Fund to hold a
security or instrument which it might otherwise have sold.
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
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circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of a Fund. If a Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
Each Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of a Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
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
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good faith hedging purposes, the Adviser and each Fund believe such obligations
do not constitute senior securities under the 1940 Act and, accordingly, will
not treat them as being subject to its borrowing restrictions. Each Fund will
not enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from an NRSRO or is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, a Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. Each Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. Each Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate 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.
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In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by that Fund. Moreover, instead of segregating assets if a Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Each Fund's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for qualification
as a regulated investment company. (See "TAXES.")
Trustees' Power to Change Objective and Policies
Except as specifically stated to the contrary, the objective and policies
stated above may be changed by the Trustees without a vote of the shareholders.
Investment Restrictions
Unless specified to the contrary, the following restrictions may not be
changed without the approval of a majority of the outstanding voting securities
of that Fund which, under the 1940 Act and the rules thereunder and as used in
this Statement of Additional Information, means the lesser of (1) 67% of the
shares of a Fund present at a meeting if the holders of more than 50% of the
outstanding shares of a Fund are present in person or by proxy, or (2) more than
50% of the outstanding shares of the Fund. Any investment restrictions herein
which involve a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund.
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
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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.
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.
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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.
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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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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.
PURCHASES
(See "Purchases" and "Transaction
information" in the Funds' prospectus.)
Additional Information About Opening an Account
Shareholders of other Scudder funds who have submitted an account
application and have a certified tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the
National Association of Securities Dealers, Inc. (the "NASD"), and banks may
open an account by wire. These investors must call 1-800-225-5163 to get an
account number. During the call, the investor will be asked to indicate the Fund
name, amount to be wired ($2,500 minimum), name of the bank or trust company
from which the wire will be sent, the exact registration of the new account, the
tax identification or Social Security number, address and telephone number. The
investor must then call his bank to arrange a wire transfer to The Scudder
Funds, State Street Bank and Trust Company, Boston, MA 02110, ABA Number
011000028, DDA Account Number: 9903-5552. The investor must give the Scudder
fund name, account name and the new account number. Finally, the investor must
send a completed and signed application to the Fund promptly.
Checks
A certified check is not necessary, but checks are only accepted subject
to collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, that Fund reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Fund or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, a Fund will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse that Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from or restricted in placing future orders in any of the Scudder
funds.
Wire Transfer of Federal Funds
To 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.
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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 Fund's 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 the Fund or the principal
underwriter by reason of such cancellation. If the purchaser is a shareholder,
the Trust shall have the authority, as agent of the shareholder, to redeem
shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Net losses on such transactions which are not
recovered from the purchaser will be absorbed by the principal underwriter. Any
net profit on the liquidation of unpaid shares will accrue to the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of 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 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 an QuickBuy 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
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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 the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the 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 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 the 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.
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.
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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.
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.
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(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 all wire redemptions.
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.
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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 an 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.
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.
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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 may be
applicable 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.
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
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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, and Uniform Trust to Minors Act 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 Scudder Family of
Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
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Load funds generally are defined as mutual funds that charge a fee for the
sale and distribution of fund shares. There are three types of loads: front-end
loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under Rule 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of the
amount invested. A back-end load is a contingent deferred sales charge, which
can be as high as 8.50% of either the amount invested or redeemed. The maximum
front-end or back-end load varies, and depends upon whether or not a fund also
charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the NASD
Conduct Rules a mutual fund can call itself a "no-load" fund only if the 12b-1
fee and/or service fee does not exceed 0.25% of a fund's average annual net
assets.
Because funds in the Scudder Family of Funds do not pay any asset-based
sales charges or service fees, Scudder developed and trademarked the phrase pure
no-load(TM) to distinguish funds in the Scudder Family of 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 Scudder Family of Funds consists of those
Funds or classes of Funds advised by the Adviser which are offered without
commissions to purchase or redeem shares or to exchange from one Fund to
another.
The following chart shows the potential long-term advantage of investing
$10,000 in a Scudder Family of Funds 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.
================================================================================
Scudder No-Load Fund
YEARS Pure No-Load(TM) 8.50% Load Load Fund with with 0.25%
Fund Fund 0.75% 12b-1 Fee 12b-1 Fee
- --------------------------------------------------------------------------------
10 $25,937 $23,733 $24,222 $25,354
- --------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
===============================================================================
Investors are encouraged to review the fee tables on pages 2 and 3 of the
Funds' prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability. A
section entitled "Planning Resources" provides information on asset allocation,
tuition, and retirement planning to users who fill out interactive "worksheets."
Investors can easily establish a "Personal Page," that presents price
information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance
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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.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders may change their dividend option either by
calling 1-800-225-5163 or by sending written instructions to the Transfer Agent.
See "How to contact Scudder" in the prospectus for the address. Please include
your account number with your written request.
Reinvestment is usually made at the closing net asset value determined on
the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gains distributions automatically deposited to their personal
bank account usually within three business days after a Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal Plan
must reinvest any dividends or capital gains.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectus. The Centers are designed to provide
individuals with services during any business day. Investors may pick up
literature
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or find assistance with opening an account, adding monies or special options to
existing accounts, making exchanges within the Scudder Family of Funds,
redeeming shares or opening retirement plans. Checks should not be mailed to the
Centers but should be mailed to "The Scudder Funds" at the address listed under
"How to contact Scudder" in the Prospectus.
Reports to Shareholders
Each Fund issues to shareholders semiannual financial statements (audited
annually by independent accountants), including a list of investments held and
statements of assets and liabilities, operations, changes in net assets and
supplementary information for each Fund.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available to
shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' 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. The Scudder Family of Funds
consists of those Funds or classes of Funds advised by Scudder which are offered
without commissions to purchase or redeem shares or to exchange from one Fund to
another. 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
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<PAGE>
of $1.00 per share, but there is no assurance that it will be able to do
so. The institutional class of shares of this Fund is not within the
Scudder Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value will
be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and the
maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There can
be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a high
degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of income
free from regular federal income taxes and to limit principal fluctuation.
The Fund will invest primarily in high-grade, intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of interest
income, exempt from regular federal income tax, from an actively managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and regular
federal income tax. The Fund is a professionally managed portfolio
consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers with
income exempt from New York State and New York City personal income taxes
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of New York municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income tax.
The Fund is a professionally managed portfolio consisting primarily of
investment-grade municipal securities.
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.
- ----------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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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.
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.
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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.
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
and to keep the value of its shares more stable than 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.
GLOBAL GROWTH
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 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 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.
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Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity securities
and gold.
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 may not be available
for purchase or exchange. For more information, please call 1-800-225-5163.
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* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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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. 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.
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Automatic Withdrawal Plan
Non-retirement plan shareholders who currently own or purchase $10,000 or
more of shares of the Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. 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, Corporation] 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, Corporation] 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.
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Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The [Trust,] reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
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DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Distribution and performance information--Dividends and capital
gains distributions" in the Funds' prospectus.)
Each Fund will follow the practice of distributing substantially all, and
in no event less than 90%, of its taxable and tax-exempt net investment income
(defined under "ADDITIONAL INFORMATION--Glossary") and any excess of net
realized short-term capital gains over net realized long-term capital losses.
Each Fund may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, if it appears to be in the best interest of a Fund and its
shareholders, a Fund may retain all or part of such gain for reinvestment.
Dividends will be declared daily and distributions of net investment
income will be made monthly. Any dividend declared in October, November, or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Distributions of net
short-term and net long-term capital gains realized during each fiscal year, if
any, will be made annually within three months after the end of each Fund's
fiscal year end. An additional distribution may also be made (or treated as
made) in November or December if necessary to avoid the excise tax enacted by
the Tax Reform Act of 1986 (See "TAXES," below). Both types of distributions
will be made in shares of a Fund and confirmations will be mailed to each
shareholder unless a shareholder has elected to receive cash, in which case a
check will be sent.
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Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Fund issues to each shareholder a statement of the
federal income tax status of all distributions, including a statement of the
percentage of the prior calendar year's distributions which a Fund has
designated as tax-exempt and the percentage of such tax-exempt distributions
treated as a tax-preference item for purposes of the alternative minimum tax.
PERFORMANCE INFORMATION
(See "Distribution and performance information--Performance
information" in the Funds' prospectus.)
From time to time, quotations of the Funds' performance may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of return
for one year, five years and for the life of a Fund, ended on the last day of a
recent calendar quarter. Average annual total return quotations reflect changes
in the price of a Fund's shares and assume that all dividends and capital gains
distributions during the respective periods were reinvested in Fund shares.
Average annual total return is calculated by finding the average annual compound
rates of return of a hypothetical investment, over such periods, according to
the following formula (average annual total return is then expressed as a
percentage):
T = (ERV/P)^1/n - 1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of
the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
The average annual total return of Scudder Massachusetts Limited Term Tax
Free Fund for the one year period ended October 31, 1997, and life of the
Fund(1) are ____% and ____%, respectively.
The average annual total return of Scudder Massachusetts Tax Free Fund for
the one and five year periods ended March 31, 1997, and life of the Fund(2) are
5.39%, 7.73%, and 8.41%, respectively.
(1) For the period beginning February 15, 1994.
(2) For the period beginning May 28, 1987.
If the Adviser had not maintained Scudder Massachusetts Limited Term Tax
Free Fund expenses and had imposed a full management fee, the average annual
total return for the one year period and life of the Fund would have been lower.
If the Adviser had not maintained Scudder Massachusetts Tax Free Fund expenses
and had imposed a full management fee, the average annual total return for the
one and five year periods, and life of the Fund would have been lower.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect the change in the price of the Fund's shares and assume that
all dividends and capital gains distributions during the period were reinvested
in Fund shares. Cumulative total return is calculated by finding the cumulative
rates of return of a hypothetical investment over such period, according to the
following formula (cumulative total return is then expressed as a percentage):
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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
____% and _____% respectively. If the Adviser had not maintained Massachusetts
Limited Term Tax Free Fund expenses and had imposed a full management fee, the
cumulative total return for the one year period and life of Fund would have been
lower.
(1) For the period beginning February 15, 1994 (commencement of
operations).
The cumulative total return of Massachusetts Tax Free Fund for the one and
five year periods ended March 31, 1997, and life of the Fund(2) were 5.39%,
45.13%, and 121.57%, respectively. If the Adviser had not maintained
Massachusetts Tax Free Fund expenses and had imposed a full management fee, the
cumulative total return for the one and five year periods, and life of the Fund
would have been lower.
(2) For the period beginning May 28, 1987.
Total Return
Total return is the rate of return on an investment for a specified period
of time calculated in the same manner as cumulative total return.
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 ____%.
The 30-day net-annualized SEC yield of Massachusetts Tax Free Fund for the
period ended March 31, 1997 was ____%.
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 ____% to receive after-tax income equal to the ____%
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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 8.94% to receive after-tax income equal to the 4.75% tax-free yield of
Massachusetts Tax Free Fund for the 30-day period ended on March 31, 1997.
Quotations of each Fund's performance are historical, show the performance
of a hypothetical investment and are not intended to indicate future
performance. Performance of a Fund will vary based on changes in market
conditions and the level of each Fund's expenses. An investor's shares, when
redeemed, may be worth more or less than their original cost.
Investors should be aware that the principal of each Fund is not insured.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the 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, the Fund also may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs.
Examples include, but are not limited to the Dow Jones Industrial Average, the
Consumer Price Index, Standard & Poor's 500 Composite Stock Price Index (S&P
500), the Nasdaq OTC Composite Index, the Nasdaq Industrials Index, the Russell
2000 Index, and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, this 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, the 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)(Directors) and officers of the Fund, the Fund's 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 Fund. 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 Fund 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 Fund. The
description may include a "risk/return spectrum" which compares the Fund 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
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also will fluctuate. The description may also compare the Fund 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
Fund, including reprints of, or selections from, editorials or articles about
this Fund. Sources for Fund performance information and articles about the Fund
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.
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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.
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.
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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.
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ORGANIZATION OF THE FUNDS
(See "Fund organization" in the Funds' prospectus.)
Each Fund is a series of Scudder State Tax Free Trust. The Trust is a
Massachusetts business trust established under a Declaration of Trust dated May
25, 1983. Such Declaration of Trust was amended and restated on December 8,
1987. Its authorized capital consists of an unlimited number of shares of
beneficial interest of $0.01 par value. The shares are currently divided into
six series. The other series of the Trust are: Scudder New York Tax Free Fund,
Scudder New York Tax Free Money Fund, Scudder Ohio Tax Free Fund and Scudder
Pennsylvania Tax Free Fund. The Trustees have the authority to issue more series
of shares and to designate the relative rights and preferences as between the
different series. Each share of each Fund has equal rights with each other share
of that Fund as to voting,
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dividends and liquidation. Shareholders have one vote for each share held on
matters on which they are entitled to vote. All shares issued and outstanding
will be fully paid and non-assessable by the Trust, and redeemable as described
in this Statement of Additional Information and in the Funds' prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with its equitable share of the
general liabilities of the Trust, as determined by the Trustees. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust or any
series, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such shares available for distribution to
shareholders.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon only by shareholders of the series involved. Additionally, approval of the
investment advisory agreement is a matter to be determined separately by each
series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve such agreement as to the other series.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of their
office.
INVESTMENT ADVISER
(See "Fund organization--Investment adviser" in the Funds' prospectus.)
Scudder 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 find 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, Adviser's
predecessor entered into an agreement with Zurich Insurance Company ("Zurich")
pursuant to which the predecessor and Zurich agreed to form an alliance. On
December 31, 1997, Zurich acquired a majority interest in Scudder, and Zurich
made its subsidiary Zurich Kemper Investments, Inc., a part of the predecessor
organization. The predecessor'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. Zurich Insurance Group is particularly strong in the insurance of
international companies and organizations. Over
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the past few years, Zurich's global presence, particularly in the United States,
has been strengthened by means of selective acquisitions.
The principal source of the Adviser's income is professional fees received
from providing continuous investment advice, and the firm derives no income from
brokerage or underwriting of securities. Today, it provides investment counsel
for many individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. In addition,
it manages Montgomery Street Income Securities, Inc., Scudder California Tax
Free Trust, Scudder Cash Investment Trust, Scudder Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Scudder Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds,
Inc., Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder
Pathway Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, Scudder Global High Income Fund, Inc.,
The Argentina Fund, Inc., The Brazil Fund, Inc., The First Iberian Fund, Inc.,
The Korea Fund, Inc. and The Japan 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 Scudder Kemper Investments, Inc.
("Scudder") and AMA Solutions, Inc., a subsidiary of the American Medical
Association (the "AMA"), dated May 9, 1997, Scudder 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 Scudder with respect to assets
invested by AMA members in Scudder funds in connection with the AMA
InvestmentLinkSM Program. Scudder 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 Scudder (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 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.
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The Investment Management Agreements between the Trust, on behalf of each
Fund, and the Adviser was approved by the Trustees on ___________, 1997 and by
the Fund's shareholders on __________, 1997. 'Each Investment Management
Agreement (collectively, the "Agreements") will continue in effect until
September 30, 1998, and from year to year thereafter only if their continuance
is approved annually by the vote of a majority of those Trustees who are not
parties to such Agreements or interested persons of the Adviser or the Trust
cast in person at a meeting called for the purpose of voting on such approval
and either by vote of a majority of the Trustees or a majority of the
outstanding voting securities of each Fund. The Agreements may be terminated at
any time without payment of penalty by either party on sixty days' written
notice, and automatically terminates in the event of its assignment.
Under each Agreement, the Adviser regularly provides a Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the Fund's investment objectives and
policies. The Adviser determines what securities shall be purchased for the
Fund's portfolio, what securities shall be held or sold by the Fund, and what
portion of the Fund's assets shall be held uninvested, subject always to the
provisions of the Trust's Declaration of Trust and By-Laws, the 1940 Act, the
Internal Revenue Code of 1986 and to the Fund's investment objective, policies
and restrictions, and subject further to such policies and instructions as the
Trustees of the Trust may from time to time establish. The Adviser also advises
and assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of each Fund.
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 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 ________, 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 ________, respectively. For the fiscal year ended October 31, 1997 for
Massachusetts Limited Term Tax Free Fund, the amount not imposed by the Adviser
equaled $_______.
The Adviser has agreed to maintain the annualized expenses of
Massachusetts Limited Term Tax Free Fund at not more than 0.75% of the average
daily net assets of the Fund until October 31, 199_.
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, 1995, 1996 and 1997, pursuant to these agreements, the
investment management fees incurred by Massachusetts Tax Free Fund were
$925,856, $1,826,799 and $1,933,810, respectively. Had the Adviser imposed a
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full investment management fee for the fiscal years ended March 31, 1995 and
1996, the investment management fees would have equaled $1,853,862 and
$1,858,029, respectively.
Under the Agreements each Fund is responsible for all of its other
expenses, including organization expenses; clerical salaries; fees and expenses
incurred in connection with membership in investment company organizations;
brokers' commissions; payment for portfolio pricing services to a pricing agent,
if any; legal, auditing or accounting expenses; taxes or governmental fees; the
fees and expenses of the Transfer Agent; the cost of preparing share
certificates and any other expenses, including clerical expense, of issuance,
redemption or repurchase of shares of beneficial interest; the expenses of and
fees for registering or qualifying securities for sale; the fees and expenses of
the Trustees of the Trust who are not affiliated with the Adviser; the cost of
preparing and distributing reports and notices to shareholders; and the fees or
disbursements of custodians. The Trust is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto.
Each Agreement further provides that as between each Fund and the Adviser
each Fund will be responsible for all expenses, including clerical expense, of
offer, sale, underwriting and distribution of a Fund's shares only so long as a
Fund employs a principal underwriter to act as the distributor of a Fund's
shares pursuant to an underwriting agreement which provides that the underwriter
will assume such expenses. The Trust's underwriting agreement provides that the
principal underwriter shall pay all expenses of offer and sale of a Fund's
shares except the expenses of preparation and filing of registration statements
under the Securities Act of 1933 and under state securities laws, issue and
transfer taxes, if any, and a portion of the prospectuses used by a Fund. In the
event that a Fund ceases to employ a principal underwriter to act as the
distributor of a Fund's shares, the expenses of distributing a Fund's shares
will be borne by the Adviser unless a Fund shall have adopted a plan pursuant to
Rule 12b-1 under the 1940 Act providing that a Fund shall be responsible for
some or all of such distribution expenses.
Each Agreement requires the Adviser to return to a Fund all or a portion
of advances of its management fee to the extent annual expenses of a Fund
(including the management fee stated above) exceed the limitations prescribed by
any state in which a Fund's shares are offered for sale. Certain expenses such
as brokerage commissions, taxes, extraordinary expenses and interest are
excluded from such limitations. Any such fee advance required to be returned to
a Fund will be returned as promptly as practicable after the end of each Fund's
fiscal year. However, no fee payment will be made to the Adviser during any
fiscal year which will cause year-to-date expenses to exceed the cumulative pro
rata expense limitation at the time of such payment. The amortization of
organizational costs is described herein under "ADDITIONAL INFORMATION--Other
Information."
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning the Agreement, Trustees who are not "interested persons" of
the Adviser are represented by independent counsel at that Fund's expense.
Each Agreement provides that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by a Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Trust
relationships.
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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
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
Daniel Pierce (63)*+@ President and Chairman of the Board Vice President,
Trustee and Managing Director Director and
of Scudder Kemper Assistant
Investments, Inc. Treasurer
Henry P. Becton, Jr.(53) Trustee President and General --
WGBH Manager, WGBH
125 Western Avenue Educational Foundation
Allston, MA
Dawn-Marie Driscoll (50) Trustee Executive Fellow, --
4909 SW 9th Place Center for Business
Cape Coral, FL Ethics; President,
Driscoll Associates
Peter B. Freeman (65)@ Trustee Corporate Director and --
100 Alumni Avenue Trustee
Providence, RI
Wesley W. Marple, Jr. Trustee Professor of Business --
(65)@ Administration,
413 Hayden Hall Northeastern
360 Huntington Avenue University College of
Boston, MA Business Administration
Kathryn L. Quirk Trustee Managing Director of Vice President
Scudder Kemper and Assistant
Investments, Inc. Secretary
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Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
Jean C. Tempel (54) Trustee General Partner, --
Ten Post Office Square TL Ventures
Suite 1325
Boston, MA
Donald C. Carleton (63)+ Vice President Managing Director of --
Scudder Kemper
Investments, Inc.
Philip G. Condon (45)+ Vice President Managing Director of --
Scudder Kemper
Investments, Inc.
Jerard K. Hartman (64)# Vice President Managing Director of --
Scudder Kemper
Investments, Inc.
John R. Hebble Assistant
Treasurer
Thomas W. Joseph (58)+ Vice President Principal of Scudder Vice President,
Kemper Investments, Director,
Inc. Treasurer and
Assistant Clerk
Jeremy L. Ragus (45)+ Vice President Principal of Scudder --
Kemper Investments,
Inc.
Rebecca Wilson (35)+ Vice President Vice President of --
Scudder Kemper
Investments, Inc.
Thomas F. McDonough (50)+ Vice President Principal of Scudder Clerk
and Secretary Kemper Investments,
Inc.
Caroline Pearson (35)+ Assistant Vice President of --
Secretary Scudder Kemper
Investments, Inc.
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* 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 and Pierce are members of the Executive Committee
of each Fund, which has the power to declare dividends from ordinary
income and distributions of realized capital gains to the same extent as
the Board is so empowered.
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of January 31, 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 Massachusetts
Limited Term Tax Free Fund and Massachusetts Tax Free Fund outstanding on such
date.
As of January 31, 1998 Scudder Kemper Investments, Inc. owned in the
aggregate, by or on behalf of accounts for which it acts as investment adviser,
_______ and _________ shares or ____% and ____% of the outstanding shares of
Massachusetts Limited Term Tax Free Fund and Massachusetts Tax Free Fund,
respectively. Scudder Kemper Investments, Inc.. may be deemed to be the
beneficial owner of such shares but disclaims any beneficial ownership in such
shares.
As of January 31, 1998, _______ and _________ shares in the aggregate or
____% and ____% of the outstanding shares of Massachusetts Limited Term Tax Free
Fund and Massachusetts Tax Free Fund, respectively, were held in the nominees of
Fiduciary Trust Company. Fiduciary Trust Company may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the best of the Trust's knowledge, as of January 31, 1998 no person
owned beneficially more than 5% of either Fund's outstanding shares, except as
stated above.
REMUNERATION
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. (the "Adviser"). 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 designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Funds' investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by each Fund's independent public accountants and
by independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
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The Independent Trustees met _____ times during 1997, including Board and
Committee meetings and meetings to review each Fund's contractual arrangements
as described above. All of the Independent Trustees attended 100% of all such
meetings.
Compensation of Officers and Trustees
Several of the officers and Trustees of the Trust may be officers of the
Adviser, or of the Distributor, the Transfer Agent, Scudder Trust Company of
Scudder Fund Accounting Corporation from whom they receive compensation, as a
result of which they may be deemed to participate in fees paid by the Trust. The
Trust pays no direct remuneration to any officer of the Trust. However, each of
the Trustees who is not affiliated with the Adviser will be compensated for all
expenses relating to Trust business (specifically including travel expenses
relating to Trust business). Each of these unaffiliated Trustees receives a
revised annual Trustee's fee of $12,000, divided equally among the series of the
Trust plus $100 for attending each Trustees' meeting, audit committee meeting or
meeting held for the purpose of considering arrangements between the Trust on
behalf of a Fund and the Adviser or any affiliates. Each unaffiliated Trustee
also receives $100 per committee meeting, other than those set forth above,
attended. For the fiscal year ended October 31, 1997, fees for Scudder
Massachusetts Limited Term Tax Free Fund totaled $______. For the fiscal year
ended March 31, 1997, fees for Scudder Massachusetts Tax Free Fund totaled
$14,973.
No additional compensation is paid to any Independent Trustee for travel
time to meetings, attendance at trustees' educational seminars or conferences,
service on industry or association committees, participation as speakers at
trustees' conferences, service on special trustee task forces or subcommittees
or service as lead or liaison trustee. Independent Trustees do not receive any
employee benefits such as pension, retirement or health insurance.
The Independent Trustees also serve in the same capacity for other funds
managed by the Adviser. These funds differ broadly in type 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 1996 from the Trust and from all of Scudder funds as a group.
Name Scudder Tax Free Trust* All Scudder Funds
---- ----------------------- -----------------
Henry P. Becton, $______ $______
Jr., Trustee (16 funds)
Dawn-Marie Driscoll, $______ $_______
Trustee (16 funds)
Peter B. Freeman, $______ $_______
Trustee (33 funds)
Wesley W. Marple, $______ $_______
Jr., Trustee (16 funds)
Jean C. Tempel, $______ $_______
Trustee (16 funds)
* Scudder State Tax Free Trust consists of six Funds: Scudder Massachusetts
Limited Term Tax Free Fund, Scudder Massachusetts Tax Free Fund, Scudder
New York Tax Free Money Fund, Scudder New York Tax Free Fund, Scudder Ohio
Tax Free Fund and Scudder Pennsylvania Tax Free Fund.
Members of the Board of Trustees who are employees of Scudder or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of Scudder, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
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DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a Massachusetts corporation, which is a subsidiary of
Scudder Kemper Investments, Inc., a Delaware corporation. The Trust's
underwriting agreement dated June 1, 1987 will remain in effect until September
30, 1997, and from year to year thereafter only if its continuance is approved
annually by a majority of the members of the Board of Trustees who are not
parties to such agreement or interested persons of any such party and either by
vote of a majority of the Board of Trustees or a majority of the outstanding
voting securities of the Trust. The underwriting agreement was last approved by
the Trustees on ___________, 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 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
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investment company under Subchapter M of the Internal Revenue Code of 1986 as
amended (the "Code") and has qualified as such. Each Fund intends to continue to
qualify in each taxable year as required under the Code in order to avoid
payment of federal income tax at the fund level.
In order to qualify as a regulated investment company, each Fund must meet
certain requirements regarding the source of its income and the diversification
of its assets and must also derive less than 30% of its gross income in each
taxable year from certain types of investments (such as securities, options and
financial futures) held for less than three months. Legislation currently
pending before the U.S. Congress would repeal this requirement. However, it is
impossible to predict whether this legislation will become law and, if it is so
enacted, what form it will eventually take.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90
percent of its taxable net investment income (including net short-term capital
gain in excess of net long-term capital loss) and at least 90 percent of its
tax-exempt net investment income and is not subject to federal income tax to the
extent that it distributes annually all of its taxable net investment income and
net realized capital gains in accordance with the timing requirements of the
Code. Each Fund intends to distribute at least annually substantially all, and
in no event less than 90%, of its taxable and tax-exempt net investment income
and net realized capital gains.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by a Fund, the Fund will elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim his share of federal income taxes paid by a Fund on such gains as
a credit against his own federal income tax liability, and will be entitled to
increase the adjusted tax basis of his Fund shares by the difference between his
pro rata share of such gains and his tax credit.
Each Fund is subject to a 4% non-deductible excise tax on amounts required
to be but not distributed under a prescribed formula. The formula requires
payment to shareholders during a calendar year of distributions representing at
least 98% of a Fund's taxable ordinary income for the calendar year, at least
98% of the excess of its capital gains over capital losses realized during the
one-year period ending October 31 during such year, and all ordinary income and
capital gains for prior years that were not previously distributed. Each Fund
has adjusted its distribution policies to minimize any adverse impact from this
tax or eliminate its application.
Net investment income is made up of dividends and interest, less expenses.
Net realized capital gains for a fiscal year are computed by taking into account
any capital loss carryforward or post-October loss of a fund. Scudder
Massachusetts Tax Free Fund and Massachusetts Limited Term Tax Free Fund intend
to offset realized capital gains by using their capital loss carryforwards
before distributing any gains. In addition, Scudder Massachusetts Tax Free Fund
intends to offset realized capital gains by using its post-October loss before
distributing gains. As of March 31, 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. As of October 31, 1996, Scudder
Massachusetts Limited Term Tax Free Fund had a net capital loss carryforward of
approximately $26,000, which may be applied against realized capital gains of
each succeeding year until fully utilized or until October 31, 2002, the
expiration date, whichever occurs first.
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations the interest on which is excluded from gross
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
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corporate alternative minimum taxes described below. Discount from certain
stripped tax-exempt obligations or their coupons, however, may be taxable.
The Revenue Reconciliation Act of 1993 requires that market discount
recognized on a tax-exempt bond is taxable as ordinary income. This rule applies
only for disposals of bonds purchased after April 30, 1993. A market discount
bond is a bond acquired in the secondary market at a price below its redemption
value. Under prior law, the treatment of market discount as ordinary income did
not apply to tax-exempt obligations. Instead, realized market discount on
tax-exempt obligations was treated as capital gain. Under the new law, gain on
the disposition of a tax-exempt obligation or any other market discount bond
that is acquired for a price less than its principal amount will be treated as
ordinary income (instead of capital gain) to the extent of accrued market
discount.
Since no portion of either Fund's income will be comprised of dividends
from domestic corporations, none of the income distributions of a Fund will be
eligible for the dividends-received deduction available for certain taxable
dividends received by corporations.
Any short-term capital loss realized upon the redemption of shares within
six months of the date of their purchase will be disallowed to the extent of any
tax-exempt dividends received with respect to such shares, although the period
may be reduced under Treasury regulations to be prescribed. All or a portion of
a loss realized upon the redemption of shares may be disallowed to the extent
shares are repurchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Property 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% individual alternative
minimum tax, but normally no more than 20% of a Fund's net assets will be
invested in securities the interest on which is such a tax preference item for
individuals.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the Federal income tax status of all distributions.
All distributions of taxable or tax-exempt net investment income and net
realized capital gain, whether received in shares or in cash, must be reported
by each shareholder on his or her federal income tax return. Dividends or
capital gains distributions declared and payable to shareholders of record on a
specified date in October, November or December, if any, will be deemed to have
been received by shareholders in December if paid during January of the
following year. Shareholders are also required to report tax-exempt interest.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
Interest which is tax-exempt for federal income tax purposes is included
as income for purposes of determining the amount of social security or railroad
retirement benefits subject to tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Fund will not be deductible for federal income tax purposes. Under
rules used by the IRS to determine when borrowed funds are used for the purpose
of purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
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Section 147(a) of the Code prohibits exemption from taxation of interest
on certain governmental obligations to persons who are "substantial users" (or
persons related thereto) of facilities financed by such obligations. Neither
Fund has undertaken any investigation as to the users of the facilities financed
by bonds in such Fund's portfolio.
Distributions by each Fund result in a reduction in the net asset value of
a Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder, to the extent it is derived from other than tax-exempt interest, as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which, to the extent it is derived from other than tax-exempt
interest, will nevertheless be taxable to them.
All futures contracts entered into by a Fund and all listed nonequity
options written or purchased by a Fund (including options on futures contracts
and options on securities indices) will be governed by Section 1256 of the Code.
Absent a tax election to the contrary, gain or loss attributable to the lapse,
exercise or closing out of any such position generally will be treated as 60%
long-term and 40% short-term, and on the last trading day of a Fund's fiscal
year, all outstanding Section 1256 positions will be marked to market (i.e.
treated as if such positions were closed out at their closing price on such
day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term. Under certain circumstances, entry into a futures contract to sell a
security may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying security or a substantially
identical security in a Fund's portfolio.
Positions of each Fund which consist of at least one debt security not
governed by Section 1256 and at least one futures contract or nonequity option
governed by Section 1256 which substantially diminishes a Fund's risk of loss
with respect to such debt security will be treated as a "mixed straddle." Mixed
straddles are subject to the straddle rules of Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments in the holding
periods of securities and conversion of short-term capital losses into long-term
capital losses. Certain tax elections, however, exist for them which reduce or
eliminate the operation of these rules. Each Fund will monitor its transactions
in options and futures and may make certain tax elections in order to mitigate
the operation of these rules and prevent disqualification of a Fund as a
regulated investment company for federal income tax purposes.
Under the federal income tax law, each Fund will be required to report to
the IRS all distributions of taxable income and capital gains as well as gross
proceeds from the redemption or exchange of Fund shares, except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, distributions of taxable income and capital gains and proceeds
from the redemption or exchange of the shares of a regulated investment company
are generally subject to withholding of federal income tax at the rate of 31% in
the case of nonexempt shareholders who fail to furnish the investment company
with their taxpayer identification numbers and with required certifications
regarding their status under the federal income tax law. Under a special
exception, distributions of taxable income and capital gains of a Fund will not
be subject to backup withholding if a Fund reasonably estimates that at least
95% of all of its distributions will consist of tax-exempt interest. However, in
this case, the proceeds from the redemption or exchange of shares may be subject
to backup withholding. Withholding may also be required if a Fund is notified by
the IRS or a broker that the taxpayer identification number furnished by the
shareholder is incorrect or that the shareholder has previously failed to report
interest or dividend income. If the withholding provisions are applicable, any
such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of each Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her.
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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 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
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(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 ____% respectively. Massachusetts Tax Free Fund's portfolio
turnover rate for the fiscal periods ended March 31, 1995, 1996 and 1997 were
17.0%, 10.2% and 11.51%, 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, 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 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.
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An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of a Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee most fairly
reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial highlights in this Statement of Additional Information has
been audited by Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA
02109, independent accountants, and is included in this Statement of Additional
Information in reliance upon the accompanying report of said firm, which report
is given upon their authority as experts in accounting and auditing. Coopers &
Lybrand L.L.P. is responsible for performing annual (semiannual) audits of the
financial statements and financial highlights of the 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 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
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well as investment-grade characteristics. Securities rated Ba or below by
Moody's are considered below investment grade, with factors giving security to
principal and interest inadequate and potentially unreliable over any period of
time. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Such
securities are commonly referred to as "junk" bonds and as such they carry a
high margin of risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG-1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG-2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest quality ratings categories of S&P for municipal bonds are
AAA (Prime), AA (High-grade), A (Good-grade), BBB (Investment-grade) and BB or B
(Below investment-grade). Bonds rated AAA have the highest rating assigned by
S&P to a municipal obligation. Capacity to pay interest and repay principal is
extremely strong. Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in a small degree.
Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. Bonds rated BBB have an adequate capacity
to pay interest and to repay principal. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds of this category than for bonds of higher rated
categories. Securities rated BB or below by S&P are considered below investment
grade, with factors giving security to principal and interest inadequate and
potentially unreliable over any period of time. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. Such securities are commonly referred to as "junk" bonds and as such
they carry a high margin of risk.
S&P's top ratings categories for municipal notes are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The six highest quality ratings categories of Fitch for municipal bonds
are AAA, AA, A, BBB, BB and B. Bonds rated AAA are considered to be investment
grade and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. Bonds rated AA are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated
'AAA'. Because bonds rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated 'F-1+'. Bonds rated A are considered to be
investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher rates. Bonds rated BBB are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse effects
on these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings. Securities rated BB or below by Fitch are considered below
investment grade, with factors giving security to principal and interest
inadequate and potentially unreliable over any period of time. Such securities
are commonly referred to as "junk" bonds and as such they carry a high margin of
risk.
Commercial Paper Ratings
Commercial paper rated A-1 or better by S&P has the following
characteristics: liquidity ratios are adequate to meet cash requirements;
long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed; the issuer has access to at least two additional
channels of borrowing; and basic earnings and cash flow have an upward trend
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 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
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.
74
<PAGE>
Other Information
The CUSIP number of Massachusetts Limited Term Tax Free Fund is 811209105.
The CUSIP number of Massachusetts Tax Free Fund is 811184-30-8.
Massachusetts Limited Term Tax Free Fund has a fiscal year ending on
October 31.
Scudder Massachusetts Tax Free Fund has a fiscal year ending on March 31.
Portfolio securities of the Funds are held separately, pursuant to a
custodian agreement, by the Funds' Custodian, State Street Bank and Trust
Company.
The firm of Willkie Farr & Gallagher of New York is counsel for the Trust.
The name "Scudder State Tax Free Trust" is the designation of the Trustees
for the time being under an Amended and Restated Declaration of Trust dated
December 8, 1987, as amended from time to time, and all persons dealing with a
Fund must look solely to the property of that Fund for the enforcement of any
claims against that Fund as neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of a Fund. No Fund of the Trust is liable for the obligations of any
other Fund. Upon the initial purchase of shares, the shareholder agrees to be
bound by the Trust's Declaration of Trust, as amended from time to time. The
Declaration of Trust of the Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts. All persons dealing with a Fund must
look only to the assets of such Fund for the enforcement of any claims against
such Fund as no other series of the Trust assumes any liabilities for
obligations entered into on behalf of that Fund.
Costs of $28,116 incurred by Massachusetts Limited Term Tax Free Fund in
conjunction with its organization are amortized over five years beginning
February 15, 1994.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net
asset value per share for each Fund. Each Fund pays SFAC an annual fee equal to
0.024% of the first $150 million of average daily net assets, 0.0070% of such
assets in excess of $150 million, 0.004% of such assets in excess of $1 billion,
plus holding and transaction charges for this service. The fee incurred by
Massachusetts Limited Term Tax Free Fund to SFAC for the fiscal year ended
October 31, 1995 was _______, October 31, 1996 was $36,000 and for the fiscal
year ended October 31, 1997 was _______. For the fiscal year ended March 31,
1997, the amount charged to Scudder Massachusetts Tax Free Fund by SFAC amounted
to $59,760, of which $5,145 was unpaid at March 31, 1997.
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 _____, October 31, 1996 was $36,098, and for the fiscal
year ended October 31, 1997 was ______. The fee incurred by Massachusetts Tax
Free Fund to Service Corporation for the year ended March 31, 1997 amounted to
$188,646, of which $16,386 was unpaid at March 31, 1997.
Scudder Trust Company, Two International Place, Boston, MA 02110-4103, an
affiliate of the Adviser provides services for certain retirement plan accounts.
The Fund pays Scudder Trust Company an annual fee of $29.00 for each account
maintained for a participant. For the fiscal year ended October 31, 1995,
Scudder Trust Company's fee amounted to $_________. For the fiscal year ended
October 31, 1996, Scudder Trust Company's fee amounted to $128,483, and for the
fiscal year ended October 31, 1997, Scudder Trust Company's fee amounted to $ .
The Fund(s), 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.
75
<PAGE>
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, 1997, are incorporated herein by reference and are hereby deemed to be
a part of this Statement of Additional Information.
76
<PAGE>
Scudder
Massachusetts
Limited Term
Tax Free Fund
Annual Report
October 31, 1997
Pure No-Load(TM) Funds
A fund designed to seek double-tax-free income, exempt from both Massachusetts
and regular federal income taxes consistent with a high degree of principal
stability.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
In Brief
o For the 12 months ended October 31, 1997, Scudder Massachusetts Limited Term
Tax Free Fund posted a total return of 5.44%. This return outpaced the average
performance of the Fund's peers according to Lipper. The Fund's total return
performance also placed it in the top 15% of similar funds over one-and
three-year periods.
o As of October 31, 1997, Scudder Massachusetts Limited Term Tax Free Fund's
30-day net annualized SEC yield was 3.90%, equivalent to an 7.36% taxable yield
for Massachusetts investors subject to the 46.85% combined federal and state
income tax rate.
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 October 31, 1997.*
* 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, and was rated among 1,448 and 676 municipal funds
for the respective periods. Of the funds rated, 10% received five stars, and
22.5% received four stars. Past performance is no guarantee of future returns.
Table of Contents
3 Letter from the Fund's President 17 Notes to Financial Statements
4 Performance Update 19 Report of Independent Accountants
5 Portfolio Summary 20 Tax Information
6 Portfolio Management Discussion 21 Shareholder Meeting Results
9 Glossary of Investment Terms 24 Officers and Trustees
10 Investment Portfolio 25 Investment Products and Services
13 Financial Statements 26 Scudder Solutions
16 Financial Highlights
2 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
We are pleased to report to you on Scudder Massachusetts Limited Term Tax
Free Fund's performance over its most recent fiscal year. As of October 31,
1997, the Fund posted a 7.36% tax equivalent yield for investors in the highest
state and federal tax brackets, significantly higher than current CD rates. The
Fund earned a 5.44% total return over the 12-month period. In addition, the Fund
earned a four-star Morningstar rating (see "In Brief" on page two for more
information). Lastly, the Massachusetts economy is strong, its debt burden is
manageable, and the State has recently received a credit upgrade from a major
ratings agency. Please read the discussion beginning on page 8 for more
information.
The past year saw volatile interest rates. Over the period, bond prices
inched upward. Leading to the volatility was the fact that as one statistic
which might imply a resurgence of inflation was announced, it was soon followed
by two others that more than allayed such fears. We would not be surprised if
the coming year saw a similar pattern.
For those interested in other offerings from Scudder, we would like to take
this opportunity to tell you about a recent addition to Scudder's family of
funds -- Scudder International Growth and Income Fund. The Fund employs a
yield-oriented approach to international investing and seeks to provide
long-term growth of capital plus current income. Investors who desire
international exposure but who wish to take a more conservative approach to
international investing may appreciate the Fund's emphasis on the dividend
paying stocks of established companies listed on foreign exchanges.
Please see pages 25 through 27 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 account or any Scudder fund.
Thank you for investing with Scudder.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Massachusetts Limited Term Tax Free Fund
3 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of October 31, 1997
- ----------------------------------------------------------------
FUND INDEX COMPARISONS
- ----------------------------------------------------------------
Total Return
Period Growth --------------
Ended of Average
10/31/97 $10,000 Cumulative Annual
- ------------------------------------------------
SCUDDER MASSACHUSETTS LIMITED TERM
TAX FREE FUND
TICKER SYMBOL: SMLFX
- ------------------------------------------------
1 Year $ 10,544 5.44% 5.44%
Life of Fund* $ 11,849 18.49% 4.68%
- ------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX
(3 YEAR)
- ------------------------------------------------
1 Year $ 10,551 5.51% 5.51%
Life of Fund* $ 11,978 19.78% 5.04%
- ------------------------------------------------
*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
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
The 3-year Lehman Brothers Municipal Bond Index is an unmanaged,
market-value-weighted measure of the short-term municipal bond market and
includes bonds with maturities of two to three years. Index returns assume
reinvested dividends and, unlike Fund returns, do not reflect fees or expenses.
- ----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- ----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
YEARLY PERIODS ENDED OCTOBER 31
1994* 1995 1996 1997
----------------------------------------------
NET ASSET VALUE......... $ 11.64 $ 12.02 $ 11.99 $ 12.10
INCOME DIVIDENDS........ $ .36 $ .54 $ .50 $ .53
FUND TOTAL RETURN (%)... .00 8.08 3.98 5.44
INDEX TOTAL RETURN (%).. .56 8.01 4.51 5.51
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may be
worth more or less than when purchased. If the Adviser had not maintained the
Fund's expenses, the total return for the one year and life of Fund periods
would have been lower.
4 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of October 31, 1997
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Hospital/Health 31%
Other General Obligation/
Lease 22%
Housing Finance Authority 9%
Higher Education 8%
Student Loans 5%
Water/Sewer Revenue 4%
Electric Utility Revenue 4%
Pollution Control/Industrial
Development 4%
State General Obligation 3%
Miscellaneous Municipal 10%
- --------------------------------------
100%
- --------------------------------------
The Fund is broadly diversified, with
holdings in several categories of
Massachusetts revenue and general
obligation bonds.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 71%
AA 10%
A 7%
BBB 10%
BB 1%
Not Rated 1%
- --------------------------------------
100%
- --------------------------------------
Weighted average quality: AA
Overall quality remains high, with
over 80% of the bonds in the Fund's
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 11%
1 - 5 years 55%
5 - 10 years 34%
- ----------------------------------------------
100%
- ----------------------------------------------
Weighted average effective maturity: 4.32 years
We continued to maintain a longer-than-neutral
average maturity to capitalize on the favorable
outlook for five- to 10-year Massachusetts
municipal bonds.
For more complete details about the Fund's investment portfolio, see page 10.
5 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
For its most recent fiscal year ended October 31, 1997, Scudder Massachusetts
Limited Term Tax Free Fund earned a solid 5.44% total return. This consisted of
a $0.11 increase in net asset value to $12.10 and income distributions of $0.53
per share. This return outpaced the Lipper average of similar funds over one-
and three-year periods, and the Fund placed in the top 15% of similar funds over
these two time periods.
On October 31, 1997, the Fund's 30-day net annualized SEC yield was 3.90%,
equivalent to a taxable yield of 7.36% for shareholders subject to the 46.85%
maximum combined state and federal income tax rate. As shown in the accompanying
graph, the Fund's tax-equivalent yield has consistently exceeded the average
yield of two-year CDs tracked nationally.
========================================================
Scudder Massachusetts Limited Term Tax Free Fund:
Outpacing the Averages
(Average annual returns for periods ended
October 31, 1997)
========================================================
Number
Scudder of
MALTTFF Lipper Funds Percentile
Period return average Rank tracked Ranking
1 year 5.44% 4.67% 5 of 38 Top 13%
3 years* 5.82% 5.10% 4 of 33 Top 12%
Past performance does not guarantee future results.
PRINTED DOCUMENT CONTAINS A LINE CHART HERE:
LINE CHART TITLE:
Scudder Massachusetts Limited Term Tax Free
Fund's Tax-Equivalent Yield vs. National Two-
Year CD Rates
November 1996 through October 1997
LINE CHART DATA:
SMALTTFF National average
tax-equivalent of two-year CD
yield yields
-------------------------------------------------
11/96 5.20 7.28
5.15 7.38
1/997 5.17 7.71
5.18 7.53
3/097 5.21 7.81
5.37 8.15
5/97 5.35 8.11
5.39 7.81
7/97 5.36 7.26
5.32 7.54
5.32 7.51
10/97 5.29 7.34
Source of CD data: BanxQuote.
Tax equivalent yields are for the 46.85% maximum federal and state tax rate.
Massachusetts Update
The Massachusetts economy continues to lead growth in the New England region.
Job creation is still strong, and unemployment is at its lowest level since
1989. The Commonwealth finished its 1997 fiscal year with an operating surplus
of $182 million in its General Fund. Massachusetts had anticipated issuing $900
million per year in bonds for the next five years, a total of $4.5 billion, to
finance transportation-related capital projects. Due to changes in federal
funding for the Central Artery Project, the Commonwealth increased its debt
limits for the 1998 and 1999 fiscal years to allow for additional bond issuance
of up to $1 billion. The pending legislative approval of a convention center
6 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
will also require debt financing, secured by a hotel tax. Although
Massachusetts' future debt issuance will be large, the burden should still be
manageable, given the Commonwealth's high wealth levels and scheduled debt
retirement. Lastly, Massachusetts and its bondholders stand to benefit from the
State's recent credit upgrade by a major ratings agency.
Portfolio Strategy
Scudder Massachusetts Limited Term Tax Free Fund is designed to deliver double
tax-free income through investments primarily in a portfolio of municipal bonds
with effective maturities between one and five years. The Fund's management team
pursues 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 most recent fiscal year, the Fund continued to maintain a
longer-than-neutral average maturity (4.3 years at the close of the period) to
capitalize on the favorable outlook for the five- to 10-year segment of the
municipal bond market. Yields of 10-year municipal bonds, for example, declined
on average one third of a percentage point (and prices rose 2.3%) during the 12
months while two-year municipal bond yields and prices were essentially
unchanged. The Fund also continued to emphasize premium noncallable bonds, which
generally exhibit less price sensitivity than bonds priced at par.
The Fund has substantial holdings of Massachusetts general obligation (G.O.)
bonds. These bonds offer attractive value, high overall quality, and relative
stability. In addition, we hold a large percentage (29% as of October 31) of
pre-refunded bonds in the Fund's portfolio. Bonds are pre-refunded when issuers
sell new debt at lower prevailing rates and use the proceeds to establish an
escrow account of U.S. Treasury bonds designated to retire the original
municipal bonds on their future call dates. These bonds offer the highest
quality available in the municipal marketplace, yet are typically priced lower
than similar bonds of slightly lower quality. The Fund's overall credit quality
remains high, with over 80% of the bonds in the Fund's portfolio rated AAA or
AA.
Outlook
As a rising but volatile stock market continued to break records, the past year
also witnessed increased activity in the bond market, as large and small
investors seeking additional diversification rebalanced their portfolios by
adding bonds. Amid Federal Reserve Chairman Greenspan's warnings about wage
pressures, the shrinking supply of labor, and the possible runout of the "peace
dividend," it's difficult to predict whether the Fed will continue to refrain
from raising interest rates in the near future and whether the currently
favorable economic and market conditions will prevail over the coming months. We
do know, however, that yields and prices of municipal bonds are currently
attractive compared with Treasuries, and that the continued low level of U.S.
inflation -- aided by business' strong investment in technological advances as
7 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
well as subdued economic activity in much of the rest of the world -- is a boon
to investors.
We will continue to maintain a conservative investment strategy, including
holding premium coupon bonds, diversifying broadly, and keeping the Fund's
credit quality high. In addition, the Fund will seek to purchase select 10-year
municipal bonds, which are currently priced at attractive levels. 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
Scudder Massachusetts Limited
Term Tax Free Fund: A Team
Approach to Investing
Scudder Massachusetts Limited Term Tax Free Fund is run by a team of Scudder
investment professionals who each play an important role in the Fund's
management process. Team members work together to develop investment
strategies and select securities for the Fund. They are supported by Scudder's
large staff of economists, research analysts, traders, and other investment
specialists who work in Scudder's offices across the United States and abroad.
We believe our team approach benefits Fund investors by bringing together many
disciplines and leveraging Scudder's extensive resources.
Philip G. Condon, Lead Portfolio Manager, joined Scudder in 1983 and has 17
years of experience as a portfolio manager and in municipal research. Phil has
managed Scudder Massachusetts Limited Term Tax Free Fund since its inception
and Scudder Massachusetts Tax Free Fund since 1989. Kathleen A. Meany,
Portfolio Manager, joined Scudder in 1988 and has 20 years of municipal sales
and portfolio management experience. Kate has managed Scudder Massachusetts
Limited Term Tax Free Fund since its inception and Scudder Massachusetts Tax
Free Fund since 1988.
8 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Glossary of Investment Terms
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.
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. Most municipal
bonds are exempt from federal income taxes, and
many are exempt from state and local income taxes
as well.
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.
REVENUE BOND A municipal bond that uses either the revenues
generated by the enterprise being financed or a
dedicated revenue stream to pay principal and
interest to the bondholder. Municipal projects that
issue revenue bonds include airports, hospitals, and
water and sewer facilities.
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 cumulative
-- 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; Barron's Dictionary of Finance and Investment Terms)
9 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Investment Portfolio as of October 31, 1997
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Municipal Investments 6.9%
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts
Massachusetts, General Obligation, Dedicated Income Tax:
Series B, Daily Demand Note, 4%, 12/1/97* ................................... 400,000 MIG1 400,000
Series E, Daily Demand Note, 4%, 12/1/97* ................................... 100,000 MIG1 100,000
Massachusetts Health & Educational Facilities Authority:
Capital Assets Program, Series 1989 G-1, Weekly Demand
Note, 3.4%, 1/1/19 (c)* ..................................................... 1,000,000 AAA 1,000,000
Series D, Weekly Demand Note, 3.5%, 8/1/17* ................................. 389,000 MIG1 389,000
Series D, Weekly Demand Note, 3.85%, 1/1/35 (c)* ............................ 3,200,000 SP1+ 3,200,000
Massachusetts Industrial Finance Agency, Merritt Care, Daily Demand Note,
4%, 4/1/09* ................................................................... 600,000 MIG1 600,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Investments (Cost $5,689,000) 5,689,000
- ------------------------------------------------------------------------------------------------------------------------------
Intermediate-Term Municipal Investments 93.1%
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts
Lowell, MA, General Obligation:
6%, 12/15/04 (c) ............................................................ 2,025,000 AAA 2,206,946
Prerefunded 2/15/01, 8.3%, 2/15/05** ........................................ 1,635,000 AAA 1,883,242
Series 1992, 6.375%, 8/15/01 ................................................ 1,000,000 BBB 1,064,206
Malden, MA, Government Obligation, Series 1997, 5.5%, 8/1/05 (c) .............. 1,570,000 AAA 1,666,382
Massachusetts Bay Transportation Authority General Obligation, Series 1997C,
5%, 3/1/04 .................................................................. 500,000 A 513,335
Massachusetts Educational Loan Authority, Issue E, Series A, 6.7%, 1/1/02 ..... 415,000 AAA 440,722
Massachusetts General Obligation:
Series C, Prerefunded 12/1/00, 7.5%, 12/1/07** .............................. 750,000 AAA 837,053
Series C, Prerefunded 12/1/00, 7%, 12/1/10** ................................ 775,000 AAA 840,139
Series A, 5.25%, 2/1/01 (c) ................................................. 3,000,000 AAA 3,099,180
Massachusetts Health & Educational Facilities Authority:
Berkshire Health System, Series C, 5.9%, 10/1/11 ............................ 1,000,000 BBB 1,015,840
Berkshire Health System, Series D, 5.3%, 10/1/03 (c) ........................ 1,350,000 AAA 1,411,925
Central Massachusetts Medical Center, Series B, 6%, 7/1/02 (c) .............. 500,000 AAA 535,340
Daughters of Charity, Carney Hospital, Prerefunded 7/1/00, 7.5%, 7/1/05** ... 1,000,000 AAA 1,102,390
Daughters of Charity, Series D, 4.9%, 7/1/00 ................................ 550,000 AA 559,587
Fairview Extended Care, 1997B, 4.55%, 1/1/21 (c) ............................ 1,750,000 AAA 1,762,425
Massachusetts Eye and Ear Infirmary Series A, 7%, 7/1/01 .................... 2,120,000 BBB 2,195,642
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical, Academic & Scientific, Series A:
5.9%, 1/1/00 ............................................................... 500,000 A 514,055
6%, 1/1/01 ................................................................. 1,000,000 A 1,039,250
6.1%, 1/1/02 ............................................................... 500,000 A 524,820
Newton-Wellesley Hospital, Series D, Prerefunded 7/1/01, 7%, 7/1/15 (c)** ... 1,500,000 AAA 1,665,375
St. Joseph's Hospital, Series C, Prerefunded 10/1/99, 9.5%, 10/1/20** ....... 3,375,000 AAA 3,771,630
Valley Regional Health System, Series C, 5.3%, 7/1/00 ....................... 1,500,000 AAA 1,537,695
Wheaton College, Series B, Prerefunded 7/1/99, 7.2%, 7/1/09** ............... 590,000 AAA 631,648
Massachusetts Housing Finance Agency:
Housing Project Revenue, Series A, 5.2%, 10/1/00 ............................ 575,000 A 587,851
Multi-Family Housing Project 1988, Series A, Prerefunded 4/1/98,
8.7%, 4/1/14** .............................................................. 1,430,000 AAA 1,500,742
Multi-Family Housing Project, Series A, 8.8%, 8/1/21 ........................ 665,000 A 682,230
Single-Family Mortgage Revenue, Series 3, 7.875%, 6/1/14 .................... 4,000,000 AA 4,081,880
Massachusetts Industrial Finance Agency:
Boston Museum of Fine Arts, Series 1996, 5.125%, 1/1/04 (c) ................. 1,000,000 AAA 1,037,080
Cape Cod Health Systems, Series 1990, Prerefunded 11/15/00, 8.5%,
11/15/20** .................................................................. 2,150,000 AAA 2,453,344
College of the Holy Cross, Series 1996, 5.5%, 3/1/06 (c) .................... 1,000,000 AAA 1,060,940
East Boston Neighborhood Project, 7.25%, 7/1/06 ............................. 930,000 BB 960,011
Leominister Hospital, Series 1989A, Prerefunded 8/1/99, 8.625%, 8/1/09** .... 2,000,000 AAA 2,188,060
Merrimack College, Series 1997, 5.5%, 7/1/06 (c) ............................ 1,055,000 AAA 1,121,391
Milton Academy, Revenue Refunding, Series A, Prerefunded 9/1/99,
7.25%, 9/1/19 (c)** ...................................................... 700,000 AAA 753,445
North Andover Solid Waste, Series A, 6.3%, 7/1/05 ........................... 2,750,000 BBB 2,960,623
Resource Recovery, North Andover Solid Waste, Series A, 6.15%, 7/1/02 ....... 750,000 BBB 785,858
Worcester Polytechnic, Series 1997II, 5.25%, 9/1/04 (c) ..................... 1,065,000 AAA 1,112,744
Massachusetts Municipal Wholesale Electric Company, Power Supply System Revenue:
Prerefunded 7/1/02, 6.75%, 7/1/17** ......................................... 1,720,000 AAA 1,927,656
Series B, 6.3%, 7/1/00 ...................................................... 345,000 A 362,360
Series B, 6.375%, 7/1/01 .................................................... 1,000,000 A 1,066,480
Massachusetts Port Authority Revenue:
Series 1997A, 6%, 7/1/04 .................................................... 1,140,000 AA 1,238,838
USAIR, 5.5%, 9/1/06 (c) ..................................................... 640,000 AAA 673,786
Massachusetts Turnpike Authority:
Series 1996, 5%, 6/1/99 ..................................................... 785,000 NR 797,984
Series 1996A, 5%, 6/1/99 .................................................... 215,000 NR 218,358
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts, Special Obligation:
Series 1997A, Prerefunded 12/1/01, 5.5%, 6/1/05** ........................... 1,000,000 AA 1,060,310
Series A, Prerefunded 8/1/01, 5.2%, 6/1/04** ................................ 1,000,000 AA 1,040,620
Massachusetts Water Resource Authority
Series 1991A, Prerefunded 12/01/01, 6.875%, 12/1/11** ....................... 1,000,000 AAA 1,117,050
Series A, Prerefunded 7/15/02, 6.75%, 7/15/12** ............................. 1,000,000 AAA 1,121,480
Nantucket, MA, General Obligation, 6.25%, 12/1/02 ............................. 250,000 AAA 273,455
New England Education Loan Marketing Corp., Massachusetts Student Loan
Revenue Refunding, Issue A, 5.8%, 3/1/02 .................................... 3,150,000 AAA 3,305,579
North Attleboro, MA, General Obligation, 6%, 3/1/07 (c) ....................... 1,000,000 AAA 1,105,190
South Essex, MA, Sewer District, Series B, Prerefunded 6/1/04, 6.75%,
6/1/13 (c)** ................................................................ 1,000,000 AAA 1,146,790
Southeastern Massachusetts University Building, Series A, 5.5%, 5/1/04 (c) .... 1,010,000 AAA 1,067,540
Springfield, MA, Municipal Purpose Loan, General Obligation, Series 1996,
6.25%, 8/1/06 (c) ........................................................... 1,000,000 AAA 1,116,910
Worcester, MA, General Obligation, Revenue Refunding, Series G, 6%,
7/1/01 (c) .................................................................... 2,000,000 AAA 2,122,420
Worcester, MA, Government Obligation, Series 1997, 5.75%, 8/1/07 (c) .......... 1,000,000 AAA 1,084,550
Puerto Rico
Puerto Rico Public Building Authority, 6.75%, 7/1/04 (c) ...................... 2,250,000 AAA 2,555,258
- ------------------------------------------------------------------------------------------------------------------------------
Total Intermediate-Term Municipal Investments (Cost $74,780,747) 76,507,640
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $80,469,747) (a) 82,196,640
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $80,481,354. At October 31,
1997, net unrealized appreciation for all securities was $1,715,286. This
consisted of aggregate gross unrealized appreciation for all securities in
which there was an excess of market value over tax cost of $1,728,587 and
aggregate gross unrealized depreciation for all investment securities in
which there was an excess of tax cost over market value of $13,301.
(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, HIBI, or MBIA.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand
notes are securities whose yields are periodically reset at levels that
are generally comparable to tax-exempt commercial paper. These securities
are payable on demand within seven calendar days and normally incorporate
an irrevocable letter of credit or line of credit from a major bank. These
notes are carried, for purposes of calculating average weighted maturity,
at the longer of the period remaining until the next rate change or to the
extent of the demand period.
** Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest on tax-exempt issue and to retire the bonds in full at the
earliest refunding date.
The accompanying notes are an integral part of the financial statements.
12 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of October 31, 1997
<TABLE>
<S> <C>
Assets
- ------------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $80,469,747) ................... $ 82,196,640
Cash ................................................................... 57,801
Interest receivable .................................................... 1,339,139
Receivable for Fund shares sold ........................................ 110,649
Deferred organization expenses ......................................... 7,250
Other assets ........................................................... 963
----------------
Total assets ........................................................... 83,712,442
Liabilities
- ------------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased ...................................... 3,905,699
Dividends payable ...................................................... 92,577
Payable for Fund shares redeemed ....................................... 100,368
Accrued management fee ................................................. 28,068
Other payables and accrued expenses .................................... 59,074
----------------
Total liabilities ...................................................... 4,185,786
---------------------------------------------------------------------------------------------
Net assets, at market value $ 79,526,656
---------------------------------------------------------------------------------------------
Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Unrealized appreciation on investments ................................. 1,726,893
Accumulated net realized loss .......................................... (147,537)
Paid-in capital ........................................................ 77,947,300
---------------------------------------------------------------------------------------------
Net assets, at market value $ 79,526,656
---------------------------------------------------------------------------------------------
Net Asset Value
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share ($79,526,656/
6,573,339 outstanding shares of beneficial interest, $.01 par ----------------
value, unlimited number of shares authorized) ....................... $12.10
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Statement of Operations
year ended October 31, 1997
<TABLE>
<S> <C>
Investment Income
- ------------------------------------------------------------------------------------------------------------------------------
Interest ............................................................... $ 3,557,500
-----------------
Expenses:
Management fee ......................................................... 424,432
Custodian and accounting fees .......................................... 53,743
Services to shareholders ............................................... 61,641
Trustees' fees and expenses ............................................ 14,916
Auditing ............................................................... 35,511
Legal .................................................................. 6,819
Reports to shareholders ................................................ 22,856
Registration fees ...................................................... 7,406
Amortization of organization expenses .................................. 5,625
Other .................................................................. 7,522
-----------------
Total expenses before reductions ....................................... 640,471
Expense reductions ..................................................... (121,977)
-----------------
Expenses, net .......................................................... 518,494
---------------------------------------------------------------------------------------------
Net investment income 3,039,006
---------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ------------------------------------------------------------------------------------------------------------------------------
Net realized gain from investments ..................................... 8,891
Net unrealized appreciation on investments during the period ........... 676,307
---------------------------------------------------------------------------------------------
Net gain on investments 685,198
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 3,724,204
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended October 31,
Increase (Decrease) in Net Assets 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ....................................... $ 3,039,006 $ 2,561,928
Net realized gain (loss) on investments ..................... 8,891 (112,182)
Net unrealized appreciation (depreciation) on investments
during the .................................................. 676,307 (97,803)
period
-------------- --------------
Net increase in net assets resulting from operations ........ 3,724,204 2,351,943
-------------- --------------
Distributions to shareholders from net investment income .... (3,039,006) (2,561,928)
-------------- --------------
Fund share transactions:
Proceeds from shares sold ................................... 34,983,831 39,513,439
Net asset value of shares issued to shareholders in
reinvestment of ............................................. 1,974,195 1,674,479
distributions
Cost of shares redeemed ..................................... (23,621,656) (30,966,008)
-------------- --------------
Net increase in net assets from Fund share transactions ..... 13,336,370 10,221,910
-------------- --------------
Increase in net assets ...................................... 14,021,568 10,011,925
Net assets at beginning of period ........................... 65,505,088 55,493,163
-------------- --------------
Net assets at end of period ................................. $ 79,526,656 $ 65,505,088
-------------- --------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ................... 5,463,378 4,615,167
-------------- --------------
Shares sold ................................................. 2,911,596 3,294,988
Shares issued to shareholders in reinvestment of ............ 164,273 139,573
distributions
Shares redeemed ............................................. (1,965,908) (2,586,350)
-------------- --------------
Net increase in Fund shares ................................. 1,109,961 848,211
-------------- --------------
Shares outstanding at end of period ......................... 6,573,339 5,463,378
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
February 15, 1994
(commencement of
operations) to
Years Ended October 31, October 31,
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------
Net asset value, beginning of period ............ $11.99 $12.02 $11.64 $12.00
----------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................... .53 .50 .54 .36
Net realized and unrealized gain (loss) on
investment transactions ...................... .11 (.03) .38 (.36)
----------------------------------------------------------------------------
Total from investment operations ................ .64 .47 .92 .00
----------------------------------------------------------------------------
Less distributions from net investment income ... (.53) (.50) (.54) (.36)
----------------------------------------------------------------------------
Net asset value, end of period .................. $12.10 $11.99 $12.02 $11.64
----------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) ............................ 5.44 3.98 8.08 0.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......... 80 66 55 36
Ratio of operating expenses, net to average ..... .75 .67 .24 --
daily net
assets (%)
Ratio of operating expenses before expense ...... .93 .90 .92 1.44*
reductions,
to average daily net assets (%)
Ratio of net investment income to average ....... 4.40 4.16 4.56 4.45*
daily net
assets (%)
Portfolio turnover rate (%) ..................... 9.77 12.4 27.4 26.3*
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
The accompanying notes are an integral part of the financial statements.
16 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Massachusetts Limited Term Tax Free Fund (the "Fund") is a
non-diversified series of Scudder State Tax Free Trust, a Massachusetts business
trust (the "Trust"), which is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. There are
currently six series in the Trust.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio debt securities 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.
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.
17 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Other. Investment transactions are accounted for on a trade date basis.
Distributions of net realized gains to shareholders are recorded on the
ex-dividend date. Interest income is accrued pro rata to the earlier of the call
or maturity date.
B. Purchases and Sales of Securities
For the year ended October 31, 1997, purchases and sales of investments
(excluding short-term) aggregated $23,410,737 and $6,279,490, respectively.
C. Related Parties
Under the Investment Management Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a fee
equal to an annual rate of 0.60% of the Fund's average daily net assets,
computed and accrued daily and payable monthly. As manager of the assets of the
Fund, the Adviser directs the investments of the Fund in accordance with its
investment objectives, policies, and restrictions. The Adviser determines the
securities, instruments, and other contracts relating to investments to be
purchased, sold or entered into by the Fund. In addition to portfolio management
services, the Adviser provides certain administrative services in accordance
with the Agreement. The Adviser agreed to maintain the annualized expenses at
0.75% of average daily net assets until February 28, 1998. For the year ended
October 31, 1997, the Adviser imposed fees amounting to $302,455 and the portion
not imposed amounted to $121,977, of which $28,068 was unpaid at October 31,
1997.
On June 26, 1997, the Adviser entered into an agreement with The Zurich
Insurance Company ("Zurich"), an international insurance and financial services
organization, pursuant to which Zurich will acquire a majority interest in the
Adviser, and the Adviser will form a new global investment organization by
combining with Zurich's subsidiary, Zurich Kemper Investments, Inc. and change
its name to Scudder Kemper Investments, Inc. Subject to the receipt of the
required regulatory and shareholder approvals, the transaction is expected to
close by the end of the fourth quarter of 1997.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended October 31, 1997, the amount charged to the Fund by SSC aggregated
$41,127 of which $3,557 was unpaid at October 31, 1997.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
October 31, 1997, the amount charged to the Fund by SFAC aggregated $36,000, of
which $6,000 was unpaid at October 31, 1997.
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 October 31, 1997,
Trustees' fees aggregated $14,916.
18 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder State Tax Free Trust and to the Shareholders of
Scudder Massachusetts Limited Term Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Scudder
Massachusetts Limited Term Tax Free Fund, including the investment portfolio, as
of October 31, 1997, 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 three years in
the period then ended, and for the period February 15, 1994 (commencement of
operations) to October 31, 1994. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Massachusetts Limited Term Tax Free Fund as of October 31, 1997, 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 three years in the period then ended, and for the period
February 15, 1994 (commencement of operations) to October 31, 1994 in conformity
with generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
December 12, 1997
19 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Tax Information
Of the dividends paid by the Scudder Massachusetts Limited Term Tax Free Fund
from net investment income for the taxable year ended October 31, 1997, 100%
constituted exempt interest dividends for regular federal income tax and
Massachusetts state income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
20 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Massachusetts
Limited Term Tax Free Fund (the "Fund") was held on October 24, 1997, at the
offices of 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*
--- ------- ------- -----------------
4,185,753 33,479 75,897 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 4,241,066 54,064
Dawn-Marie Driscoll 4,250,455 44,675
Peter B. Freeman 4,250,455 44,675
George M. Lovejoy, Jr. 4,250,455 44,675
Dr. Wesley W. Marple, Jr. 4,248,187 48,942
Daniel Pierce 4,248,612 46,518
Kathryn L. Quirk 4,248,612 46,518
Jean C. Tempel 4,250,455 44,675
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*
--- ------- ------- -----------------
3,925,286 129,294 103,224 137,326
21 - Scudder Massachusetts Limited Term 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*
--- ------- ------- -----------------
3,983,319 105,822 92,880 117,713
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Fundamental Policies For Against Abstain Broker Non-Votes*
-------------------- --- ------- ------- -----------------
<S> <C> <C> <C> <C>
5.1 Diversification N/A N/A N/A N/A
5.2 Borrowing 3,894,547 135,006 128,251 137,326
5.3 Senior securities 3,886,942 134,051 136,811 137,326
5.4 Concentration 3,886,942 134,051 136,811 137,326
5.5 Loans 3,886,942 134,051 136,811 137,326
5.6 Underwriting of securities 3,886,942 134,051 136,811 137,326
5.7 Investment in real estate 3,886,017 134,976 136,811 137,326
5.8 Purchase of physical 3,886,017 134,976 136,811 137,326
commodities
5.9 Investment in California N/A N/A N/A N/A
municipal securities
5.10 Investment in municipal N/A N/A N/A N/A
securities
5.11 Investment in 3,895,502 134,051 128,251 137,326
Massachusetts municipal
securities
5.12 Investment in New York N/A N/A N/A N/A
municipal securities
5.13 Investment in Ohio N/A N/A N/A N/A
municipal securities
22 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
5.14 Investment in Pennsylvania N/A N/A N/A N/A
municipal securities
5.15 Investment in short-term N/A N/A N/A N/A
municipal securities
5.16 Elimination of tax 3,895,502 134,051 128,251 137,326
diversification
5.17 Purchases of voting N/A N/A N/A N/A
securities
5.18 Affiliated transactions N/A N/A N/A N/A
5.19 Disclosed practices N/A N/A N/A N/A
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
4,198,748 19,700 76,682
* 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 Massachusetts Limited Term Tax Free Fund
<PAGE>
Officers and Trustees
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
E. Michael Brown*
Trustee
Dawn-Marie Driscoll
Trustee; Executive Fellow;
President, Driscoll Associates
Peter B. Freeman
Trustee; Corporate Director and
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration, Northeastern
University
Daniel Pierce*
Trustee
Kathryn L. Quirk*
Trustee
Jean C. Tempel
Trustee; General Partner,
TL Ventures
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant
Treasurer
*Scudder, Stevens & Clark, Inc.
24 - 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
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.
Retirement Programs
- -------------------
IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
The Latin America Dollar Income Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
Scudder World Income Opportunities
Fund, Inc.
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +++Funds within categories are listed
in order from expected least risk to most risk. 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. +++ +++A no-load variable annuity
contract provided by Charter National Life Insurance Company and its affiliate,
offered by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised
by Scudder, Stevens & Clark, Inc., are traded on various stock exchanges.
25 - 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 you designate Lets you purchase Scudder fund shares
the purchase details and the bank account, and money is electronically, avoiding potential mailing delays;
electronically debited from that account monthly to designate a bank account and the transaction
regularly purchase fund shares and "dollar cost average" details, and money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from that account.
fewer when it's higher, which can reduce your average
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 designate.
DistributionsDirect
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 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 6,000 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
- ------------------------------------------------------------------------------------------------------------------------------
New From Scudder: Scudder International Growth and Income Fund
Scudder International Growth and Income Fund takes a yield-oriented approach to investing in international equities. The
Fund seeks to provide long-term growth of capital plus current income. Investors who desire international exposure but
who wish to take a more conservative approach may appreciate the Fund's emphasis on the dividend paying stocks of
well-established companies outside the United States.
- ------------------------------------------------------------------------------------------------------------------------------
The share price of Scudder International Growth and Income Fund will fluctuate. International investing involves special
risks including currency fluctuation and political instability. Contact Scudder Investor Services, Inc., Distributor,
for a prospectus which contains more complete information, including management fees and other expenses. Please read it
carefully before you invest or send money.
</TABLE>
27 - Scudder Massachusetts Limited Term Tax Free Fund
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven Clark,
Scudder, Stevens & Clark was the first independent investment counsel firm in
the United States. Since its birth, Scudder's pioneering spirit and commitment
to professional long-term investment management have helped shape the investment
industry. In 1928, we introduced the nation's first no-load mutual fund. Today
we offer over 40 pure no load(TM) funds, including the first international
mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
This information must be preceded or accompanied by a
current prospectus.
Portfolio changes should not be considered recommendations
for action by individual investors.
SCUDDER
[LOGO]
<PAGE>
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 years ended March 31, 1997.
(Incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement.)
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 period May
28, 1987 (commencement of operations) to March 31,
1988 and for the nine fiscal years ended March 31,
1997.
(Incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement.)
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 four fiscal years ended October 31,
1998.
Financial Highlights for Scudder Massachusetts Tax
Free Fund for the period May 28, 1987 (commencement
of operations) to March 31, 1988 and for the nine
fiscal years ended March 31, 1997 and unaudited
financial highlights for the period ended September
30, 1997.
Included in Part B of this Registration Statement:
For Scudder New York Tax Free Fund:
Investment Portfolio as of March 31, 1997
Statement of Assets and Liabilities as of March 31,
1997
Statement of Operations for the year ended March 31,
1997
Statements of Changes in Net Assets for the two
fiscal years ended March 31, 1997
Financial Highlights for the ten years ended March
31, 1997
Notes to Financial Statements
Report of Independent Accountants
(Incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement.)
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, 1997
Statement of Assets and Liabilities as of March 31,
1997
Statement of Operations for the year ended March 31,
1997
Statements of Changes in Net Assets for the two
fiscal years ended March 31, 1997
Financial Highlights for the period May 28, 1987
(commencement of operations) to March 31, 1988 and for
the nine fiscal years ended March 31, 1996
Notes to Financial Statements
Report of Independent Accountants
(Incorporated by reference to Post-Effective
Amendment No. 22 to the Registration Statement.)
Part C - Page 1
<PAGE>
For Scudder Massachusetts Limited Term Tax Free Fund:
Investment Portfolio as of October 31, 1997
Statement of Assets and Liabilities as of October 31,
1997
Statement of Operations for the six months ended
October 31, 1997
Statements of Changes in Net Assets for the fiscal
year ended October 31, 1997
Financial Highlights for the period February 15, 1994
(commencement of operations) to October 31, 1994, and
for the three fiscal years ended October 31, 1997
Notes to Financial Statements
Report of Independent Accountants
For Scudder Massachusetts Tax Free Fund:
Investment Portfolio as of March 31, 1997
Statement of Assets and Liabilities as of March 31,
1997
Statement of Operations for the six months ended
March 31, 1997
Statements of Changes in Net Assets for the two
fiscal years ended March 31, 1997
Financial Highlights for the period May 28, 1987
(commencement of operations) to March 31, 1988 and
for the nine fiscal years ended March 31, 1997 and
unaudited financial highlights for the period ended
September 30, 1997
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.)
Part C - Page 2
<PAGE>
(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.)
(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.)
(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.)
(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.)
(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.)
(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.)
(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 is filed herein.
Part C - Page 3
<PAGE>
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.)
(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.)
Part C - Page 4
<PAGE>
(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.)
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.)
(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.)
Part C - Page 5
<PAGE>
(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. 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.)
Item 25. Persons Controlled by or under Common Control with Registrant.
None
Item 26. Number of Holders of Securities (as of February 13, 1998).
(1) (2)
Title of Class Number of Record Shareholders
-------------- -----------------------------
Shares of beneficial interest
$.01 par value
Scudder New York Tax Free Fund 3,977
Scudder New York Tax Free Money Fund 1,540
Scudder Ohio Tax Free Fund 1,962
Scudder Pennsylvania Tax Free Fund 2,069
Scudder Massachusetts Tax Free Fund 6,545
Scudder Massachusetts Limited Term Tax 1,392
Free Fund
Part C - Page 6
<PAGE>
Item 27. Indemnification.
A policy of insurance covering Scudder, Stevens & Clark, Inc. its
subsidiaries including Scudder Investor Services, Inc., and all of
the registered investment companies advised by Scudder, Stevens &
Clark, 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.
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:
Part C - Page 7
<PAGE>
(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:
(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.
Part C - Page 8
<PAGE>
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.
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 America(o)
Rolf Huppi Director, Chairman of the Board, Scudder Kemper
Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance
Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company
of America(o)
Director, ZKI Holding Corporation xx
Kathryn L. Quirk 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*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder
Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens
& Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada
Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty
Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark
Corporation**
Director and Secretary, Scudder, Stevens & Clark
Overseas Corporation(oo)
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined
Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital
Asset Corporation**
Director, Vice President and Secretary, Scudder Capital
Stock Corporation**
Director, Vice President and Secretary, Scudder Capital
Planning Corporation**
Director, Vice President and Secretary, SS&C Investment
Corporation**
Part C - Page 9
<PAGE>
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 Corporation(oo)
President and Director, Scudder, Stevens & Clark
Corporation**
Director, Scudder Realty Advisors, Inc. x
Director, IBJ Global Investment Management S.A.
Luxembourg, Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
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.
(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>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
William S. Baughman Vice President
Two International Place
Boston, MA 02110
Lynn S. Birdsong Senior Vice President
345 Park Avenue
New York, NY 10154
</TABLE>
Part C - Page 10
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Mary Elizabeth Beams Vice President
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and
Two International Place Assistant Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice
Two International Place President
Boston, MA 02110
Richard W. Desmond Vice President
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and
345 Park Avenue Assistant Clerk
New York, NY 10154
Philip S. Fortuna Vice President
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President,
Two International Place Treasurer and Assistant Clerk
Boston, MA 02110
Thomas F. McDonough Clerk
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President
345 Park Avenue and Assistant Clerk
New York, NY 10154
</TABLE>
Part C - Page 11
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Robert A. Rudell Vice President
Two International Place
Boston, MA 02110
William M. Thomas Vice President
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President
Two International Place
Boston, MA 02110
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
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, Stevens & Clark,
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
maintained by Scudder Service Corporation, Two International Place,
Boston, Massachusetts.
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings.
Inapplicable.
Part C - Page 12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this
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 12th day of February, 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.
SIGNATURE TITLE DATE
/s/Daniel Pierce
- -------------------------
Daniel Pierce* President and Trustee February 12, 1998
/s/Henry P. Becton, Jr.
- -------------------------
Henry P. Becton, Jr.* Trustee February 12, 1998
/s/Dawn-Marie Driscoll
- -------------------------
Dawn-Marie Driscoll* Trustee February 12, 1998
/s/Peter B. Freeman
- -------------------------
Peter B. Freeman* Trustee February 12, 1998
/s/George M. Lovejoy, Jr.
- -------------------------
George M. Lovejoy, Jr.* Trustee February 12, 1998
/s/Wesley W. Marple, Jr.
- -------------------------
Wesley W. Marple, Jr.* Trustee February 12, 1998
<PAGE>
SIGNATURE TITLE DATE
/s/Kathryn L. Quirk
- -------------------------
Kathryn L. Quirk* Vice President, February 12, 1998
Assistant Secretary
and Trustee
/s/Jean C. Tempel
- -------------------------
Jean C. Tempel* Trustee February 12, 1998
*By:
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.
<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. 24
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 25
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER STATE TAX FREE TRUST
<PAGE>
SCUDDER STATE TAX FREE TRUST
EXHIBIT INDEX
Exhibit 5(h)
Exhibit 11
Exhibit 17
Scudder State Tax Free Trust
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Scudder Massachusetts Limited Term Tax Free Fund
Ladies and Gentlemen:
Scudder State Tax Free Trust (the "Trust") has been established as a
Massachusetts business trust to engage in the business of an investment company.
Pursuant to the Trust's Declaration of Trust, as amended from time-to-time (the
"Declaration"), the Board of Trustees has divided the Trust's shares of
beneficial interest, par value $0.01 per share, (the "Shares") into separate
series, or funds, including Scudder Massachusetts Limited Term Tax Free Fund
(the "Fund"). Series may be abolished and dissolved, and additional series
established, from time to time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the sole
investment manager of the Fund and to provide certain other services, as more
fully set forth below, and you have indicated that you are willing to act as
such investment manager and to perform such services under the terms and
conditions hereinafter set forth.
Accordingly, the Trust on behalf of the Fund agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of
investing and reinvesting the assets of the Fund in the manner and in accordance
with the investment objectives, policies and restrictions specified in the
currently effective Prospectus (the "Prospectus") and Statement of Additional
Information (the "SAI") relating to the Fund included in the Trust's
Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Trust under the Investment Company Act of
1940, as amended, (the "1940 Act") and the Securities Act of 1933, as amended.
Copies of the documents referred to in the preceding sentence have been
furnished to you by the Trust. The Trust has also furnished you with copies
properly certified or authenticated of each of the following additional
documents related to the Trust and the Fund:
(a) The Declaration dated December 8, 1987, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders of the Fund
selecting you as investment manager and approving the form of this
Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated December 14, 1993 relating to the Fund.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of
the rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Trust a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Trust's name
(the "Fund Name"), and (ii) the Scudder Marks in connection with the Trust's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Trust,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Trust agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Trust's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Trust shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Trust further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Trust rendered during the one-year period preceding
the date of this Agreement are acceptable. At your reasonable request, the Trust
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Trust as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Trust, or you no longer are a
licensee of the Scudder Marks, the Trust shall (to the extent that, and as soon
as, it lawfully can) cease to use the Fund Name or any other name indicating
that it is advised by, managed by or otherwise connected with you (or any
organization which shall have succeeded to your business as investment manager)
or the Trademark Owner. In no event shall the Trust use the Scudder Marks or any
other name or mark confusingly similar thereto (including, but not limited to,
any name or mark that includes the name "Scudder") if this Agreement or any
other investment advisory agreement between you (or your successor) and the Fund
is terminated.
3. Portfolio Management Services. As manager of the assets of the Fund,
you shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue Code of 1986, as amended, (the "Code") relating to regulated
investment companies and all rules and regulations thereunder; and all other
applicable federal and state laws and regulations of which you have knowledge;
subject always to policies and instructions adopted by the Trust's Board of
Trustees. In connection therewith, you shall use reasonable efforts to manage
the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 3, you shall
be entitled to receive and act upon advice of counsel to the Trust or counsel to
you. You shall also make available to the Trust promptly upon request all of the
2
<PAGE>
Fund's investment records and ledgers as are necessary to assist the Trust in
complying with the requirements of the 1940 Act and other applicable laws. To
the extent required by law, you shall furnish to regulatory authorities having
the requisite authority any information or reports in connection with the
services provided pursuant to this Agreement which may be requested in order to
ascertain whether the operations of the Trust are being conducted in a manner
consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts relating
to investments to be purchased, sold or entered into by the Fund and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Fund policies as expressed in the Registration Statement. You shall determine
what portion of the Fund's portfolio shall be invested in securities and other
assets and what portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on
the investment performance of the Fund and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Trust's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Fund such office space and facilities in the United States as the
Fund may require for its reasonable needs, and you (or one or more of your
affiliates designated by you) shall render to the Trust administrative services
on behalf of the Fund necessary for operating as an open-end investment company
and not provided by persons not parties to this Agreement including, but not
limited to, preparing reports to and meeting materials for the Trust's Board of
Trustees and reports and notices to Fund shareholders; supervising, negotiating
contractual arrangements with, to the extent appropriate, and monitoring the
performance of, accounting agents, custodians, depositories, transfer agents and
pricing agents, accountants, attorneys, printers, underwriters, brokers and
dealers, insurers and other persons in any capacity deemed to be necessary or
desirable to Fund operations; preparing and making filings with the Securities
and Exchange Commission (the "SEC") and other regulatory and self-regulatory
organizations, including, but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; assisting in
the preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax return pursuant to Section
4982 of the Code; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation of
net asset value; monitoring the registration of Shares of the Fund under
applicable federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent that such books, records and reports
and other information are not maintained by the Fund's custodian or other agents
of the Fund; assisting in establishing the accounting policies of the Fund;
assisting in the resolution of accounting issues that may arise with respect to
the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
establishing and monitoring the Fund's operating expense budgets; reviewing the
Fund's bills; processing the payment of bills that have been approved by an
authorized person; assisting the Fund in determining the amount of dividends and
distributions available to be paid by the Fund to its shareholders, preparing
and arranging for the printing of dividend notices to shareholders, and
providing the transfer and dividend paying agent, the custodian, and the
accounting agent with such information as is required for such parties to effect
the payment of dividends and distributions; and otherwise assisting the Trust as
it may reasonably request in the conduct of the Fund's business, subject to the
direction and control of the Trust's Board of Trustees. Nothing in this
3
<PAGE>
Agreement shall be deemed to shift to you or to diminish the obligations of any
agent of the Fund or any other person not a party to this Agreement which is
obligated to provide services to the Fund.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including the Fund's
share of payroll taxes) who are affiliated persons of you, and you shall make
available, without expense to the Fund, the services of such of your directors,
officers and employees as may duly be elected officers of the Trust, subject to
their individual consent to serve and to any limitations imposed by law. You
shall provide at your expense the portfolio management services described in
section 3 hereof and the administrative services described in section 4 hereof.
You shall not be required to pay any expenses of the Fund other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Fund's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Fund: organization
expenses of the Fund (including out-of-pocket expenses, but not including your
overhead or employee costs); fees payable to you and to any other Fund advisors
or consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars;
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing share
certificates and, except as provided below in this section 5, other expenses in
connection with the issuance, offering, distribution, sale, redemption or
repurchase of securities issued by the Fund; expenses relating to investor and
public relations; expenses and fees of registering or qualifying Shares of the
Fund for sale; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Trust business) of Trustees, officers and
employees of the Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; costs of
shareholders' and other meetings; and travel expenses (or an appropriate portion
thereof) of Trustees and officers of the Trust who are directors, officers or
employees of you to the extent that such expenses relate to attendance at
meetings of the Board of Trustees of the Trust or any committees thereof or
advisors thereto held outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Fund if and to the extent
that (i) such expenses are required to be borne by a principal underwriter which
acts as the distributor of the Fund's Shares pursuant to an underwriting
agreement which provides that the underwriter shall assume some or all of such
expenses, or (ii) the Trust on behalf of the Fund shall have adopted a plan in
conformity with Rule 12b-1 under the 1940 Act providing that the Fund (or some
other party) shall assume some or all of such expenses. You shall be required to
pay such of the foregoing sales expenses as are not required to be paid by the
principal underwriter pursuant to the underwriting agreement or are not
permitted to be paid by the Fund (or some other party) pursuant to such a plan.
4
<PAGE>
6. Management Fee. For all services to be rendered, payments to be made
and costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the
Trust on behalf of the Fund shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.60 of 1 percent of the average daily net assets as defined below of the Fund
for such month over any compensation waived by you from time to time (as more
fully described below). You shall be entitled to receive during any month such
interim payments of your fee hereunder as you shall request, provided that no
such payment shall exceed 75 percent of the amount of your fee then accrued on
the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the average of
the values placed on the Fund's net assets as of 4:00 p.m. (New York time) on
each day on which the net asset value of the Fund is determined consistent with
the provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully
determines the value of its net assets as of some other time on each business
day, as of such time. The value of the net assets of the Fund shall always be
determined pursuant to the applicable provisions of the Declaration and the
Registration Statement. If the determination of net asset value does not take
place for any particular day, then for the purposes of this section 6, the value
of the net assets of the Fund as last determined shall be deemed to be the value
of its net assets as of 4:00 p.m. (New York time), or as of such other time as
the value of the net assets of the Fund's portfolio may be lawfully determined
on that day. If the Fund determines the value of the net assets of its portfolio
more than once on any day, then the last such determination thereof on that day
shall be deemed to be the sole determination thereof on that day for the
purposes of this section 6.
You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your services.
You shall be contractually bound hereunder by the terms of any publicly
announced waiver of your fee, or any limitation of the Fund's expenses, as if
such waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be
deemed to be exclusive and it is understood that you may render investment
advice, management and services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Trust. Whenever the
Fund and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Fund recognizes that in some cases this procedure may adversely
affect the size of the position that may be acquired or disposed of for the
Fund.
5
<PAGE>
8. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Trust agrees that
you shall not be liable under this Agreement for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates, provided that nothing in this Agreement
shall be deemed to protect or purport to protect you against any liability to
the Trust, the Fund or its shareholders to which you would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties hereunder. Any person, even though also employed by you,
who may be or become an employee of and paid by the Fund shall be deemed, when
acting within the scope of his or her employment by the Fund, to be acting in
such employment solely for the Fund and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall
remain in force until September 30, 1998, and continue in force from year to
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Trustees of the Trust, or by the vote of a majority of the
outstanding voting securities of the Fund. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually" shall
be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Fund or by the Trust's Board of Trustees on 60 days'
written notice to you, or by you on 60 days' written notice to the Trust. This
Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of
which, together with all amendments thereto, is on file in the Office of the
Secretary of the Commonwealth of Massachusetts, provides that the name "Scudder
State Tax Free Trust" refers to the Trustees under the Declaration collectively
as Trustees and not as individuals or personally, and that no shareholder of the
Fund, or Trustee, officer, employee or agent of the Trust, shall be subject to
claims against or obligations of the Trust or of the Fund to any extent
whatsoever, but that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability
as set forth in the Declaration and you agree that the obligations assumed by
the Trust on behalf of the Fund pursuant to this Agreement shall be limited in
all cases to the Fund and its assets, and you shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of the Fund or any
other series of the Trust, or from any Trustee, officer, employee or agent of
the Trust. You understand that the rights and obligations of each Fund, or
series, under the Declaration are separate and distinct from those of any and
all other series.
6
<PAGE>
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or
management agreements entered into between you and the Trust on behalf of the
Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
SCUDDER STATE TAX FREE TRUST, on behalf of
Scudder Massachusetts Limited Term Tax Free Fund
By: ______________________________
President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: ______________________________
Managing Director
7
Coopers & Lybrand
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. 24 to the Registration Statement of Scudder State Tax Free Trust on Form
N-1A, of our report dated December 12, 1997 on our audit of the financial
statements and financial highlights of Scudder Massachusetts Limited Term Tax
Free Fund, which report is included in the Annual Report to Shareholders for the
year ended October 31, 1997 which is 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/Coopers & Lybrand L.L.P.
Boston, Massachusetts Coopers & Lybrand L.L.P.
February 19, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Mass
Limited Term Tax Free Fund Annual Report for the fiscal year ended 10/31/97 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> SCUDDER MASSACHUSETTS LIMITED TERM
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 80,469,747
<INVESTMENTS-AT-VALUE> 82,196,640
<RECEIVABLES> 1,449,788
<ASSETS-OTHER> 66,014
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 83,712,442
<PAYABLE-FOR-SECURITIES> 3,905,699
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 280,087
<TOTAL-LIABILITIES> 4,185,786
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 77,947,300
<SHARES-COMMON-STOCK> 6,573,339
<SHARES-COMMON-PRIOR> 5,463,378
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (147,537)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,726,893
<NET-ASSETS> 79,526,656
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,557,500
<OTHER-INCOME> 0
<EXPENSES-NET> 518,494
<NET-INVESTMENT-INCOME> 3,039,006
<REALIZED-GAINS-CURRENT> 8,891
<APPREC-INCREASE-CURRENT> 676,307
<NET-CHANGE-FROM-OPS> 3,724,204
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,039,006)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,911,596
<NUMBER-OF-SHARES-REDEEMED> (1,965,909)
<SHARES-REINVESTED> 164,273
<NET-CHANGE-IN-ASSETS> 14,021,568
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (152,407)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 424,432
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 640,471
<AVERAGE-NET-ASSETS> 69,107,699
<PER-SHARE-NAV-BEGIN> 11.99
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.53)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.10
<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 Massachusetts Tax Free Fund Semiannual Report for the semiannual period
ended September 30, 1997 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> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 328,365,860
<INVESTMENTS-AT-VALUE> 352,056,553
<RECEIVABLES> 10,650,825
<ASSETS-OTHER> 30,186
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 362,737,564
<PAYABLE-FOR-SECURITIES> 10,795,150
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,028,050
<TOTAL-LIABILITIES> 11,823,200
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 329,754,089
<SHARES-COMMON-STOCK> 24,763,624
<SHARES-COMMON-PRIOR> 24,047,228
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,530,418)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,690,693
<NET-ASSETS> 350,941,364
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,883,419
<OTHER-INCOME> 0
<EXPENSES-NET> 1,317,784
<NET-INVESTMENT-INCOME> 8,565,635
<REALIZED-GAINS-CURRENT> 981,264
<APPREC-INCREASE-CURRENT> 9,996,358
<NET-CHANGE-FROM-OPS> 19,543,257
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,565,635)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,455,409
<NUMBER-OF-SHARES-REDEEMED> (2,100,164)
<SHARES-REINVESTED> 361,151
<NET-CHANGE-IN-ASSETS> 21,072,195
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,511,682)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,021,561
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,317,784
<AVERAGE-NET-ASSETS> 339,586,308
<PER-SHARE-NAV-BEGIN> 13.72
<PER-SHARE-NII> 0.35
<PER-SHARE-GAIN-APPREC> 0.45
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.17
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
