SCUDDER
Scudder Massachusetts Limited
Term Tax Free Fund
Scudder Massachusetts Tax Free
Fund
Prospectus
March 1, 1999
Two funds seeking double tax-free income, exempt from both Massachusetts state
personal income and regular federal income tax.
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
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No Sales Charges
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NO-LOAD
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The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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Contents
1 Fund Descriptions
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1 Investment objectives
1 Main investment strategies
2 Other investments
3 Risk management strategies
3 Main risks
4 About the Funds
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4 Scudder Massachusetts Limited Term Tax
Free Fund
4 Past performance
5 Fee and expense information
6 Scudder Massachusetts Tax Free Fund
6 Past performance
7 Fee and expense information
9 A message from the President
10 Investment adviser
11 Distributions
12 Taxes
14 Financial highlights
16 About Your Investment
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16 Transaction information
17 Buying and selling shares
18 Purchases
19 Exchanges and redemptions
20 Investment products and services
<PAGE>
Fund Descriptions
Investment objectives
o Scudder Massachusetts Limited Term Tax Free Fund seeks 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 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.
o Scudder Massachusetts Tax Free Fund seeks to provide income exempt from
Massachusetts state personal income and regular federal income tax. The
fund seeks a higher level of income than normally provided by tax-free
money market or tax-free short-term investments with less price stability
than investments in short- and intermediate-term bonds.
Unless otherwise indicated, each fund's investment objectives and strategies may
be changed without a vote of shareholders.
Main investment strategies
Investments
It is a fundamental policy, which may not be changed without a vote of
shareholders, that at least 80% of each fund's net assets be invested in
municipal securities of issuers located in Massachusetts and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam). These
securities include municipal bonds, which meet longer-term capital needs of
issuers and generally have maturities of more than one year when issued. 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 for short-term
capital needs of issuers and have maturities of one year or less. Under normal
market conditions, each fund expects 100% of its portfolio securities to consist
of Massachusetts municipal securities.
Each fund's portfolio management team will sell a security from a fund's
portfolio under certain circumstances, including: declining credit condition of
a holding; to adjust the duration of the fund's portfolio or to sell a security
with a maturity in an unattractive part of the yield curve; to raise cash to
meet redemptions; to purchase a bond with better value, improved structure or
liquidity; and, when market conditions generate a higher than normal price for a
security.
1
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Maturity
Scudder Massachusetts Limited Term Tax Free Fund maintains a portfolio of
shorter-term, high-grade municipal debt securities with an average maturity of
between one and five years and 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 maintains a portfolio of municipal
securities with long-term maturities (i.e., more than 10 years). The fund has
the flexibility, however, to invest in Massachusetts municipal securities with
short- and medium-term maturities as well.
Quality
Each fund invests at least 75% of its net assets in investment-grade and
medium-grade tax-exempt municipal securities with independent credit ratings of
Aaa, Aa, A, Baa/AAA, AA, A, BBB (and their unrated equivalents). Each fund may
also invest up to 25% of its total assets in fixed-income securities rated below
Baa/BBB (and their unrated equivalents). Scudder Massachusetts Limited Term Tax
Free Fund, under normal market conditions, will invest at least 50% of its total
assets in fixed-income securities rated A or better (and their unrated
equivalents).
Each fund purchases securities that it believes are attractive and offer
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, each fund performs credit analysis and manages its
portfolio, attempting to take advantage of opportunities to improve each fund's
total return.
Of course, there can be no guarantee that by following these investment
strategies, the funds will achieve their objectives.
Other investments
To a more limited extent, each fund may, but is not required to, make the
following investments:
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.
Each fund may utilize other investments and investment techniques that may
impact fund performance including, but not limited to, options, futures and
other derivatives (financial investments that derive their value from other
securities or commodities, or are based on indices).
2
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Risk management strategies
Each fund attempts to manage risk by investing primarily in investment-grade
municipal securities. In addition, the funds attempt to manage their exposure to
interest rate risk by adjusting the duration of their portfolios. Duration,
expressed in years, is based on the estimated payback period of income and
principal of a bond (or portfolio of bonds) and is the most widely used gauge of
sensitivity to interest rate change. Scudder Massachusetts Limited Term Tax Free
Fund may not purchase securities with effective maturities greater than 10 years
at the time of purchase or issuance, whichever is later. Scudder Massachusetts
Tax Free Fund invests primarily in municipal securities with long-term
maturities (i.e., over 10 years) but has the flexibility to invest in securities
with short- and medium-term maturities as well.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes or when an unusual disparity between after-tax
income on taxable and municipal securities makes it advisable, up to 20% of a
fund's assets may be held in cash or invested in short-term taxable investments,
including U.S. Government obligations and money market instruments and, for
Scudder Massachusetts Tax Free Fund, repurchase agreements.
In addition, each fund may also, as a defensive measure, temporarily invest more
than 20% of its net assets in taxable securities. In such a case, a fund would
not be pursuing, and may not achieve, its investment objective.
Main risks
Each fund is also more susceptible to factors adversely affecting Massachusetts
municipal securities than is a comparable municipal bond fund that does not
focus on investments in the securities of Massachusetts issuers. 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, the funds' net asset value, the liquidity of the
investments held by the funds and the funds' ability to preserve or realize
appreciation of the funds' capital could be adversely affected.
As with most tax-free bond funds, a major factor affecting the funds'
performance is interest rates. When interest rates rise, the price of bonds (and
tax-free bond funds) typically fall in proportion to their duration. Because
Scudder Massachusetts Tax Free Fund intends to have a longer duration, the
interest rate risk is greater in this fund than in a fund that does not intend
to be principally invested in municipal
3
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securities with long-term maturities. A fund may have lower returns than other
funds that invest in lower-quality municipal securities. Massachusetts municipal
securities in a fund's portfolio could be downgraded or go into default.
Because the funds are non-diversified, each fund may invest a relatively high
percentage of its assets in a limited number of issuers. Accordingly, a fund's
investment returns are more likely to be impacted by changes in the market value
and returns of any one portfolio holding.
There are market and investment risks with any security and the value of an
investment in the funds will fluctuate over time and it is possible to lose
money invested in the funds.
About the Funds
Scudder Massachusetts Limited Term Tax Free Fund
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following information was depicted as a bar chart in the printed material.]
9.48% 3.36% 5.71% 4.72%
1995 1996 1997 1998
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 3.06% (the first quarter of 1995), and the fund's lowest
return for a calendar quarter was -0.20% (the first quarter of 1996).
4
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Average annual total returns
Scudder Massachusetts Lehman Brothers
For periods ended Limited Term Tax Free Municipal Bond Index
December 31, 1998 Fund (3-year)
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One Year 4.72% 5.21%
Since Inception (2/15/94) 4.78% 5.10%*
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* Index comparison begins February 28,1994.
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.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
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Shareholder fees: Fees paid directly from your investment.
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Maximum sales charge (load) imposed on purchases (as % of offering
price) NONE
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Maximum deferred sales charge (load) NONE
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Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
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Redemption fee (as % of amount redeemed, if applicable) NONE*
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Exchange fee NONE
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Annual fund operating expenses (expenses that are deducted from fund assets):
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Management fee 0.60%
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Distribution (12b-1) fees NONE
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Other expenses 0.24%
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Total annual fund operating expenses 0.84%
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Expense reimbursement 0.09%
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Net expenses 0.75%**
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* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
** Total fund operating expenses are contractually maintained at 0.75%
through July 31, 1999.
5
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Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
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One Year $ 86
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Three Years $ 268
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Five Years $ 466
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Ten Years $ 1,037
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Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
Scudder Massachusetts Tax Free Fund
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed, and by comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following information was depicted as a bar chart in the printed material.]
9.83% 6.33% 12.24% 10.84% 14.28% -6.19% 17.90% 4.07% 8.54% 6.20%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
6
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For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 7.48% (the first quarter of 1995), and the fund's lowest
return for a calendar quarter was -6.08% (the first quarter of 1994).
Average annual total returns
For periods ended Scudder Massachusetts Lehman Brothers
December 31, 1998 Tax Free Fund Municipal Bond Index
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One Year 6.20% 6.48%
Five Years 5.82% 6.22%
Ten Years 8.22% 8.22%
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The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of municipal bonds issued across the United States. Index issues have a
credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvested dividends and, unlike fund returns, do not reflect
fees or expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
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Shareholder fees: Fees paid directly from your investment.
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Maximum sales charge (load) imposed on purchases (as % of offering
price) NONE
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Maximum deferred sales charge (load) NONE
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Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
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Redemption fee (as % of amount redeemed, if applicable) NONE*
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Exchange fee NONE
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Annual fund operating expenses (expenses that are deducted from fund assets):
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Investment management fee 0.60%
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Distribution (12b-1) fees NONE
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Other expenses 0.16%
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Total annual fund operating expenses 0.76%
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* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
7
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Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
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One Year $ 78
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Three Years $ 243
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Five Years $ 422
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Ten Years $ 942
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Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
8
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A message from the President
[PHOTO]
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 $280 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage 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: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(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
9
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Investment adviser
Each fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), Two International Place, Boston, MA, to manage the funds'
daily investment and business affairs subject to the policies established by
each fund's Board. The Adviser actively manages each fund's investments.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities.
Scudder Massachusetts Limited Term Tax Free Fund
The Adviser agreed to maintain the annualized expenses of the fund at no more
than 0.75% of the average daily net assets of the fund until July 31, 1999. As a
result, the Adviser received an investment management fee of 0.51% of the fund's
average daily net assets on an annual basis for the fiscal year ended October
31, 1998.
Scudder Massachusetts Tax Free Fund
For the fiscal year ended March 31, 1998, the Adviser received an investment
management fee of 0.60% of the fund's average daily net assets on an annual
basis.
Portfolio management
Each fund is managed by a team of investment professionals, who each plays an
important role in the fund's management process. Team members work together to
develop investment strategies and select securities for each fund's portfolio.
They are supported by the Adviser's large staff of economists, research
analysts, traders and other investment specialists who work in the Adviser's
offices across the United States and abroad. The funds' investment manager
believes its team approach benefits fund investors by bringing together many
disciplines and leveraging its extensive resources.
10
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The following investment professionals are associated with each fund as
indicated:
Name & Title Joined the Funds Responsibilities and Background
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Philip G. Condon Scudder Massachusetts Mr. Condon joined the Adviser in
Lead Manager for each Limited Term Tax Free 1983 as a portfolio manager and
fund Fund: 1994 has 17 years of experience in
municipal investing and
Scudder Massachusetts portfolio management.
Tax Free Fund: 1989
Kathleen A. Meany Scudder Massachusetts Ms. Meany joined the Adviser in
Manager for each fund Limited Term Tax Free 1988 as a portfolio manager and
Fund: 1994 has 20 years of municipal
investment and portfolio
Scudder Massachusetts management experience.
Tax Free Fund: 1988
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Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, each
fund could be adversely affected if computer systems on which each fund relies,
which primarily include those used by the Adviser, its affiliates or other
service providers, are unable to process correctly date-related information on
and after January 1, 2000. The risk is commonly called the Year 2000 issue.
Failure to address successfully the Year 2000 issue could result in
interruptions to and other material adverse effects on each fund's business and
operations, such as problems with calculating net asset value and difficulties
in implementing the fund's purchase and redemption procedures. The Adviser has
commenced a review of the Year 2000 issue as it may affect the funds and is
taking steps it believes are reasonably designed to address the Year 2000 issue,
although there can be no assurances that these steps will be sufficient. In
addition, there can be no assurances that the Year 2000 issue will not have an
adverse effect on the issuers whose securities are held by each fund or on
global markets or economies generally.
Distributions
Each fund intends to declare daily and distribute dividends from its net
investment income monthly. Each fund intends to distribute net realized capital
gains after utilization of capital loss carryforwards, if any, in November or
December. An additional distribution may be made at a later date, if necessary.
11
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Any dividends or capital gains distributions declared in October, November or
December with a record date in such 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.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of a fund. Distributions may be subject to
federal income tax whether received in cash or reinvested. Exchanges among funds
are also taxable events.
Taxes
Distributions derived from interest on Massachusetts municipal securities are
not subject to federal income taxes, except for the possible applicability of
the federal alternative minimum tax. For federal income tax purposes, a portion
of each fund's income may be taxable to shareholders as ordinary income.
Long-term capital gains distributions, if any, are taxable to shareholders as
long-term capital gains, regardless of the length of time shareholders have
owned 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 (at varying tax rates depending on the
period a fund has held the sold securities), 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.
12
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A sale or exchange of shares is a taxable event and may result in a capital gain
or loss if the shares were held as a capital asset. Capital gains may be
long-term or short-term, depending on how long you owned the shares.
Each fund sends detailed tax information to its shareholders about the amount
and type of their distributions by January 31 of the following year.
The funds may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide a fund
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Any such withheld amounts may be credited against the
shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in a fund.
13
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Financial highlights
The financial highlights tables are intended to help you understand each fund's
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single fund share. The total return figures
represent the rate that a shareholder would have earned (or lost) on an
investment in a fund, assuming reinvestment of all dividends and distributions.
This information has been audited by PricewaterhouseCoopers LLP whose report,
along with the funds' financial statements, is included in the annual report,
which is available upon request by calling Scudder Investor Relations at
1-800-225-2470 or, for existing shareholders, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890.
Scudder Massachusetts Limited Term Tax Free Fund
<TABLE>
<CAPTION>
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For the
Period
February 15,
1994
(commence
-ment of
operations)
Years Ended October 31, to October
1998 1997 1996 1995 31, 1994
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<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ... $12.10 $11.99 $12.02 $11.64 $12.00
------------------------------------------------------
Income from investment
operations:
Net investment income .................. .49 .53 .50 .54 .36
Net realized and unrealized gain
(loss) on investment
transactions ......................... .17 .11 (.03) .38 (.36)
------------------------------------------------------
Total from investment operations ....... .66 .64 .47 .92 .00
------------------------------------------------------
Less distributions from net
investment income .................... (.49) (.53) (.50) (.54) (.36)
------------------------------------------------------
Net asset value, end of period ......... $12.27 $12.10 $11.99 $12.02 $11.64
- -------------------------------------------------------------------------------------------------
Total Return (%) (a) ................... 5.59 5.44 3.98 8.08 0.00**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ......................... 96 80 66 55 36
Ratio of operating expenses, net
to average daily net assets (%) ...... .75 .75 .67 .24 --
Ratio of operating expenses
before expense reductions, to
average daily net assets (%) ......... .84 .93 .90 .92 1.44*
Ratio of net investment income
to average daily net assets (%) ...... 4.05 4.40 4.16 4.56 4.45*
Portfolio turnover rate (%) ............ 9.1 9.8 12.4 27.4 26.3*
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
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14
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Scudder Massachusetts Tax Free Fund
<TABLE>
<CAPTION>
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Six Months
Ended
September
30, 1998 Years Ended March 31,
(Unaudited) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .......... $14.34 $13.72 $13.70 $13.33 $13.16 $13.61
----------------------------------------------------------------------
Income from investment
operations:
Net investment income ........ .35 .70 .70 .72 .74 .81
Net realized and
unrealized gain
(loss) on investment
transactions ............... .30 .62 .02 .37 .18 (.33)
----------------------------------------------------------------------
Total from investment
operations ................. .65 1.32 .72 1.09 .92 .48
----------------------------------------------------------------------
Less distributions:
From net investment
income ..................... (.35) (.70) (.70) (.72) (.74) (.81)
From net realized gains on
investment transactions .... -- -- -- -- -- (.08)
In excess of net realized
gains ...................... -- -- -- -- (.01) (.04)
----------------------------------------------------------------------
Total distributions .......... (.35) (.70) (.70) (.72) (.75) (.93)
----------------------------------------------------------------------
----------------------------------------------------------------------
Net asset value, end of
period ..................... $14.64 $14.34 $13.72 $13.70 $13.33 $13.16
- -----------------------------------------------------------------------------------------------------
Total Return (%) (a) ......... 4.57** 9.82 5.39 8.28 7.37 3.37
Ratios and Supplemental
Data
Net assets, end of period
($ millions) ............... 403 374 330 314 296 332
Ratio of operating
expenses, net to average
daily net assets (%) ....... .74* .76 .76 .75 .47 .07
Ratio of operating
expenses before
expense reductions, to
average daily net
assets (%) ................. .74* .76 .76 .76 .77 .77
Ratio of net investment
income to average daily
net assets (%) ............. 4.80* 4.97 5.12 5.23 5.73 5.80
Portfolio turnover rate (%) .. 16.7* 8.4 11.5 20.9 10.2 17.0
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced
through March 31, 1996.
* Annualized
** Not annualized
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15
<PAGE>
About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
each fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock 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. Market
prices are used to determine the value of the fund's assets. If market prices
are not readily available for a security or if a security's price is not
considered to be market indicative, that security may be valued by another
method that the Board or its delegate believes accurately reflects fair value.
In those circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
Processing time
All purchase and redemption requests received in good order at the funds'
transfer agent by the close of regular trading on the New York Stock Exchange
are executed at the net asset value per share calculated at the close of trading
that day. All other requests that are in good order will be executed the
following business day.
Signature guarantees
A signature guarantee is required when you sell more than $100,000 worth of
shares. You can obtain a guarantee from most brokerage houses and financial
institutions, although not from a notary public. 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). For more information, please call 1-800-225-5163.
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. Each
fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason, including when
there is evidence of a pattern of frequent purchases and sales made in response
to short-term fluctuations in a fund's share price.
16
<PAGE>
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in a fund and have not established an automatic investment plan will
be assessed an annual $10.00 per fund charge; this fee is paid to each fund.
Each fund reserves the right, following 60 days written notice to shareholders,
to redeem all shares in accounts that have a value below $1,000 where such a
reduction in value has occurred due to a redemption, exchange or transfer out of
the account.
Write-a-check
You may redeem shares of Scudder Massachusetts Limited Term Tax Free Fund by
writing checks against your account for at least $100.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Other policies
Each fund reserves the right to redeem in kind. That is, it may honor redemption
requests with readily marketable fund securities instead of cash. There may be
transaction costs associated with converting these securities to cash.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For information about No-Fee IRAs, Roth
IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
17
<PAGE>
Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send your completed and signed application and check
- --------------------------------------------------------------------------------
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
- --------------------------------------------------------------------------------
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to complete your
application with the help of a Scudder representative.
Investor Centers are located in Boca Raton, Boston,
Chicago, New York and San Francisco.
- --------------------------------------------------------------------------------
To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number
and the complete fund name, to the appropriate address
listed above.
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor
Center locations are listed above.
- --------------------------------------------------------------------------------
By Telephone Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
- --------------------------------------------------------------------------------
18
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), the
Scudder Automated Information Line, call 1-800-343-2890
(24 hours a day).
- --------------------------------------------------------------------------------
By Mail or Fax Print or type your instructions and include:
- the name of the fund and the account number you
are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions The Scudder Funds
by regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
- --------------------------------------------------------------------------------
To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), the
Scudder 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.
- --------------------------------------------------------------------------------
By Mail Send your instructions for redemption to the appropriate
or Fax address or fax number above and include:
- the name of the fund and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
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, but not more than $5,000,000.
- --------------------------------------------------------------------------------
By Automatic You may arrange to receive automatic cash payments
Withdrawal Plan periodically. Call 1-800-225-5163 for more information and an
enrollment form.
- --------------------------------------------------------------------------------
19
<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 --
Prime Reserve Shares*
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 Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
20
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
- ------------------- ------------------
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**[[
Scudder Horizon Advantage**[[[
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.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
- -----------
[ Funds within categories are listed in order from expected least risk to
most risk. Certain Scudder funds or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder Family
of Funds.
[[ A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470.
[[[ A no-load variable annuity contract issued by Glenbrook Life and Annuity
Company and underwritten by Allstate Financial Services, Inc., sold by
Scudder's insurance agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are traded on
the New York Stock Exchange and, in some cases, on various other stock
exchanges.
21
<PAGE>
Additional information about each fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of fund shares. The semiannual and annual
shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected a fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Telephone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-3749
[PRINTED WITH SOY INK LOGO] [RECYCLE LOGO] Printed on recycled paper
50/105-2-39
PR012399
<PAGE>
SCUDDER MASSACHUSETTS LIMITED TERM TAX FREE FUND
and
SCUDDER MASSACHUSETTS TAX FREE FUND
Each a series of Scudder State Tax Free Trust
Two No-Load (No Sales Charges) Non-Diversified Mutual Funds
Specializing in the Management
of Massachusetts Municipal
Security Portfolios
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus. The
combined prospectus of Scudder Massachusetts Limited Term Tax Free Fund and
Scudder Massachusetts Tax Free Fund dated March 1, 1999, as amended from time to
time, may be obtained without charge by writing to Scudder Investor Services,
Inc., Two International Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders of Scudder Massachusetts Limited Term Tax Free
Fund dated October 31, 1998 and Semiannual Report to Shareholders of Scudder
Massachusetts Tax Free Fund dated September 30, 1998 are incorporated by
reference and are hereby deemed to be part of this Statement of Additional
Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUNDS'INVESTMENT OBJECTIVES AND POLICIES..................................................................1
General Investment Objective and Policies of Scudder Massachusetts Limited Term Tax Free Fund........1
General Investment Objective and Policies of Scudder Massachusetts Tax Free Fund.....................2
Master/feeder Fund Structure.........................................................................3
Municipal Obligations................................................................................4
Management Strategies................................................................................7
Special Considerations...............................................................................7
Trustees'Power to Change Objective and Policies.....................................................21
Investment Restrictions.............................................................................21
PURCHASES....................................................................................................22
Additional Information About Opening an Account.....................................................22
Minimum balances....................................................................................23
Additional Information About Making Subsequent Investments..........................................23
Additional Information About Making Subsequent Investments by QuickBuy..............................23
Checks..............................................................................................24
Wire Transfer of Federal Funds......................................................................24
Share Price.........................................................................................24
Share Certificates..................................................................................25
Other Information...................................................................................25
EXCHANGES AND REDEMPTIONS....................................................................................25
Exchanges...........................................................................................25
Redemption by Telephone.............................................................................26
Redemption By QuickSell.............................................................................27
Redemption by Mail or Fax...........................................................................27
Redemption by Checkwriting.........................................................................27
Redemption-in-Kind..................................................................................28
Other Information...................................................................................28
FEATURES AND SERVICES OFFERED BY THE FUNDS...................................................................28
The No-Load Concept................................................................................28
Internet access.....................................................................................29
Dividends and Capital Gains Distribution Options....................................................30
Scudder Investor Centers............................................................................30
Reports to Shareholders.............................................................................30
Transaction Summaries...............................................................................30
THE SCUDDER FAMILY OF FUNDS..................................................................................30
SPECIAL PLAN ACCOUNTS........................................................................................35
Automatic Withdrawal Plan...........................................................................35
Cash Management System --Group Sub-Accounting Plan for Trust Accounts, Nominees
and Corporations..............................................................................36
Automatic Investment Plan...........................................................................36
Uniform Transfers/Gifts to Minors Act...............................................................36
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS....................................................................36
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
PERFORMANCE INFORMATION......................................................................................37
Average Annual Total Return.........................................................................37
Cumulative Total Return.............................................................................38
Total Return........................................................................................38
SEC Yield...........................................................................................38
Tax-Equivalent Yield................................................................................39
Comparison of Fund Performance......................................................................40
ORGANIZATION OF THE FUNDS....................................................................................43
INVESTMENT ADVISER...........................................................................................44
Personal Investments by Employees of the Adviser....................................................47
TRUSTEES AND OFFICERS........................................................................................47
REMUNERATION.................................................................................................50
Responsibilities of the Board --Board and Committee Meetings........................................50
Compensation of Officers and Trustees...............................................................50
DISTRIBUTOR..................................................................................................51
TAXES........................................................................................................52
Federal Taxation....................................................................................52
State Taxation......................................................................................54
PORTFOLIO TRANSACTIONS.......................................................................................55
Brokerage Commissions...............................................................................55
Portfolio Turnover..................................................................................56
NET ASSET VALUE..............................................................................................56
ADDITIONAL INFORMATION.......................................................................................56
Experts.............................................................................................57
Shareholder Indemnification.........................................................................57
Ratings of Municipal Obligations....................................................................57
Commercial Paper Ratings............................................................................58
Glossary............................................................................................58
Other Information...................................................................................59
FINANCIAL STATEMENTS.........................................................................................60
Massachusetts Limited Term Tax Free Fund............................................................60
Massachusetts Tax Free Fund.........................................................................60
</TABLE>
ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See "Investment objective," "Main investment strategies" and "Other
investments" in the Funds' prospectus.)
Scudder Massachusetts Limited Term Tax Free Fund and Scudder
Massachusetts Tax Free Fund (each a "Fund," collectively the "Funds") are each a
non-diversified series of Scudder State Tax Free Trust (the "Trust"). The Trust
is a pure no-load(TM) open-end management investment company presently
consisting of six series.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Funds may engage (such
as short selling, hedging, etc.) or a financial instrument in which the Funds
may purchase (such as options, forward foreign currency contracts, etc.) are
meant to describe the spectrum of investments that Scudder Kemper Investments,
Inc. (the "Adviser"), in its discretion, might, but is not required to, use in
managing a Fund's portfolio assets. The Adviser may, in its discretion, at any
time employ such practice, technique or instrument for one or more funds but not
for all fund advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of a Fund but, to the extent employed, could from time
to time have a material impact on that Fund's performance.
General Investment Objective and Policies of Scudder Massachusetts Limited Term
Tax Free Fund
Scudder Massachusetts Limited Term Tax Free Fund ("Massachusetts
Limited Term Tax Free Fund") seeks to provide Massachusetts taxpayers with as
high a level of income exempt from Massachusetts personal income tax and regular
federal income tax, as is consistent with a high degree of price stability
through a professionally managed portfolio consisting primarily of investment
grade municipal securities. In pursuit of its objective, the Fund expects to
invest at least 75% of its assets in Massachusetts municipal securities that are
rated Baa or better by Moody's Investors Service, Inc. ("Moody's"), BBB or
better by Standard and Poor's Corporation Ratings Services ("S&P"), or Fitch
Investors Service, Inc. ("Fitch"), or in securities considered to be of
equivalent quality. There can be no assurance that the objective of the Fund
will be achieved or that all income to shareholders which is exempt from regular
federal income taxes will be exempt from state income or local taxes or that
income exempt from regular federal income tax will be exempt from the federal
alternative minimum tax.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in the Commonwealth of Massachusetts and other qualifying
issuers (including Puerto Rico, the U.S. Virgin Islands and Guam) whose interest
payments, if distributed to Massachusetts residents, would be exempt, in the
opinion of bond counsel rendered on the date of issuance, from Massachusetts
personal income as well as regular federal income taxes. Because the Fund is
intended for investors subject to Massachusetts personal income tax and federal
income tax it may not be appropriate for all investors and is not available in
all states. As described below in "Massachusetts Limited Term Tax Free Fund's
Investments," the Fund may also invest in taxable obligations.
Massachusetts Limited Term Tax Free Fund's Investments. As a matter of
fundamental policy, which cannot be changed without the approval of a majority
of the Fund's outstanding voting securities (as defined below under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be normally
invested in municipal obligations the income from which is, in the opinion of
bond counsel rendered on the date of issuance, exempt from regular federal and
Massachusetts personal income taxes ("Massachusetts municipal securities")
except that the Fund may temporarily invest more than 20% of its net assets in
securities the income from which may be subject to regular federal and
Massachusetts personal income taxes during periods which, in the opinion of the
Adviser, require a temporary defensive position for the protection of
shareholders. The Fund may also invest in when-issued or forward delivery
securities and strategic transactions (as defined below). Investors should be
aware that shares of the Fund do not represent a complete investment program.
Normally, at least 80% of the Fund's net assets will be invested in
securities whose interest income is not treated as a tax preference item under
the individual alternative minimum tax. Furthermore, all of the Fund's portfolio
obligations, including short-term obligations, will be (a) rated at the time of
purchase within the six highest quality ratings categories assigned by Moody's,
S&P or Fitch, (b) if not rated, judged at the time of purchase by the Adviser,
to be of a quality comparable to the six highest quality ratings categories of
Moody's, S&P or Fitch and to be readily
<PAGE>
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
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.
2
<PAGE>
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, 1998, based upon the dollar-weighted
average ratings of the portfolio holdings at the end of each month during that
period, the Fund had the following percentage of its net assets invested in debt
securities rated below investment-grade (or if unrated, considered by the
Adviser to be equivalent to rated securities): 0%.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable Massachusetts municipal securities make it advisable to do so, up to
20% of the Fund's net assets may be held in cash or invested in short-term
taxable investments such as (1) U.S. Treasury notes, bills and bonds; (2)
obligations of agencies and instrumentalities of the U.S. Government; and (3)
money market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances. It is
impossible to accurately predict how long such alternative strategies may be
utilized.
Master/feeder Fund 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.
3
<PAGE>
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Municipal Obligations
Municipal obligations are issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions, agencies
and instrumentalities to obtain funds for various public purposes. The interest
on most of these obligations is generally exempt from regular federal income tax
in the hands of most individual investors, although it may be subject to the
individual and corporate alternative minimum tax. Interest on municipal
obligations issued by Massachusetts issuers is generally exempt from
Massachusetts personal income tax. The two principal classifications of
municipal obligations are "notes" and "bonds."
1. Municipal Notes. Municipal notes are generally used to provide
for short-term capital needs and generally have maturities of
one year or less. Municipal notes include: tax anticipation
notes; revenue anticipation notes; bond anticipation notes;
and construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Tax anticipation notes and revenue anticipation
notes are generally issued in anticipation of various seasonal revenues such as
income, sales, use, and business taxes. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as federal revenues
available under the Federal Revenue Sharing Program. Bond anticipation notes are
sold to provide interim financing. These notes are generally issued in
anticipation of long-term financing in the market. In most cases, such financing
provides for the repayment of the notes. Construction loan notes are sold to
provide construction financing. After the projects are successfully completed
and accepted, many projects receive permanent financing through the Federal
Housing Administration under "Fannie Mae" (the Federal National Mortgage
Association) or "Ginnie Mae" (the Government National Mortgage Association).
There are, of course, a number of other types of notes issued for different
purposes and secured differently from those described above.
2. Municipal Bonds. Municipal bonds, which meet longer term
capital needs and generally have maturities of more than one
year when issued, have two principal classifications: "general
obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
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Industrial development and pollution control bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Under federal tax legislation, certain
types of Industrial Development Bonds and Pollution Control Bonds may no longer
be issued on a tax-exempt basis, although previously-issued bonds of these types
and certain refundings of such bonds are not affected. Each Fund may invest more
than 25% of its assets in industrial development or other private activity
bonds, subject to each Fund's fundamental investment policies, and also subject
to each Fund's current intention not to invest in municipal securities whose
investment income is taxable or subject to each Fund's 20% limitation on
investing in municipal securities the interest income from which is subject to
the alternative minimum tax ("AMT bonds"). For the purposes of each Fund's
investment limitation regarding concentration of investments in any one
industry, industrial development or other private activity bonds ultimately
payable by companies within the same industry will be considered as if they were
issued by issuers in the same industry.
3. Other Municipal Obligations. There is, in addition, a variety
of hybrid and special types of municipal obligations as well
as numerous differences in the security of municipal
obligations both within and between the two principal
classifications above.
Each Fund may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit a Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. Each Fund intends to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to a Fund, or (3) to maintain an
investment grade investment portfolio. A bank that issues a repurchase
commitment may receive a fee from a Fund for this arrangement. The issuer of a
variable rate demand instrument may have a corresponding right to prepay in its
discretion the outstanding principal of the instrument plus accrued interest
upon notice comparable to that required for the holder to demand payment.
The variable rate demand instruments that a Fund may purchase are
payable on demand on not more than thirty calendar days' notice. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily up to six months, and the adjustments are based upon the prime rate
of a bank or other appropriate interest rate adjustment index as provided in the
respective instruments. A Fund will determine the variable rate demand
instruments that it will purchase in accordance with procedures approved by the
Trustees to minimize credit risks. The Adviser may determine that an unrated
variable rate demand instrument meets a Fund's quality criteria by reason of
being backed by a letter of credit or guarantee issued by a bank that meets the
quality criteria for a Fund. Thus, either the credit of the issuer of the
municipal obligation or the guarantor bank or both will meet the quality
standards of a Fund. The Adviser will reevaluate each unrated variable rate
demand instrument held by a Fund on a quarterly basis to determine whether it
continues to meet a Fund's quality criteria.
The value of the underlying variable rate demand instruments may change
with changes in interest rates generally, but the variable rate nature of these
instruments should minimize changes in value due to interest rate fluctuations.
Accordingly, as interest rates decrease or increase, the potential for capital
gain and the risk of capital loss on the disposition of portfolio securities are
less than would be the case with the comparable portfolio of fixed income
securities. A Fund may purchase variable rate demand instruments on which stated
minimum or maximum rates, or maximum rates set by state law, limit the degree to
which interest on such variable rate demand instruments may fluctuate; to the
extent it does, increases or decreases in value of such variable rate demand
notes may be somewhat greater than would be the case without such limits.
Because the adjustment of interest rates on the variable rate demand instruments
is made in relation to movements of the applicable rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed interest
rate securities. Accordingly, interest rates on the variable rate demand
instruments may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar final maturities.
The maturity of the variable rate demand instrument held by a Fund will
ordinarily be deemed to be the longer of (1) the notice period required before a
Fund is entitled to receive payment of the principal amount of the instrument or
(2) the period remaining until the instrument's next interest rate adjustment.
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
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which are not publicly offered may nevertheless be readily
marketable. A secondary market exists for municipal
obligations which were not publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in a Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. In addition,
Stand-by Commitments and demand obligations also enhance marketability.
For the purpose of a Fund's investment restrictions, the identification
of the "issuer" of municipal obligations which are not general obligation bonds
is made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. Government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments, which might affect all
municipal obligations of a similar type. However, each Fund believes that the
most important consideration affecting risk is the quality of particular issues
of municipal obligations, rather than factors affecting all, or broad classes
of, municipal obligations.
Each Fund may invest up to 25% of its total assets in fixed-income
securities rated below investment grade, that is, below Baa by Moody's, or below
BBB by S&P or Fitch, or in unrated securities considered to be of equivalent
quality. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. Each Fund may not invest in
fixed-income securities rated below B by Moody's, S&P or Fitch, or their
equivalent. Securities rated below BBB are commonly referred to as "junk bonds"
and involve greater price volatility and higher degrees of speculation with
respect to the payment of principal and interest than higher-quality
fixed-income securities. In addition, the trading market for these securities is
generally less liquid than for higher-rated securities and the Funds may have
difficulty disposing of these securities at the time they wish to do so. The
lack of a liquid secondary market for certain securities may also make it more
difficult for the Funds to obtain accurate market quotations for purposes of
valuing their portfolios and calculating their net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
a Fund will be purchased upon issuance, which may involve special risks because
the securities so acquired are new issues. In such instances a Fund may be a
substantial purchaser of the issue and therefore have the opportunity to
participate in structuring the terms of the offering. Although this may enable a
Fund to seek to protect itself against certain of such risks, the considerations
discussed herein would nevertheless remain applicable.
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.
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During the fiscal year ended October 31, 1998 for Scudder Massachusetts
Limited Term Tax Free Fund, the average monthly dollar-weighted market value of
the bonds in the Fund's portfolio rated lower than BBB by Moody's, S&P or Fitch,
or their equivalent was 0%.
Management Strategies
In pursuit of its investment objective, each Fund purchases securities
that it believes are attractive and competitive values in terms of quality,
yield, and the relationship of current price to maturity value. However,
recognizing the dynamics of municipal obligation prices in response to changes
in general economic conditions, fiscal and monetary policies, interest rate
levels and market forces such as supply and demand for various issues, the
Adviser, subject to the Trustees' review, performs credit analysis and manages
each Fund's portfolio continuously, attempting to take advantage of
opportunities to improve total return, which is a combination of income and
principal performance over the long term. The primary strategies employed in the
management of each Fund's portfolio are:
Emphasis on Credit Analysis. As indicated above, each Fund's portfolio will be
invested in municipal obligations rated within, or judged by the Funds' Adviser
to be of a quality comparable to, the six highest quality ratings categories of
Moody's, S&P or Fitch, or in U.S. Government obligations. The ratings assigned
by Moody's, S&P or Fitch represent their opinions as to the quality of the
securities which they undertake to rate. It should be emphasized, however, that
ratings are relative and are not absolute standards of quality. Furthermore,
even within this segment of the municipal obligation market, relative credit
standing and market perceptions thereof may shift. Therefore, the Adviser
believes that it should review continuously the quality of municipal
obligations.
The Adviser has over many years developed an experienced staff to
assign its own quality ratings which are considered in making value judgments
and in arriving at purchase or sale decisions. Through the discipline of this
procedure the Adviser attempts to discern variations in credit ratings of the
published services and to anticipate changes in credit ratings.
Variations of Maturity. In an attempt to capitalize on the differences in total
return from municipal obligations of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Adviser's
expectations of changes therein. To the extent that a Fund invests in short-term
maturities, capital volatility will be reduced.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal obligations of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
disparities in yield relationships may afford opportunities to implement a
flexible policy of trading a Fund's holdings in order to invest in more
attractive market sectors or specific issues.
Market Trading Opportunities. In pursuit of the above each Fund may engage in
short-term trading (selling securities held for brief periods of time, usually
less than three months) if the Adviser believes that such transactions, net of
costs, would further the attainment of a Fund's objective. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that a Fund will be able to take advantage of them.
Each Fund will limit its voluntary short-term trading to the extent such
limitation is necessary for it to qualify as a "regulated investment company"
under the Internal Revenue Code.
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
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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.
Each Fund is more susceptible to factors adversely affecting issuers of
Massachusetts municipal securities than is a comparable municipal bond fund that
does not focus on investments of Massachusetts issuers. In 1989, Massachusetts
experienced growth rates significantly below the national average an 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 experiences
shifts in employment from labor-intensive manufacturing industries to technology
and service-based industries. After declining since 1989, however, total
Massachusetts employment showed positive annual growth in 1993 and 1994.
Employment in 1993 and 1994 increased in all sectors, except manufacturing which
had experienced declines in each year since 1985. In 1995, total
non-agricultural employment in Massachusetts grew at a rate of 2.4% with the
most rapid growth coming in the construction sector and the services sector,
which grew at rates of 4.7% and 4.9%, respectively. The unemployment rate for
the Commonwealth for 1996 and 1997 was 4.1% and 4.0%, respectively, compared to
the national rate of 5.2% for the same periods. In addition, in 1997 employment
in manufacturing increased by almost 2%, the largest annual increase in
manufacturing in over twelve years. Real income levels in Massachusetts declined
between 1989 and 1991. Since 1994, however, real per capita income levels in
Massachusetts continue to increase faster than the national average, showing
growth rates of 6.2% and 6.0% in 1996 and 1997, respectively. Massachusetts had
the third highest level of personal income in the United States in 1995.
State Economy. Throughout much of the 1980s, the Commonwealth had a strong
economy which was evidenced by low unemployment and high personal income growth
as compared to national trends. Economic growth in the Commonwealth slowed in
the late 1980s and early 1990s but outpaced that of the nation as a whole in
1997 and 1998. Current economic indicators such as retail sales, housing
permits, construction, and employment levels suggest a strong and continued
economic recovery. The unemployment rate for the Commonwealth as of November
1998 was 2.9% compared to a national average of 4.4%. The unemployment rate is
expected to remain steady through Calendar Year 2000. In addition, in 1997
employment in manufacturing increased by almost 2%, the largest annual increase
in manufacturing in over twelve years. Although the rate of growth for per
capita personal income has outpaced the national average since 1991 and still
remains among the highest in the nation, it is expected to fall from
approximately 5.1% in Fiscal Year 1998 to 4.5% in Fiscal Year 1999 and remain at
that level for a few years.
Major infrastructure projects are anticipated in the Commonwealth over
the next decade. It is currently anticipated that the federal government will
assume responsibility for approximately 67% of the estimated $10.8 billion cost
of projects which consist of the depression of the central artery which
traverses the City of Boston and the construction of a third harbor tunnel
linking downtown Boston to Logan Airport. The current estimated date of
completion of the project is 2004. In 1997, a law was passed authorizing the
Commonwealth to spend up to $609 million for the design and construction of a
new convention facility in South Boston. At the same time, $49.5 million was
authorized for the expansion and renovation of the Springfield Civic Center, and
$19 million was reimbursed to the City of Worcester for construction of a new
convention center. Revenue bonds used to finance these three facilities will be
paid from various parking receipts, car rental surcharges, hotel taxes and sales
taxes in business located in and around the facilities.
The fiscal viability of the Commonwealth's authorities and
municipalities is inextricably linked to that of the Commonwealth. The
Commonwealth guarantees the debt of several authorities, most notably the
Massachusetts Bay Transportation Authority and the University of Massachusetts
Building Authority. Their ratings are based on this guarantee and can be
expected to move in tandem. Several other authorities are funded in part or in
whole by the Commonwealth and their debt ratings may be adversely affected by a
negative change in those of the Commonwealth.
Commonwealth spending exceeded revenues in each of the five fiscal
years commencing fiscal 1987. In particular, from 1987 to 1990, spending in five
major expenditure categories (Medicaid, debt service, public assistance, group
health insurance and transit subsidies) grew at rates in excess of the rate of
inflation for the comparable period. In
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addition, the Commonwealth's tax revenues during this period repeatedly failed
to meet official forecasts. For the budgeted funds, operating losses in fiscal
1987 and 1988, of $349 million and $370 million, respectively, were covered by
surpluses carried forward from prior years. The operating losses in fiscal 1989
and 1990, which totaled $672 million and $1.251 billion, respectively, were
covered primarily through deficit borrowings. During that period, operating fund
balances declined from a budget surplus of $1.072 billion in fiscal 1987 to a
deficit of $1.104 billion for the fiscal year ending 1990.
For the fiscal year ending June 30, 1991, total operating revenues of
the Commonwealth increased by 13.5% over the prior year, to $13.878 billion.
This increase was due chiefly to state tax increases enacted in July, 1990 and
to a substantial federal reimbursement for uncompensated patient care under the
Medicaid program. 1991 expenditures also increased over the prior year to
$13.899 billion resulting in an operating loss in the amount of $21.2 million.
However, after applying the opening fund balances created from proceeds of the
borrowing that financed the fiscal 1990 deficit, no deficit borrowing was
required to close-out fiscal 1991.
For the fiscal year ended June 30, 1992, the budgeted operating funds
ended with an excess of revenues and other sources over expenditures and other
uses of $312.3 million and with a surplus of $549.4 million, when such excess is
added to the fund balances carried forward from fiscal 1991.
The budgeted operating funds of the Commonwealth ended fiscal 1993 with
a surplus of revenues and other sources over expenditures and other uses of
$13.1 million and aggregate ending fund balances in the budgeted operating funds
of the Commonwealth of approximately $562.5 million. Budgeted revenues and other
sources for fiscal 1993 totaled approximately $14.710 billion, including tax
revenues of $9.930 billion. Total revenues and other sources increased by
approximately 6.9% from fiscal 1992 to 1993, while tax revenues increased by
4.7% for the same period. In July 1992, tax revenues had been estimated to be
approximately $9.685 billion for fiscal 1993. This amount was subsequently
revised during fiscal 1993 to $9.940 billion.
Commonwealth budgeted expenditures and other uses in fiscal 1993
totaled approximately $14.696 billion, which is $1.280 billion or approximately
9.6% higher than fiscal 1992 expenditures and other uses. Fiscal 1993 budgeted
expenditures were $23 million lower than the initial July 1992 estimates of
fiscal 1993 budgeted expenditures.
As of June 30, 1993, after payment of all Local Aid and retirement of
short-term debt, the Commonwealth showed a year-end cash position of
approximately $622.2 million, as compared to a projected position of $485.1
million.
The budgeted operating funds of the Commonwealth ended fiscal 1994 with
a surplus of revenues and other sources over expenditures and other uses of
$26.8 million and aggregate ending fund balances in the budgeted operating funds
of the Commonwealth of approximately $589.3 million. Budgeted revenues and other
sources for fiscal 1994 totaled approximately $15.550 billion, including tax
revenues of $10.607 billion, $87 million below the Department of Revenue's
fiscal 1994 tax revenue estimate of $10.694 billion. Total revenues and other
sources increased by approximately 5.7% from fiscal 1993 to fiscal 1994 while
tax revenues increased by 6.8% for the same period.
Commonwealth budgeted expenditures and other uses in fiscal 1994
totaled $15.523 billion, which is $826.5 million or approximately 5.6% higher
than fiscal 1993 budgeted expenditures and other uses.
As of June 30, 1994, the Commonwealth showed a year-end cash position
of approximately $757 million, as compared to a projected position of $599
million.
Fiscal 1995 tax revenue collections totaled $11.163 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $11.151 billion, and approximately $556 million, or
5.2%, above fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and
other sources, including non-tax revenues collected in fiscal 1995 totaled
$16.387 billion, approximately $837 million, or 5.4%, above fiscal 1994 budgeted
revenues of $15.550 billion. Budgeted expenditures and other uses of funds in
fiscal 1995 were approximately $16.251 billion, approximately $728 million, or
4.7%, above fiscal 1994 budgeted expenditures and uses of $15.523 billion. The
Commonwealth ended fiscal 1995 with an operating gain of $137 million and an
ending fund balance of $726 million.
The Commonwealth ended fiscal 1996 with a surplus of revenues and other
sources over expenditures and other uses of $446.4 million resulting in
aggregate ending fund balances in the budgeted operating funds of the
Commonwealth of approximately $1.173 billion. Budgeted revenues and other
sources for fiscal 1996 totaled approximately $17.327 billion, including tax
revenues of approximately $12.049 billion, approximately $365 million higher
than prior official estimate in May, 1996. Budgeted revenues and other sources
increased by approximately 5.7%
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from fiscal 1995 to fiscal 1996, while tax revenues increased by approximately
7.9% for the same period. Income tax withholding payments increased by
approximately 8.0% from fiscal 1995, and total income tax collections by
approximately 12.3%. Budgeted expenditures and other uses in fiscal 1996 totaled
approximately $16.896 billion, an increase of approximately $645.7 million, or
4.0%, over fiscal 1995.
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $179.4 million, bringing the Stabilization Fund balance to
approximately $627.1 million, which exceeded the amount that can remain in the
Stabilization Fund by law, $543.3 million. In fiscal 1997, the statutory ceiling
on the Stabilization Fund was raised from 5% of total tax revenues to 5% of
total budgetary revenues. At the end of fiscal 1997, the Stabilization Fund's
balance was $799.3 million. Under state finance law, year-end surplus amounts
(as defined in the law) in excess of the amount that can remain in the
Stabilization Fund are transferred to the Tax Reduction Fund, to be applied,
subject to legislative appropriation, to the reduction of personal income taxes.
The budgeted operating funds of the Commonwealth ended fiscal 1997 with
a surplus of revenues and other sources over expenditures and other uses of
$221.0 million and aggregate ending fund balances in the budgeted operating
funds of the Commonwealth of approximately $1.394 billion. Budgeted revenues and
other sources for fiscal 1997 totaled approximately $18.170 billion, including
tax revenues of $12.864 billion, an increase of approximately 6.8% over fiscal
1996. Commonwealth budgeted expenditures and other uses in fiscal 1997 totaled
$19.949 billion. At the end of fiscal 1997, the Commonwealth showed a year-end
cash position of approximately $902.0 million, which did not include the
aforementioned Stabilization Fund ending balance of $799.3 million.
Beginning in 1989, S&P and Moody's lowered their ratings of the
Commonwealth's general obligation bonds from AA+ and Aa, respectively, to BBB
and Baa, respectively. In March 1992, S&P placed the Commonwealth's general
obligation and related guaranteed bond ratings on CreditWatch with positive
implications, citing such factors as continued progress towards balanced
financial operations and reduced short-term borrowing as the basis for the
positive forecast. As of the date hereof, the Commonwealth's general obligation
bonds are rated AA- by S&P and A1 by Moody's. From time to time, the rating
agencies may further change their ratings.
State Budget. The budget for the 1998 fiscal year marked the eighth consecutive
year in which the Commonwealth's budget was balanced without new taxes or
deficit borrowing. As a result, the fiscal 1998 budget contained three tax cuts
with an aggregate fiscal cost of approximately $60.9 million. A total of
twenty-eight tax cuts initiated in the previous and current administrations
translate to a total of $2 billion in annual tax savings to taxpayers. Further,
the current administration proposes cutting the tax rate on earned and unearned
income from 5.95% to 5.00% over three years. Budgeted revenues and other sources
to be collected in fiscal 1998 totalled $19.799 billion. This amount includes
fiscal 1998 tax revenues of $14.026 billion. Collections through December, 1998
totaled $6.706 billion, up 8.9% or $548 million, from the same period in Fiscal
Year 1998.
Fiscal 1998 non-tax revenues totaled $5.773 billion, approximately
$276.5 million more than fiscal 1997 non-tax revenues after adjusting for the
shifts to and from certain non-budgeted items. Federal reimbursements increased
by more than $300 million, from $3.019 billion in fiscal 1997 to $3.361 billion
in fiscal 1998.
On January 27, 1998 the Governor submitted the proposed budget for the
1999 fiscal year. The fiscal 1999 budget contains five tax cuts with an
aggregate fiscal cost of approximately $244.8 million. Budgeted revenues and
other sources to be collected in fiscal 1999 are estimated by the Executive
Office for Administration and Finance to be approximately $19.725 billion. This
amount includes estimated fiscal 1999 tax revenues of $14 billion. Total Fiscal
Year 1999 tax revenue collections are estimated to decrease by a net 0.2% over
Fiscal Year 1998 levels.
Fiscal 1999 non-tax revenues are projected to total approximately
$5.725 billion, approximately $48 million less than fiscal 1998 non-tax revenues
after adjusting for the shifts to and from certain non-budgeted items. Federal
reimbursements increase by approximately $80 million, from approximately $3.361
billion in fiscal 1998 to $3.441 billion in fiscal 1999. The fiscal 1999 budget
is based on numerous spending and revenue estimates, the achievement of which
cannot be assured.
Debt Limits and Outstanding Debt. Growth of tax revenues in the Commonwealth is
limited by law. Tax revenues in each of fiscal years 1988 to 1992 were lower
than the limits set by law. In addition, during each of the fiscal years 1989
through 1991, the official tax revenue forecasts made at the beginning of the
year proved to be substantially more optimistic than the actual results. The
fiscal 1992 budget initially was based on the joint revenue estimate of $8.292
billion, a 7% decrease from 1991, while actual tax revenues were $9.484 billion,
a 5.4% increase over fiscal 1991. The fiscal 1993 budget initially was based on
the joint revenue estimate of $9.685 billion, an increase of 2.1% over 1992. The
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actual 1993 tax revenues were $9.930 billion, a 4.7% increase over 1992. On May
13, 1993, the tax revenue forecast of the Chairpersons of the House and Senate
Ways and Means Committees and the Secretary for Administration and Finance for
fiscal 1994 was $10.540 billion, an increase of 6.1% over 1993. Actual fiscal
1994 tax revenues were $10.607 billion, a 6.8% increase over fiscal 1993.
In May 1994, the Chairpersons of the House and Senate Ways and Means
Committees and the Secretary for Administration and Finance jointly endorsed an
estimate of tax revenues for fiscal 1994 of $11.328 billion, an increase of $634
million, or 5.9%, from then expected tax revenues for fiscal 1994 of $10.694
billion. The fiscal 1995 budget was based upon this tax revenue estimate, less
$19.3 million of tax cuts signed by the Governor in the fiscal 1995 budget.
Fiscal 1995 tax revenue collections were approximately $11.163 billion. Fiscal
1996 tax revenue collections were $12.049 billion. Fiscal 1997 tax revenue
collections were $12.864 billion. Fiscal 1998 tax revenue collections were
$14.026 billion. For Fiscal Year 1999, tax revenue collections were $6.706
billion through December 31, 1998 and are expected to total $14 billion. Tax
collections for Fiscal Year 2000 are projected to increase by 3.3%.
Effective July 1, 1990, limitations were placed on the amount of direct
bonds the Commonwealth may have outstanding in a fiscal year, and the amount of
the total appropriation in any fiscal year that may be expended for payment of
principal of and interest on general obligation debt of the Commonwealth was
limited to 10 percent of such appropriation. Bonds in the aggregate principal
amount of $1.399 billion issued in October and December, 1990, under Chapter 151
of the Acts of 1990 to meet the fiscal 1990 deficit are excluded from the
computation of these limitations, and principal of and interest on such bonds
are to be repaid from up to 15% of the Commonwealth's income receipts and tax
receipts in each year that such principal or interest is payable.
Furthermore, certain of the Commonwealth's cities and towns have at
times experienced serious financial difficulties which have adversely affected
their credit standing. For example, due in large part to prior year cutbacks,
the City of Chelsea was forced into receivership in September 1991. The
recurrence of such financial difficulties, or financial difficulties of the
Commonwealth, could adversely affect the market values and marketability, or
result in default in payment on, outstanding obligations issued by the
Commonwealth or its public authorities or municipalities. In addition, recent
developments regarding the Massachusetts statutes which limit the taxing
authority of the Commonwealth or certain Massachusetts governmental entities may
impair the ability of issuers of some Massachusetts obligations to maintain debt
service on their obligations.
The Commonwealth currently has two types of bonds and notes
outstanding: general obligation debt and special obligation debt. Special
obligation revenue debt consists of special obligation revenue bonds ("Special
Obligation Bonds") issued under Section 20 of Chapter 29 of the Massachusetts
General Laws (the "Special Obligation Act") which may be secured by all or a
portion of the revenues credited to the Commonwealth's Highway Fund. The
Commonwealth has issued Special Obligation Bonds secured by a pledge of 6.86
cents of the Commonwealth's 21-cent gasoline tax. Certain independent
authorities and agencies within the Commonwealth are statutorily authorized to
issue debt for which the Commonwealth is either directly, in whole or in part,
or indirectly liable. The Commonwealth's liabilities with respect to these bonds
and notes are classified as either (a) Commonwealth-supported debt; (b)
Commonwealth-guaranteed debt; or (c) indirect obligations. Indirect obligations
consist of (i) obligations of the Commonwealth to fund capital reserve funds
pledged to certain Massachusetts Housing Finance Agency bonds, (ii) the
obligation of the Commonwealth, acting through the Higher Education Coordinating
Council ("HECC"), to fund debt service, solely from moneys otherwise
appropriated to HECC, on certain community college program bonds issued by the
Massachusetts Health and Educational Facilities Authority, (iii) the obligation
of the Commonwealth, acting through the Executive Office of Public Safety
("EOPS"), to fund debt service from amounts appropriated by the Legislature to
EOPS, on certificates of participation issued to finance the new Plymouth County
Correctional Facility, and (iv) the obligation of the Commonwealth to make lease
payments from amounts appropriated by the Legislature with respect to the
Massachusetts Information Technology Center in the city of Chelsea,
Massachusetts. In addition, the Commonwealth has liabilities under certain
tax-exempt capital leases. Commonwealth-guaranteed debt consists of certain
liabilities arising out of the Commonwealth's guarantees of the bonds of the two
higher education building authorities and certain bond anticipation notes of the
Massachusetts Turnpike Authority. Commonwealth-supported debt arises from
statutory requirements from payments by the Commonwealth with respect to debt
service of the Massachusetts Bay Transportation Authority (including the Boston
Metropolitan District), the Massachusetts Convention Center Authority, the
Massachusetts Government Land Bank, the Steamship Authority and certain regional
transit authorities. Hence, the Commonwealth's fiscal condition could adversely
affect the market values and marketability of, or result in default in payment
on, obligations of certain authorities and agencies.
Local Governments. Proposition 2 1/2, an initiative petition adopted by the
voters of the Commonwealth of Massachusetts on November 4, 1980, constrains
levels of property taxation and limits the charges and fees imposed on
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cities and towns by certain governmental entities, including county governments.
At the time Proposition 2 1/2 was enacted, many cities and towns had property
tax levels in excess of the limit and were therefore required to roll back
property taxes with a concurrent loss of revenues. While many communities have
responded to the limits of Proposition 2 1/2 through statutorily permitted
overrides and exclusions (such as exclusion of debt service on specific bonds
and notes), Proposition 2 1/2 has and will continue to restrain significantly
the ability of cities and towns to pay for local services, including certain
debt service. To mitigate the impact of Proposition 2 1/2 on local programs and
services since 1980, the Commonwealth has increased payments to its cities,
towns and regional school districts.
A statute adopted by voter initiative petition in November, 1990,
regulates the distribution of Local Aid to cities and towns. Direct Local Aid
decreased from $2.937 billion in fiscal 1990 to $2.360 billion in fiscal 1992;
increased to $2.547 billion in fiscal 1993 and increased to $2.727 billion in
fiscal 1994. Fiscal 1995 expenditures for direct Local Aid were $2.976 billion.
Fiscal 1996 expenditures for direct Local Aid were $3.246 billion. Fiscal 1997
expenditures for direct Local Aid were $3.534 billion, which is approximately
8.87% above fiscal 1996 level. Fiscal 1998 expenditures for direct Local Aid
were $3.904 billion. The estimated local aid spending for fiscal 1999 is $4.217
billion. It is estimated that fiscal 2000 expenditures will total $4.456
billion. Under the November, 1990 law, new Local Aid distribution formulas would
have called for a substantial increase in direct Local Aid in fiscal 1992, and
would call for such an increase in fiscal 1993 and in subsequent years. Local
Aid payments explicitly remain subject to annual appropriation, and fiscal 1992,
1993, 1994, 1995, 1996 and 1997 appropriations for Local Aid did not meet the
levels set forth in the initiative law. Reductions in, failure to fund or delays
in the payment of Local Aid may create financial difficulties for certain
municipalities or other local government entities.
Medicaid. The Medicaid program provides health care to low-income children and
families, the disabled and the elderly. The program, which is administered by
the Division of Medical Assistance (an agency within the Executive Office of
Health and Human Services), is 50% funded by federal reimbursements.
During fiscal years 1993, 1994, 1995, 1996, 1997 and 1998 Medicaid
expenditures were $3.151 billion, $3.313 billion, $3.398 billion, $3.416
billion, $3.482 and $3.821 billion, respectively. The average annual growth rate
from fiscal 1992 to fiscal 1996 was 3.9%, compared to an average annual growth
of approximately 17% between fiscal 1987 and fiscal 1991. There was virtually no
growth from fiscal 1995 to fiscal 1996 and fiscal 1996 to fiscal 1997. There was
a 9.11% increase from fiscal 1997 to fiscal 1998. The Executive Office for
Administration and Finance estimates that fiscal 1999 Medicaid expenditures will
be approximately $4.036 billion, while the projection for fiscal 2000 is
approximately $4.184 billion. The decrease in the rate of growth after 1991 is
due to a number of savings and cost control initiatives that the Division of
Medical Assistance continues to implement and refine, including managed care,
utilization review and the identification of third party liabilities.
Fiscal 1999 is projected by the Executive Office for Administration and
Finance to be the sixth year with no need for supplemental Medicaid
appropriations for current year expenses. Decreased reliance on supplemental
appropriations reflects an effective management of Medicaid expenditures by the
Commonwealth. Prior to fiscal 1994, substantial Medicaid expenditures were
provided through supplemental appropriations because program requirements
consistently exceeded initial appropriations. In addition, substantial amounts
have been required to cover retroactive settlement of provider payments.
Medicaid expenditures for fiscal 1992 of $2.818 billion included $50.0 million
for prior year provider settlements. Fiscal 1994 and fiscal 1995 Medicaid
expenditures included a total of approximately $123.0 million in retroactive
rate settlements funded through the final fiscal 1994 supplemental budget to pay
pre-1992 liabilities to hospitals and nursing homes. Fiscal 1996 expenditures
included $9.4 million for final settlement of these hospital and nursing home
liabilities. The Executive Office for Administration and Finance estimates that
all current Medicaid costs as well as all remaining prior year bills will be
covered within the current appropriation for fiscal 1999.
Pensions. The Commonwealth is responsible for the payment of pension benefits
for state employees and school teachers throughout the state and for the
cost-of-living increases payable to local government retirees. In 1988, the
Commonwealth adopted a funding schedule under which it is required to fund
future pension liabilities currently and to amortize the accumulated unfunded
liabilities over 40 years. Since the adoption of this schedule, the amount of
the unfunded liability has been reduced significantly. Total pension
expenditures have increased at an average annual rate of 8% per year, rising
from $751.5 million in fiscal 1992 to $1.005 billion in fiscal 1996. Total
pension expenses include the costs associated with an early retirement program
for elementary and secondary school teachers mandated by the 1993 education
reform legislation. In fiscal 1998, the anticipated pension expenditure is
$1.064 billion, a decrease of 4.0% over fiscal 1997 costs of $1.069 billion and
a further decrease of $93.88 million is expected in fiscal 1999. In fiscal 1996,
a number of reform measures affecting pensions were enacted into law. Among the
most notable were a measure consolidating the assets of the state employees' and
teachers' retirement systems into a single investment fund and another that will
reform the disability pension system.
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When-Issued Securities. Each Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer and
no interest accrues to the purchaser. To the extent that assets of a Fund are
not invested prior to the settlement of a purchase of securities, a Fund will
earn no income; however, it is intended that a Fund will be fully invested to
the extent practicable and subject to the policies stated herein. When-issued or
forward delivery purchases are negotiated directly with the other party, and are
not traded on an exchange. While when-issued or forward delivery securities may
be sold prior to the settlement date, it is intended that a Fund will purchase
such securities with the purpose of actually acquiring them unless a sale
appears desirable for investment reasons. At the time a Fund makes the
commitment to purchase a security on a when-issued or forward delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. Each Fund does not believe that a Fund's net asset value or
income will be adversely affected by its purchase of securities on a when-issued
or forward delivery basis. Each Fund will not enter into such transactions for
leverage purposes.
Stand-by Commitments. Massachusetts Tax Free Fund, subject to the receipt of any
required regulatory authorization, may acquire "stand-by commitments," which
will enable the Fund to improve its portfolio liquidity by making available same
day settlements on portfolio sales (and thus facilitate the payment of same day
payments of redemption proceeds in federal funds). The Fund may enter into such
transactions subject to the limitations in the rules under the Investment
Company Act of 1940, as amended (the "1940 Act"). A stand-by commitment is a
right acquired by the Fund, when it purchases a municipal obligation from a
broker, dealer or other financial institution ("seller"), to sell up to the same
principal amount of such securities back to the seller, at the Fund's option, at
a specified price. Stand-by commitments are also known as "puts." The Fund's
investment policies permit the acquisition of stand-by commitments solely to
facilitate portfolio liquidity. The exercise by the Fund of a stand-by
commitment is subject to the ability of the other party to fulfill its
contractual commitment.
Stand-by commitments acquired by the Fund will have the following
features: (1) they will be in writing and will be physically held by the Fund's
custodian, State Street Bank and Trust Company; (2) the Fund's rights to
exercise them will be unconditional and unqualified; (3) they will be entered
into only with sellers which in the Adviser's opinion present a minimal risk of
default; (4) although stand-by commitments will not be transferable, municipal
obligations purchased subject to such commitments may be sold to a third party
at any time, even though the commitment is outstanding; and (5) their exercise
price will be (i) the Fund's acquisition cost (excluding the cost, if any, of
the stand-by commitment) of the municipal obligations which are subject to the
commitment (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date. The Fund expects to refrain from exercising a stand-by commitment in the
event that the amount receivable upon exercise of the stand-by commitment is
significantly greater than the then current market value of the underlying
municipal obligations, determined as described below under "Net Asset Value," in
order to avoid imposing a loss on a seller and thus jeopardizing the Fund's
business relationship with that seller.
The Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by the Fund in either manner for outstanding stand-by commitments will
not exceed 1/2 of 1% of the value of the total assets of the Fund calculated
immediately after any stand-by commitment is acquired. If the Fund pays
additional consideration for a stand-by commitment, the yield on the security to
which the stand-by commitment relates will, in effect, be lower than if the Fund
had not acquired such stand-by commitment.
It is difficult to evaluate the likelihood of use or the potential
benefit of a stand-by commitment. Therefore, it is expected that the Trustees
will determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where the Fund has paid for a stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held.
Management understands that the Internal Revenue Service (the "IRS")
has issued a revenue ruling to the effect that, under specified circumstances, a
registered investment company will be the owner of tax-exempt municipal
obligations acquired subject to a put option. The IRS has also issued private
letter rulings to certain taxpayers (which do not serve as precedent for other
taxpayers) to the effect that tax-exempt interest received by a regulated
investment
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company with respect to such obligations will be tax-exempt in the hands of the
company and may be distributed to its shareholders as exempt-interest dividends.
The IRS has subsequently announced that it will not ordinarily issue advance
ruling letters as to the identity of the true owner of property in cases
involving the sale of securities or participation interests therein if the
purchaser has the right to cause the security, or the participation interest
therein, to be purchased by either the seller or a third party. The Fund intends
to take the position that it is the owner of any municipal obligations acquired
subject to a stand-by commitment and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the IRS will agree with such position in any particular case.
There is no assurance that stand-by commitments will be available to the Fund
nor has the Fund assumed that such commitments would continue to be available
under all market conditions.
Third Party Puts. Each Fund may also purchase long-term fixed rate bonds that
have been coupled with an option granted by a third party financial institution
allowing a Fund at specified intervals to tender (or "put") the bonds to the
institution and receive the face value thereof (plus accrued interest). These
third party puts are available in several different forms, may be represented by
custodial receipts or trust certificates and may be combined with other features
such as interest rate swaps. A Fund receives a short-term rate of interest
(which is periodically reset), and the interest rate differential between that
rate and the fixed rate on the bond is retained by the financial institution.
The financial institution granting the option does not provide credit
enhancement, and in the event that there is a default in the payment of
principal or interest or downgrading of a bond to below investment grade or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to a Fund will be that of holding a long-term bond. A Fund may be
assessed "tender fees" for each tender period at a rate equal to the difference
between the bond's fixed coupon rate and the rate, as determined by a
remarketing or similar agent, that would cause the bond coupled with the option
to trade at par on the date of such determination.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. Each Fund intends to take
the position that it is the owner of any municipal obligation acquired subject
to a third-party put, and that tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt in its hands. There is no assurance
that the IRS will agree with such position in any particular case. Additionally,
the federal income tax treatment of certain other aspects of these investments,
including the treatment of tender fees and swap payments, in relation to various
regulated investment company tax provisions is unclear. However, the Adviser
intends to manage a Fund's portfolio in a manner designed to minimize any
adverse impact from these investments.
Variable Rate Demand Instruments. Each Fund may purchase variable rate demand
instruments that are tax-exempt municipal obligations providing for a periodic
adjustment in the interest rate paid on the instrument according to changes in
interest rates generally. These instruments also permit the Funds to demand
payment of the unpaid principal balance plus accrued interest upon a specified
number of days' notice to the issuer or its agent.
Municipal Lease Obligations 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
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determining the liquidity of municipal lease obligations and participation
interests, the Adviser will consider a variety of factors including: (1) the
willingness of dealers to bid for the security; (2) the number of dealers
willing to purchase or sell the obligation and the number of other potential
buyers; (3) the frequency of trades or quotes for the obligation; and (4) the
nature of the marketplace trades. In addition, the Adviser will consider factors
unique to particular lease obligations and participation interests affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by a Fund.
Each Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. Each Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Adviser, the
interest from such participations is exempt from regular federal income tax and
Massachusetts state income tax.
Illiquid Securities. Each Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities" or "not readily
marketable," i.e., securities which cannot be sold to the public without
registration under the 1933 Act or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale.
Generally speaking, illiquid securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. A Fund may be deemed to be an "underwriter" for
purposes of the 1933 Act when selling restricted securities to the public, and
in such event the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading.
Repurchase Agreements. Massachusetts Tax Free Fund may enter into repurchase
agreements with any member bank of the Federal Reserve System or any
broker-dealer which is recognized as a reporting government securities dealer if
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
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price. However, if the market value of the Obligation subject to the repurchase
agreement becomes less than the repurchase price (including interest), the Fund
will direct the seller of the Obligation to deliver additional securities so
that the market value of all securities subject to the repurchase agreement will
equal or exceed the repurchase price. It is possible that the Fund will be
unsuccessful in seeking to enforce the seller's contractual obligation to
deliver additional securities.
Reverse Repurchase Agreements. Each Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
will maintain a segregated account, as described under "Use of Segregated and
Other Special Accounts" in connection with outstanding reverse repurchase
agreements. Reverse repurchase agreements are deemed to be borrowings subject to
the Fund's investment restrictions applicable to that activity. The Fund will
enter into a reverse repurchase agreement only when the Adviser believes that
the interest income to be earned from the investment of the proceeds of the
transaction will be greater than the interest expense of the transaction. There
is no current intention to invest more than 5% of the Fund's net assets in
reverse repurchase agreements.
Indexed Securities. Each Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which
a Fund may invest in several respects. First, the interest rate or, unlike other
debt securities, the principal amount payable at maturity of an indexed security
may vary based on changes in one or more specified reference instruments, such
as an interest rate compared with a fixed interest rate or the currency exchange
rates between two currencies (neither of which need be the currency in which the
instrument is denominated). The reference instrument need not be related to the
terms of the indexed security. For example, the principal amount of a U.S.
dollar denominated indexed security may vary based on the exchange rate of two
foreign currencies. An indexed security may be positively or negatively indexed;
that is, its value may increase or decrease if the value of the reference
instrument increases. Further, the change in the principal amount payable or the
interest rate of an indexed security may be a multiple of the percentage change
(positive or negative) in the value of the underlying reference instrument(s).
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 for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the Fund's portfolio, or enhancing 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.
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 instruments, purchase and sell
futures contracts and options thereon, and enter into various 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 the Funds' net assets are required to be
invested in tax-exempt municipal securities, and as limited by the Funds' other
investment restrictions) to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Funds' portfolio
resulting from securities markets fluctuations, to protect the Funds' unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Funds' portfolio, or to establish a position in the derivatives markets
as a 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 Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Funds will comply with applicable regulatory requirements
when implementing these strategies,
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techniques and instruments. Strategic Transactions will not be used to alter the
fundamental investment purposes and characteristics of the Funds and each Fund
will segregate assets (or as provided by applicable regulations, enter into
certain offsetting positions) to cover its obligations under options, futures
and swaps to limit leveraging of a Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of options and futures transactions entails certain other risks. In particular,
the variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of a Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of that Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, a Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.
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),
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in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the Counterparty to sell the option back to a Fund at a formula
price within seven days. A Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing.
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 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 and for duration
management, and for risk management and return enhancement, 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 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
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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 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 for bona fide hedging, risk management (including duration management) or
other portfolio management and return enhancement purposes. Typically,
maintaining a futures contract or selling an option thereon requires a Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of a Fund. If a Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
Each Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of a Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Fund may enter are interest rate and index and other 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 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
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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 each Fund will
segregate assets (or enter into offsetting positions) to cover its obligations
under swaps, 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 reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
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(6) purchase physical commodities or contracts relating to
physical commodities; or
(7) make loans except as permitted under the 1940 Act, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
In addition, as a matter of fundamental policy, each of Massachusetts
Tax Free Fund and Massachusetts Limited Term Tax Free Fund will:
(8) have at least 80% of its net assets invested in municipal
securities of issuers located in Massachusetts and other
qualifying issuers (including Puerto Rico, the U.S. Virgin
Islands and Guam) during periods of normal market conditions.
As a matter of nonfundamental policy, each of Massachusetts Limited
Term Tax Free Fund and Massachusetts Tax Free Fund may not:
(i) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(ii) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(iii) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(iv) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(v) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(vi) lend portfolio securities in an amount greater than 5% of its
total assets.
PURCHASES
(See "Transaction information," "Purchases" and "Buying and selling
shares" in the Funds' prospectus.)
Additional Information About Opening an Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
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 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 bank or
trust company from which the wire will be sent, the exact registration of the
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new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
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 the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the fee to be paid
to the Fund) for any non-fiduciary/non-custodial account
without an automatic investment plan (AIP) in place and a
balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer 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. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
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 established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. 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 the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your
23
<PAGE>
call. QuickBuy requests received after the close of regular trading on the
Exchange will begin their processing and be purchased at the net asset value
calculated the following business day. If you purchase shares by QuickBuy and
redeem them within seven days of the purchase, the Fund may hold the redemption
proceeds for a period of up to seven business days. If you purchase shares and
there are insufficient funds in your bank account the purchase will be canceled
and you will be subject to any losses or fees incurred in the transaction.
QuickBuy transactions are not available for most retirement plan accounts.
However, QuickBuy transactions are available for Scudder IRA accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The 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 the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
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 Trust 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.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the 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.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which 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 the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
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<PAGE>
Share Certificates
Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
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
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund'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 may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The Board of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
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 Fund reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Fund with a tax identification number
during the 30-day notice period.
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 personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
(See "Transaction information" and "Buying and selling shares" 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.
25
<PAGE>
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.
(a) NEW INVESTORS wishing to establish telephone redemption to a
pre-designated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit Sharing, Scudder 401(k) and Scudder
403(b) Plan holders) who wish to establish telephone
redemption to a pre-designated bank account or who want to
change the bank account previously designated to receive
redemption payments should either return a Telephone
Redemption Option Form (available upon request) or send a
letter identifying the account and specifying the exact
information to be changed. The letter must be signed exactly
as the shareholder's name(s) appear on the account. An
original signature and an original signature guarantee are
required for each person in whose name the account is
registered.
Telephone redemption is not available with respect to shares held in
retirement accounts.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be made by Federal Reserve Bank wire to the bank
account designated on the application unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5.00
charge for each wire redemption.
Note: Investors designating that a savings bank receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their banks and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
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<PAGE>
The Trust employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Trust does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Trust will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of a Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders that wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. The Funds will not be liable
for acting upon instructions communicated by telephone that they reasonably
believe to be genuine.
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within five days after receipt by the Transfer Agent of a request for
redemption that complies with the above requirements. Delays in payment of more
than seven business days of payment for shares tendered for repurchase or
redemption may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those of
regular accounts. For more information call 1-800-225-5163.
Redemption by Checkwriting
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
"Checkwriting" procedure.
27
<PAGE>
Redemption-in-Kind
Each Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by a
Fund and valued as they are for purposes of computing a Fund's net asset value
(a redemption-in-kind). If payment is made in securities, a shareholder may
incur transaction expenses in converting these securities into cash.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive, in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed or repurchased may be more or less than the shareholder's cost
depending on the net asset value at the time of redemption or repurchase. The
Fund does not impose a redemption or repurchase charge although a wire charge
will be charged for redemption proceeds wired to an investor's bank account.
Redemption of shares, including an exchange into another Scudder fund and
redemptions by Checkwriting, 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 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.
FEATURES AND SERVICES OFFERED BY THE FUNDS
The No-Load 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.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers 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.
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.
28
<PAGE>
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder pure no-load fund over investing the same amount
in a load fund that collects an 8.50% front-end load, a load fund that collects
only a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25%
12b-1 and/or service fee. The hypothetical figures in the chart show the value
of an account assuming a constant 10% rate of return over the time periods
indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
====================================================================================================================
Scudder No-Load Fund with
YEARS No-Load Fund 8.50% Load Fund Load Fund with 0.75% 0.25% 12b-1
12b-1 Fee Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. is
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 that 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.
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<PAGE>
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "Purchases" or "Exchanges and Redemptions" in the Funds'
prospectus.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights.
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. 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.
30
<PAGE>
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income
through investment primarily in investment-grade corporate debt
securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
32
<PAGE>
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
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.
- ------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
33
<PAGE>
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
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 EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
- ------------------------
*** Only the International Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
34
<PAGE>
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities
(including American Depository Receipts) of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor Relations; and easy telephone
exchanges into other Scudder funds. Certain Scudder funds or classes thereof may
not be available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Transaction information," "Purchases" and "Buying and selling
shares" in the Funds' prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plans. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Automatic Withdrawal Plan
Non-retirement plan shareholders who currently own or purchase $10,000
or more of shares of a Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount,
35
<PAGE>
fixed share amount, percent of account value or declining balance. The Plan
provides for income dividends and capital gains distributions, if any, to be
reinvested in additional shares. Shares are then liquidated as necessary to
provide for withdrawal payments. Since the withdrawals are in amounts selected
by the investor and have no relationship to yield or income, payments received
cannot be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Trust or its agent on written notice, and will be terminated
when all shares of the Fund under the Plan have been liquidated or upon receipt
by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Cash Management System -- Group Sub-Accounting Plan for Trust Accounts, Nominees
and Corporations
To minimize record-keeping by fiduciaries and corporations,
arrangements have been made with the Transfer Agent to offer a convenient group
sub-accounting and dividend payment system to bank trust departments and others.
Debt obligations of banks which utilize the Cash Management System are not given
any preference in the acquisition of investments for a Fund.
In its discretion, a Fund may accept minimum initial investments of
less than $2,500 as part of a continuous group purchase plan by fiduciaries and
others (e.g., brokers, bank trust departments, employee benefit plans) provided
that the average single account in any one Fund in the group purchase plan will
be $2,500 or more. A Fund may also wire all redemption proceeds where the group
maintains a single designated bank account.
Shareholders who withdraw from the group purchase plan through which
they were permitted to initiate accounts under $2,500 will be subject to the
minimum account restrictions described under "EXCHANGES AND REDEMPTIONS -- Other
Information."
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of investment program may be suitable for
various investment goals such as, but not limited to, college planning or saving
for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
36
<PAGE>
(See "Distributions" in the Funds' prospectus.)
Each Fund will follow the practice of distributing substantially all,
and in no event less than 90%, of its taxable and tax-exempt net investment
income (defined under "ADDITIONAL INFORMATION -- Glossary") and any excess of
net realized short-term capital gains over net realized long-term capital
losses. Each Fund may follow the practice of distributing the entire excess of
net realized long-term capital gains over net realized short-term capital
losses. However, if it appears to be in the best interest of a Fund and its
shareholders, a Fund may retain all or part of such gain for reinvestment.
Dividends will be declared daily and distributions of net investment
income will be made monthly. Any dividend declared in October, November, or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Distributions of net
short-term and net long-term capital gains realized during each fiscal year, if
any, will be made annually within three months after the end of each Fund's
fiscal year end. An additional distribution may also be made (or treated as
made) in November or December if necessary to avoid the excise tax enacted by
the Tax Reform Act of 1986 (See "TAXES," below). Both types of distributions
will be made in shares of a Fund and confirmations will be mailed to each
shareholder unless a shareholder has elected to receive cash, in which case a
check will be sent.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Fund issues to each shareholder a statement of the
federal income tax status of all distributions, including a statement of the
percentage of the prior calendar year's distributions which a Fund has
designated as tax-exempt and the percentage of such tax-exempt distributions
treated as a tax-preference item for purposes of the alternative minimum tax.
PERFORMANCE INFORMATION
(See "Financial highlights" 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 Fund's fiscal year end. 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 returns of Scudder Massachusetts Limited Term
Tax Free Fund for the one year period ended October 31, 1998, and life of the
Fund(1) are 5.59% and 4.88%.
The average annual total returns of Scudder Massachusetts Tax Free Fund
for the one, five and ten year periods ended March 31, 1998 were 9.82%, 6.82%
and 8.49%, respectively.
(1) For the period beginning February 15, 1994 (commencement of
operations).
37
<PAGE>
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
five year period and life of the Fund would have been lower.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect the change in the price of the Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such period,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
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, 1998 the cumulative total returns of Massachusetts
Limited Term Tax Free Fund for the one year period and life of the Fund(1) are
5.59% and 25.11% 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,
five and ten year periods ended March 31, 1998 were 9.82%, 39.08% and 125.87%,
respectively. If the Adviser had not maintained Massachusetts Tax Free Fund
expenses and had imposed a full management fee, the cumulative total return for
the five year period and life of the Fund would have been lower.
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
SEC Yield
Yield is the net annualized SEC yield based on a specified 30-day (or
one month) period assuming a semiannual compounding of income. Yield, sometimes
referred to as the Fund's "SEC yield," is calculated by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
a = Dividends and interest earned during the
period including the amortization of
market premium or accretion of market
discount.
b = Expenses accrued for the period (net of
reimbursements).
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = The maximum offering price per share on the
last day of the period.
The 30-day net-annualized SEC yield of Massachusetts Limited Term Tax
Free Fund for the period ended October 31, 1998 was 3.06%.
The 30-day net-annualized SEC yield of Massachusetts Tax Free Fund for
the period ended March 31, 1998 was 4.19%.
38
<PAGE>
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 46.85% would need to
earn a taxable yield of 5.76% to receive after-tax income equal to the 3.06%
tax-free yield of Massachusetts Limited Term Tax Free Fund for the 30-day period
ended October 31, 1998. Taxpayers with a federal tax rate of 36% and an
effective combined marginal tax rate of 46.85% would need to earn a taxable
yield of 7.88% to receive after-tax income equal to the 4.19% tax-free yield of
Massachusetts Tax Free Fund for the 30-day period ended on March 31, 1998.
Quotations of each Fund's performance are historical, show the
performance of a hypothetical investment and are not intended to indicate future
performance. Performance of a Fund will vary based on changes in market
conditions and the level of each Fund's expenses. An investor's shares, when
redeemed, may be worth more or less than their original cost.
Investors should be aware that the principal of each Fund is not
insured.
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.
39
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a Taxable
Investment Would Have to Earn*:
- --------------------------------------------------------------------------------------------------------------------------
1998 Taxable Combined Marginal Tax 5% 7% 9%
Income: Rate:
- --------------------------------------------------------------------------------------------------------------------------
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 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 of the table in order
to achieve an after-tax yield on a comparable tax-exempt security.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
40
<PAGE>
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
41
<PAGE>
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
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.
42
<PAGE>
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Investment adviser" in the Funds' prospectus.)
Each Fund is a non-diversified series of Scudder State Tax Free Trust.
The Trust is a Massachusetts business trust established under a Declaration of
Trust dated May 25, 1983. Such Declaration of Trust was amended and restated on
December 8, 1987. Its authorized capital consists of an unlimited number of
shares of beneficial interest of $0.01 par value. The shares are currently
divided into six series. The other series of the Trust are: Scudder New York Tax
Free Fund, Scudder New York Tax Free Money Fund, Scudder Ohio Tax Free Fund and
Scudder Pennsylvania Tax Free Fund. The Trustees have the authority to issue
more series of shares and to designate the relative rights and preferences as
between the different series. Each share of each Fund has equal rights with each
other share of that Fund as to voting, dividends and liquidation. Shareholders
have one vote for each share held on matters on which they are entitled to vote.
All shares issued and outstanding will be fully paid and non-assessable by the
Trust, and redeemable as described in this Statement of Additional Information
and in the Funds' prospectus.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with its equitable share of the
general liabilities of the Trust, as determined by the Trustees. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or
43
<PAGE>
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 "Investment adviser" in the Funds' prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc.,
Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway
Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder Tax Free
Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund, Scudder
Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil Fund, Inc.,
The Korea Fund, Inc., The Japan Fund, Inc. and Scudder Spain and Portugal Fund,
Inc. Some of the foregoing companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
44
<PAGE>
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) 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.
The transaction between Scudder and Zurich resulted in the assignment
of each Funds' investment management agreement with Scudder, the agreements were
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, new investment management agreements
between the Funds and the Adviser were approved by the Funds' Trustees. At the
special meeting of the Funds' shareholders held on October 24, 1997, the
shareholders also approved proposed new investment management agreements. The
new investment management agreements (the "1997 Agreements") became effective as
of December 31, 1997 and were in effect for an initial term ending on September
30, 1998. The Agreements are in all material respects on the same terms as the
previous investment management agreements which they supersede. The Agreements
incorporate conforming changes which promote consistency among all of the funds
advised by the Adviser and which permit ease of administration.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Funds' existing investment
management agreements with Scudder Kemper were deemed to have been assigned and,
therefore, terminated. The Board has approved new investment management
agreements (the "Agreements") with Scudder Kemper, which are substantially
identical to the current investment management agreements, except for the date
of execution and termination. The agreements became effective September 7, 1998,
upon the termination of the then current investment management agreements and
were approved at a shareholder meeting held in December 1998.
The Agreements dated September 7, 1998 were approved by the Trustees on
August 6, 1998 and ratified on September 15, 1998. The Agreements will continue
in effect until September 30, 1999 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 a vote of the Trust's Trustees or of a
majority of the outstanding voting securities of the Funds. The Agreements may
be terminated at any time without payment of penalty by either party on sixty
days' notice and automatically terminates in the event of its assignment.
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<PAGE>
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, 1996, 1997 and 1998 pursuant to these agreements, the
investment management fees incurred by Massachusetts Limited Term Tax Free Fund
were $231,096, $302,455 and $466,504, respectively. Had the Adviser imposed a
full investment management fee for the fiscal years ended October 31, 1996, 1997
and 1998, the investment management fee would have equaled $370,008, $424,432
and $549,378, respectively.
The Adviser has agreed to maintain the annualized expenses of
Massachusetts Limited Term Tax Free Fund at not more than 0.75% of the average
daily net assets of the Fund until July 31, 1999.
The Agreements provide that if a Fund's expenses, exclusive of taxes,
interest, and extraordinary expenses, exceed specified limits, such excess, up
to the amount of the management fee, will be paid by the Adviser. The Adviser
retains the ability to be repaid by a Fund if expenses fall below the specified
limit prior to the end of the fiscal year. These expense limitation arrangements
can decrease a Fund's expenses and improve its performance. For the fiscal years
ended March 31, 1996, 1997 and 1998, pursuant to these agreements, the
investment management fees incurred by Massachusetts Tax Free Fund were
$1,826,799, $1,933,810 and $2,110,713, respectively, of which $186,239 was
unpaid at March 31, 1998.
Under the Agreements each Fund is responsible for all of its other
expenses, including organization expenses; clerical salaries; fees and expenses
incurred in connection with membership in investment company organizations;
brokers' commissions; payment for portfolio pricing services to a pricing agent,
if any; legal, auditing or accounting expenses; taxes or governmental fees; the
fees and expenses of the Transfer Agent; the cost of preparing share
certificates and any other expenses, including clerical expense, of issuance,
redemption or repurchase of shares of beneficial interest; the expenses of and
fees for registering or qualifying securities for sale; the fees and expenses of
the Trustees of the Trust who are not affiliated with the Adviser; the cost of
preparing and distributing reports and notices to shareholders; and the fees or
disbursements of custodians. The Trust is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto.
Each Agreement further provides that as between each Fund and the
Adviser each Fund will be responsible for all expenses, including clerical
expense, of offer, sale, underwriting and distribution of a Fund's shares only
so long as a Fund employs a principal underwriter to act as the distributor of a
Fund's shares pursuant to an underwriting agreement which provides that the
underwriter will assume such expenses. The Trust's underwriting agreement
provides that the principal underwriter shall pay all expenses of offer and sale
of a Fund's shares except the expenses of preparation and filing of registration
statements under the Securities Act of 1933 and under state securities laws,
issue and transfer taxes, if any, and a portion of the prospectuses used by a
Fund. In the event that a Fund ceases to employ a principal underwriter to act
as the distributor of a Fund's shares, the expenses of distributing a Fund's
shares will be borne by the
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<PAGE>
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.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the Trustees or officers of the Trust may have dealings with
either Fund as principals in the purchase or sale of securities, except as
individual subscribers to or holders of shares of such Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
<S> <C> <C> <C>
Daniel Pierce*+@ (64) President and Managing Director of Scudder Vice President,
Trustee Kemper Investments, Inc. Director and Assistant
Treasurer
47
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
Henry P. Becton, Jr. (55) Trustee President and General Manager, --
WGBH WGBH Educational Foundation
125 Western Avenue
Allston, MA 02134
Dawn-Marie Driscoll (52) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates (consulting firm)
Peter B. Freeman@ (66) Trustee Trustee, Eastern Utilities --
100 Alumni Avenue Associates; Director, Swan Point
Providence, RI 02906 Cemetery; Director, AMICA Mutual
Insurance Co.; Trustee, various
non-family trusts and charitable
institutions; Director, the A.H.
Belo Company
George M. Lovejoy, Jr. (68) Trustee President and Director, Fifty --
50 Congress Street Associates (real estate
Boston, MA 02110 investment trust)
Wesley W. Marple, Jr.@ (67) Trustee Professor of Business --
413 Hayden Hall Administration, Northeastern
360 Huntington Avenue University College of Business
Boston, MA 02115 Administration
Kathryn L. Quirk#@ (46) Trustee, Vice Managing Director of Scudder Senior Vice President,
President, Kemper Investments, Inc. Director and Clerk
Assistant Secretary
Jean C. Tempel (55) Trustee Venture Partner, Internet --
Internet Capital Corp. Capital Corp.
10 Post Office Square
Suite 1325
Boston, MA 02109-4603
Philip G. Condon+ (48) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas W. Joseph+ (59) Vice President Senior Vice President of Scudder Director, Vice
Kemper Investments, Inc. President, Treasurer
and Assistant Clerk
Ann M. McCreary# (42) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Jeremy L. Ragus+ (46) Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
Rebecca Wilson+ (37) Vice President Vice President of Scudder Kemper --
Investments, Inc.
48
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
Thomas F. McDonough+ (52) Vice President, Senior Vice President of Scudder Assistant Clerk
Treasurer and Kemper Investments, Inc.
Secretary
John R. Hebble+ (40) Assistant Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
Caroline Pearson+ (36) Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm), 1989-1997
</TABLE>
* Mr. Pierce and Ms. Quirk are considered by the Trust and its counsel to
be Trustees who are "interested persons" of the Adviser or of each Fund
within the meaning of the Investment Company Act of 1940, as amended.
** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years but not
necessarily in the same capacity.
+ Address: Two International Place, Boston, Massachusetts 02110
# Address: 345 Park Avenue, New York, New York 10154
@ Messrs. Freeman, Marple, Pierce and Ms. Quirk are members of the
Executive Committee of the Trust, which has the power to declare
dividends from ordinary income and distributions of realized capital
gains to the same extent as the Board is so empowered.
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of January 29, 1999, all Trustees and officers of the Trust as a
group owned beneficially (as that term is defined in Section 13(d) under the
Securities Exchange Act of 1934) less than 1% of the outstanding shares on such
date.
Certain accounts for which the Adviser acts as investment adviser owned
406,705 shares in the aggregate, or 5.18% of the outstanding shares of
Massachusetts Limited Term Tax Free Fund on January 29, 1999. The Adviser may be
deemed to be the beneficial owner of such shares, but disclaims any beneficial
ownership in such shares.
Certain accounts for which the Adviser acts as investment adviser owned
2,374,849 shares in the aggregate, or 8.32% of the outstanding shares of
Massachusetts Tax Free Fund on January 29, 1999. The Adviser may be deemed to be
the beneficial owner of such shares, but disclaims any beneficial ownership in
such shares.
As of January 29, 1999, 2,073,985 shares in the aggregate or 7.27% of
the outstanding shares of Massachusetts Tax Free Fund were held in the nominees
of Fiduciary Trust Company. Fiduciary Trust Company may be deemed to be the
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of January 29, 1999, 613,705 shares in the aggregate or 7.83% of the
outstanding shares of Massachusetts Limited Term Tax Free Fund were held in the
nominees of Fiduciary Trust Company. Fiduciary Trust Company may be deemed to be
the beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
To the best of the Trust's knowledge, as of January 29, 1999, no person
owned beneficially more than 5% of the Fund's outstanding shares, except as
stated above.
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<PAGE>
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that each Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by each Fund's independent public accountants and
by independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from each
Fund: an annual trustee's fee of $1,800 for Massachusetts Limited Term Tax Free
Fund and $3,600 for Massachusetts Tax Free Fund; a fee of $75 for attendance at
each board meeting, audit committee meeting, or other meeting held for the
purposes of considering arrangements between the Trust on behalf of each Fund
and the Adviser or any affiliate of the Adviser; $100 for all other committee
meetings and reimbursement of expenses incurred for travel to and from Board
Meetings. No additional compensation is paid to any Independent Trustee for
travel time to meetings, attendance at trustees' educational seminars or
conferences, service on industry or association committees, participation as
speakers at trustees' conferences or service on special trustee task forces or
subcommittees. The Independent Trustee who serves as lead or liason Trustee
receives an additional annual retainer fee of $500 from each Fund. Independent
Trustees do not receive any employee benefits such as pension or retirement
benefits or health insurance. Notwithstanding the schedule of fees, the
Independent Trustees have in the past and may in the future waive a portion of
their compensation. or other activities.
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 1998 from the Trust and from all of Scudder funds as a group.
<TABLE>
<CAPTION>
All Scudder Funds
-----------------
Scudder State Tax Free Paid by
Name Trust(1) the Funds
---- -------- ---------
<S> <C> <C> <C>
Henry P. Becton, $19,039.26 $135,000 (28 funds)
Trustee
Dawn-Marie Driscoll, $21,599.58 $145,000 (28 funds)
Trustee
Peter B. Freeman, $19,324.92 $172,425 (46 funds)
Trustee
George M. Lovejoy, Jr., $19,039.26 $148,600 (29 funds)
Trustee
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<PAGE>
All Scudder Funds
-----------------
Scudder State Tax Free Paid by
Name Trust(1) the Funds
---- -------- ---------
Wesley W. Marple, Jr., $19,039.26 $135,000 (28 funds)
Trustee
Jean C. Tempel, $19,103.58 $135,000 (29 funds)
Trustee
</TABLE>
(1) Scudder State Tax Free Trust consists of six funds: Scudder
Massachusetts Limited Term Tax Free Fund, Scudder Massachusetts Tax
Free Fund, Scudder New York Tax Free Money Fund, Scudder New York Tax
Free Fund, Scudder Ohio Tax Free and Scudder Pennsylvania Tax Free
Fund.
No fees were incurred by the Funds with respect to the alliance with
B.A.T.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
The Trust has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a Massachusetts corporation, which is a subsidiary of
the Adviser, a Delaware corporation. The Trust's underwriting agreement dated
September 7, 1998 will remain in effect until September 30, 1999, and from year
to year thereafter only if its continuance is approved annually by a majority of
the members of the Board of Trustees who are not parties to such agreement or
interested persons of any such party and either by vote of a majority of the
Board of Trustees or a majority of the outstanding voting securities of the
Trust. The underwriting agreement was last approved by the Trustees on August 8,
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.
51
<PAGE>
TAXES
(See "Taxes" in the Funds' prospectus.)
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situation.
Certain political events, including federal elections and future
amendments to federal income tax laws, may affect the desirability of investing
in either Fund.
Federal Taxation
Each fund within the Trust will be separate for investment and
accounting purposes, and will be treated as a separate taxable entity for
federal income tax purposes. Each Fund has elected to be treated as a separate
regulated investment company under Subchapter M of the Internal Revenue Code of
1986 as amended (the "Code") and has qualified as such. Each Fund intends to
continue to qualify in each taxable year as required under the Code in order to
avoid payment of federal income tax at the fund level.
In order to qualify as a regulated investment company, each Fund must
meet certain requirements regarding the source of its income and the
diversification of its assets.
As a regulated investment company qualifying under Subchapter M of the
Code, each Fund is required to distribute to its shareholders at least 90
percent of its taxable net investment income (including net short-term capital
gain in excess of net long-term capital loss) and at least 90 percent of its
tax-exempt net investment income and is not subject to federal income tax to the
extent that it distributes annually all of its taxable net investment income and
net realized capital gains in accordance with the timing requirements of the
Code. Each Fund intends to distribute at least annually substantially all, and
in no event less than 90%, of its taxable and tax-exempt net investment income
and net realized capital gains.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by a Fund, the Fund will elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim his share of federal income taxes paid by a Fund on such gains as
a credit against his own federal income tax liability, and will be entitled to
increase the adjusted tax basis of his Fund shares by the difference between his
pro rata share of such gains and his tax credit.
Each Fund is subject to a 4% non-deductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of a Fund's taxable ordinary income for the calendar
year, at least 98% of the excess of its capital gains over capital losses
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed. Each Fund has adjusted its distribution policies to minimize any
adverse impact from this tax or eliminate its application.
Net investment income is made up of dividends and interest, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward or post-October loss of a fund.
Scudder Massachusetts Tax Free Fund and Massachusetts Limited Term Tax Free Fund
intend to offset realized capital gains by using their capital loss
carryforwards before distributing any gains. In addition, Scudder Massachusetts
Tax Free Fund intends to offset realized capital gains by using its post-October
loss before distributing gains. As of March 31, 1998, Scudder Massachusetts Tax
Free Fund had a net capital loss carryforward of approximately $66,000 which may
be applied against realized capital gains of each succeeding year until fully
utilized or until March 31, 2005, the expiration date, whichever occurs first.
At October 31, 1998, Massachusetts Limited Term Tax Free Fund had a net tax
basis capital loss carryforward of approximately $160,000 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), October 31, 2004 ($115,000)
and October 31, 2005 ($24,000), the respective expiration dates, whichever
occurs first.
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
52
<PAGE>
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations the interest on which is excluded from gross
income under Section 103(a) of the Code. Each Fund intends to satisfy this 50%
requirement in order to permit its distributions of tax-exempt interest to be
treated as such for federal income tax purposes in the hands of its
shareholders. Distributions to shareholders of tax-exempt interest earned by a
Fund for the taxable year are therefore not expected to be subject to regular
federal income tax, although they may be subject to the individual and corporate
alternative minimum taxes described below. Discount from certain stripped
tax-exempt obligations or their coupons, however, may be taxable.
Market discount recognized on a tax-exempt bond is taxable as ordinary
income. A market discount bond is a bond acquired in the secondary market at a
price below its redemption value. Gain on the disposition of a tax-exempt
obligation will be treated as ordinary income (instead of capital gain) to the
extent of accrued market discount.
Since no portion of either Fund's income will be comprised of dividends
from domestic corporations, none of the income distributions of a Fund will be
eligible for the dividends-received deduction available for certain taxable
dividends received by corporations.
Any short-term capital loss realized upon the redemption of shares
within six months of the date of their purchase will be disallowed to the extent
of any tax-exempt dividends received with respect to such shares, although the
period may be reduced under Treasury regulations to be prescribed. All or a
portion of a loss realized upon the redemption of shares may be disallowed to
the extent shares are repurchased (including shares acquired by means of
reinvested dividends) within 30 days before or after such redemption.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of a Fund
have been held by such shareholders. Such distributions to corporate
shareholders of a Fund are not eligible for the dividends-received deduction.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain during such
six-month period with respect to such shares.
Distributions derived from interest which is exempt from regular
federal income tax may subject corporate shareholders to, or increase their
liability under, the corporate alternative minimum tax. A portion of such
distributions may constitute a tax preference item for individual shareholders
and may subject them to, or increase their liability under the 26% and 28%
individual alternative minimum tax, but normally no more than 20% of a Fund's
net assets will be invested in securities the interest on which is such a tax
preference item for individuals.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund issues to its
shareholders a statement of the Federal income tax status of all distributions.
All distributions of taxable or tax-exempt net investment income and net
realized capital gain, whether received in shares or in cash, must be reported
by each shareholder on his or her federal income tax return. Dividends or
capital gains distributions declared and payable to shareholders of record on a
specified date in October, November or December, if any, will be deemed to have
been received by shareholders in December if paid during January of the
following year. Shareholders are also required to report tax-exempt interest.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
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.
53
<PAGE>
Section 147(a) of the Code prohibits exemption from taxation of
interest on certain governmental obligations to persons who are "substantial
users" (or persons related thereto) of facilities financed by such obligations.
Neither Fund has undertaken any investigation as to the users of the facilities
financed by bonds in such Fund's portfolio.
Distributions by each Fund result in a reduction in the net asset value
of a Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder, to the extent it is derived from other than tax-exempt interest, as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which, to the extent it is derived from other than tax-exempt
interest, will nevertheless be taxable to them.
All futures contracts entered into by a Fund and all listed nonequity
options written or purchased by a Fund (including options on futures contracts
and options on securities indices) will be governed by Section 1256 of the Code.
Absent a tax election to the contrary, gain or loss attributable to the lapse,
exercise or closing out of any such position generally will be treated as 60%
long-term and 40% short-term, and on the last trading day of a Fund's fiscal
year, all outstanding Section 1256 positions will be marked to market (i.e.
treated as if such positions were closed out at their closing price on such
day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term.
Positions of each Fund which consist of at least one debt security not
governed by Section 1256 and at least one futures contract or nonequity option
governed by Section 1256 which substantially diminishes a Fund's risk of loss
with respect to such debt security will be treated as a "mixed straddle." Mixed
straddles are subject to the straddle rules of Section 1092 of the Code, the
operation of which may cause deferral of losses, adjustments in the holding
periods of securities and conversion of short-term capital losses into long-term
capital losses. Certain tax elections, however, exist for them which reduce or
eliminate the operation of these rules. Each Fund will monitor its transactions
in options and futures and may make certain tax elections in order to mitigate
the operation of these rules and prevent disqualification of a Fund as a
regulated investment company for federal income tax purposes.
Under the federal income tax law, each Fund will be required to report
to the IRS all distributions of taxable income and capital gains as well as
gross proceeds from the redemption or exchange of Fund shares, except in the
case of certain exempt shareholders. Under the backup withholding provisions of
Section 3406 of the Code, distributions of taxable income and capital gains and
proceeds from the redemption or exchange of the shares of a regulated investment
company are generally subject to withholding of federal income tax at the rate
of 31% in the case of nonexempt shareholders who fail to furnish the investment
company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law. Under a
special exception, distributions of taxable income and capital gains of a Fund
will not be subject to backup withholding if a Fund reasonably estimates that at
least 95% of all of its distributions will consist of tax-exempt interest.
However, in this case, the proceeds from the redemption or exchange of shares
may be subject to backup withholding. Withholding may also be required if a Fund
is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. domestic corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of each Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her.
State Taxation
The Trust is organized as a Massachusetts business trust, and neither
the Trust nor either Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund qualifies as a regulated
investment company.
Individual shareholders of a Fund resident in Massachusetts will not be
subject to Massachusetts personal income tax on distributions received from a
Fund to the extent such distributions constitute either (1) exempt-interest
dividends under Section 852(b)(5) of the Code which a Fund properly identifies
as consisting of interest on tax-exempt
54
<PAGE>
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 (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
55
<PAGE>
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, 1996, 1997 and 1998 were
12.4%, 9.8% and 9.1%, respectively. Massachusetts Tax Free Fund's portfolio
turnover rates for the fiscal years ended March 31, 1996, 1997 and 1998 were
20.9%, 11.51% and 8.4%, respectively. Purchases and sales are made for a Fund's
portfolio whenever necessary in management's opinion, to meet a Fund's
objective.
NET ASSET VALUE
The net asset value per share of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading
(the "Value Time"). The Exchange is scheduled to be closed on the following
holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Net asset value per share is
determined by dividing the value of the total assets of the Fund, less all
liabilities, by the total number of shares outstanding.
Debt securities, other than money market instruments, are valued at
prices supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less, maturing at par, shall be
valued at 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 as of the Value Time. If no such
bid quotation is available, the Adviser may calculate the price of that debt
security, subject to limitations established by the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options , or the most recent asked quotation in the case of written
options . Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options . Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of the Fund's other
portfolio holdings is determined in a manner which, in the discretion of the
Valuation Committee, most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
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<PAGE>
ADDITIONAL INFORMATION
Experts
The Financial Highlights of each Fund included in each Fund's
prospectus and the Financial Statements incorporated by reference in this
Statement of Additional Information have been so included or incorporated by
reference in reliance on the report of PricewaterhouseCoopers LLP, One Post
Office Square, Boston, Massachusetts 02109, independent accountants, and given
on the authority of that firm as experts in accounting and auditing.
PricewaterhouseCoopers LLP is responsible for performing annual audits of the
financial statements and financial highlights of each Fund in accordance with
generally accepted auditing standards and the preparation of federal tax
returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with a Fund's property or the
acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of a Fund's property of any shareholder held
personally liable for the claims and liabilities to which a shareholder may
become subject by reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations.
Ratings of Municipal Obligations
The six highest quality ratings categories of Moody's for municipal
bonds are Aaa, Aa, A, Baa, Ba and B. Bonds rated Aaa are judged by Moody's to be
of the best quality. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. Together with securities rated A and Baa, they comprise
investment grade securities. Moody's states that Aa bonds are rated lower than
the best bonds because margins of protection or other elements make long-term
risks appear somewhat larger than for Aaa municipal bonds. Municipal bonds which
are rated A by Moody's possess many favorable investment attributes and are
considered "upper medium grade obligations." Factors giving security to
principal and interest of A rated municipal bonds are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Securities rated Baa are considered medium grade, with factors
giving security to principal and interest adequate at present but may be
unreliable over any period of time. Such bonds have speculative elements as well
as investment-grade characteristics. Securities rated Ba or below by Moody's are
considered below investment grade, with factors giving security to principal and
interest inadequate and potentially unreliable over any period of time. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small. Such securities are
commonly referred to as "junk" bonds and as such they carry a high margin of
risk.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG-1 are of the best quality, enjoying strong protection by
establishing cash flows of funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG-2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
The six highest quality ratings categories of S&P for municipal bonds
are AAA (Prime), AA (High-grade), A (Good-grade), BBB (Investment-grade) and BB
or B (Below investment-grade). Bonds rated AAA have the highest rating assigned
by S&P to a municipal obligation. Capacity to pay interest and repay principal
is extremely strong. Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only in a small
degree. Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. Bonds rated BBB have an adequate capacity
to pay interest and to repay principal. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds of this category than for bonds of higher rated
categories. Securities rated BB or below by S&P are considered below investment
grade, with factors giving security to principal and interest inadequate and
potentially unreliable over any period of time. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse
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business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. Such securities are commonly
referred to as "junk" bonds and as such they carry a high margin of risk.
S&P's top ratings categories for municipal notes are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The six highest quality ratings categories of Fitch for municipal bonds
are AAA, AA, A, BBB, BB and B. Bonds rated AAA are considered to be investment
grade and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. Bonds rated AA are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated
`AAA'. Because bonds rated in the `AAA' and `AA' categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated `F-1+'. Bonds rated A are considered to be
investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher rates. Bonds rated BBB are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse effects
on these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings. Securities rated BB or below by Fitch are considered below
investment grade, with factors giving security to principal and interest
inadequate and potentially unreliable over any period of time. Such securities
are commonly referred to as "junk" bonds and as such they carry a high margin of
risk.
Commercial Paper Ratings
Commercial paper rated A-1 or better by S&P has the following
characteristics: liquidity ratios are adequate to meet cash requirements;
long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed; the issuer has access to at least two additional
channels of borrowing; and basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances. Typically, the issuer's industry
is well established and the issuer has a strong position within the industry.
The reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
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
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A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types
of securities which evidence a debt.
3. Discount and Premium
A discount (premium) bond is a bond selling in the market at a
price lower (higher) than its face value. The amount of the
market discount (premium) is the difference between market
price and face value.
4. Maturity
The date on which the principal amount of a debt obligation
comes due by the terms of the instrument.
5. Municipal Obligation
Obligations issued by or on behalf of states, territories and
possessions of the United States, their political
subdivisions, agencies and instrumentalities and the District
of Columbia and other issuers, the interest from which is, at
the time of issuance in the opinion of bond counsel for the
issuers, exempt from federal income tax.
6. Net Asset Value Per Share
The value of each share of the Fund for purposes of sales and
redemptions.
7. Net Investment Income
The net investment income of a Fund is comprised of its
interest income, including amortizations of original issue
discounts, less amortizations of premiums and expenses paid or
accrued computed under GAAP.
Other Information
The CUSIP number of Massachusetts Limited Term Tax Free Fund is
811209105.
The CUSIP number of Massachusetts Tax Free Fund is 811184-30-8.
Massachusetts Limited Term Tax Free Fund has a fiscal year ending on
October 31.
Massachusetts Tax Free Fund has a fiscal year ending on March 31.
Portfolio securities of the Funds are held separately, pursuant to a
custodian agreement, by the Funds' Custodian, State Street Bank and Trust
Company.
The firm of Willkie Farr & Gallagher of New York is counsel for the
Trust.
The name "Scudder State Tax Free Trust" is the designation of the
Trustees for the time being under an Amended and Restated Declaration of Trust
dated December 8, 1987, as amended from time to time, and all persons dealing
with a Fund must look solely to the property of that Fund for the enforcement of
any claims against that Fund as neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of a Fund. No Fund of the Trust is liable for the obligations of any
other Fund. Upon the initial purchase of shares, the shareholder agrees to be
bound by the Trust's Declaration of Trust, as amended from time to time. The
Declaration of Trust of the Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts. All persons dealing with a Fund must
look only to the assets of such Fund for the enforcement of any claims against
such Fund as no other series of the Trust assumes any liabilities for
obligations entered into on behalf of that Fund.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net
asset value per share for each Fund. Each Fund pays SFAC an annual fee equal to
0.024% of the first $150 million of average daily net assets, 0.0070% of such
assets in excess of $150 million, 0.004% of such assets in excess of $1 billion,
plus holding and transaction charges for this service. The fee incurred by
Massachusetts Limited Term Tax Free Fund to SFAC for the fiscal year ended
October 31, 1996 was $36,000, for the fiscal year ended October 31, 1997 was
$36,000 and for the fiscal year ended October 31, 1998 was $36,000. For the
fiscal years ended March 31, 1996 and 1997 , the amounts charged to Scudder
Massachusetts Tax Free Fund by
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SFAC amounted to $58,015 and $59,760 , respectively. For the fiscal year ended
March 31, 1998, the amount charged was $63,206, of which $5,531 was unpaid at
March 31, 1998.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer
and dividend-paying agent. Service Corporation also serves as shareholder
service agent. Each Fund pays Service Corporation an annual fee of $25.00 for
each account maintained for a shareholder. The fee incurred by Massachusetts
Limited Term Tax Free Fund to Service Corporation for the fiscal year ended
October 31, 1996 was $36,098, for the fiscal year ended October 31, 1997 was
$41,127 and for the fiscal year ended October 31, 1998 was $43,271, of which
$3,511 was unpaid at October 31, 1998. The fee incurred by Massachusetts Tax
Free Fund to Service Corporation for the years ended March 31, 1996 and 1997
amounted to $184,353 and $188,646 , respectively. For the fiscal year ended
March 31, 1998, the amount charged amounted to $194,865, of which $16,255 was
unpaid at March 31, 1998.
The Funds, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
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 the Report of
Independent Accountants, Financial Highlights and notes to financial statements
in the Annual Report to the Shareholders of the Fund dated October 31, 1998, 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 Semiannual Report to the Shareholders of the Fund
dated September 30, 1998, are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
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