Filed with the Securities and Exchange Commission on June 1, 2000.
File No. 2-84021
File No. 811-3749
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 31
--
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 32
--
Scudder State Tax Free Trust
----------------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
----------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (6l7) 295-1000
--------------
John Millette
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
-----------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/_/ Immediately upon filing pursuant to paragraph (b)
/_/ 60 days after filing pursuant to paragraph (a) (1)
/_/ 75 days after filing pursuant to paragraph (a) (2)
/_/ On __________________ pursuant to paragraph (b)
/X/ On August 1, 2000 pursuant to paragraph (a) (1)
/_/ On __________________ pursuant to paragraph (a) (2) of Rule 485.
If Appropriate, check the following box:
/_/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
SCUDDER
INVESTMENTS(SM)
[LOGO]
--------------------------------------------------------------------------------
BOND/TAX FREE
--------------------------------------------------------------------------------
Scudder State Tax Free
Funds
Scudder New York Tax Free Fund
#042
Scudder California Tax Free Fund
#043
Scudder Massachusetts Tax Free
Fund #012
Prospectus
August 1, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder State Tax Free Funds
How the funds work
2 Scudder New York Tax Free Fund
6 Scudder California Tax Free Fund
10 Scudder Massachusetts Tax Free Fund
14 Other Policies and Risks
15 Who Manages and Oversees the Funds
19 Financial Highlights
How to invest in the funds
23 How to Buy Class S Shares
24 How to Exchange or Sell Class S Shares
25 How to Buy Class AARP Shares
26 How to Exchange or Sell Class AARP
Shares
27 Policies You Should Know About
32 Understanding Distributions and Taxes
35 Additional Information for Class AARP
Shareholders
<PAGE>
How the funds work
These funds invest mainly in municipal bonds and other investments whose income
is expected to be free from most taxes. Each fund is designed for investors who
pay income tax in a particular state.
The funds use various strategies to manage risk and their share prices will
fluctuate.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
You can access all Scudder fund prospectuses online at: www.scudder.com and
aarp.scudder.com
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | SCYTX fund number | 042
Scudder New York Tax Free Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks income that is exempt from New York state and New York City
personal income tax and regular federal income taxes. It does this by investing
at least 80% of net assets in New York municipal securities.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes). They may also include municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and prefer those that cannot be called in before maturity. In
making their buy and sell decisions, the managers typically weigh a number of
factors against each other, from economic outlooks and possible interest rate
movements to changes in supply and demand within the municipal bond market.
Although the managers may adjust the fund's duration (a measure of sensitivity
to interest rates), they generally intend to keep it similar to that of the
Lehman Brothers Municipal Bond Index. Also, while the fund is permitted to use
various types of derivatives (contracts whose value is based on, for example,
indices or securities), the managers don't intend to use them as principal
investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 75% of total assets in securities that are
of the top four grades of credit quality, or else are issued or guaranteed by
the U.S. government.
The fund could put up to 25% of total assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, junk bonds may pay higher yields and have higher volatility and risk of
default.
2 | Scudder New York Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] New York taxpayers who are in a moderate to high tax bracket
and who are looking for current income may want to consider
this fund.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's duration could
make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt fund performance. This risk is
greater with junk bonds. The fact that the fund is not diversified and invests
primarily in securities from a single state increases this risk, because any
factors affecting the state or region, such as economic or fiscal problems,
could affect portfolio securities. For example, a downturn in the financial
industry could bring on a fiscal crisis in New York, which has experienced such
crises before.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
3 | Scudder New York Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how returns of the fund's Class S shares have varied from
year to year, which may give some idea of risk. The table shows average annual
total returns for the fund and a broad-based market index (which, unlike the
fund, does not have any fees or expenses). The performance of both the fund and
the index varies over time. All figures on this page assume reinvestment of
dividends and distributions.
---------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
---------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
`90 `91 `92 `93 `94 `95 `96 `97 `98 '99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: __%
Best Quarter: __%, Q_ ____ Worst Quarter: __%, Q_ ____
---------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/99
---------------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------------
Fund -- Class S __ __ __
---------------------------------------------------------------
Index __ __ __
---------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
4 | Scudder New York Tax Free Fund
<PAGE>
How Much Investors Pay
This fund has no sales charge or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
---------------------------------------------------------------
Class
Fee Table Class S AARP
---------------------------------------------------------------
Shareholder Fees (paid directly from your
investment) None
---------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
---------------------------------------------------------------
Management Fee
---------------------------------------------------------------
Distribution (12b-1) Fee
---------------------------------------------------------------
Other Expenses*
----------------
---------------------------------------------------------------
Total Annual Operating Expenses
---------------------------------------------------------------
* Includes costs of shareholder servicing, custody, and similar expenses,
which may vary with fund size and other factors.
---------------------------------------------------------------
Expense Example
---------------------------------------------------------------
This example helps you compare this fund's expenses to those of other funds. The
example assumes operating expenses above remain the same and that you invested
$10,000, earned 5% annual returns and reinvested all dividends and
distributions. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------
Class S
---------------------------------------------------------------
Class AARP $ $ $ $
---------------------------------------------------------------
5 | Scudder New York Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol | SCTFX fund number | 043
Scudder California Tax Free Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks income that is exempt from California personal and regular
federal income taxes. It does this by investing at least 80% of net assets in
California municipal securities.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes). They may also include municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and prefer those that cannot be called in before maturity. In
making their buy and sell decisions, the managers typically weigh a number of
factors against each other, from economic outlooks and possible interest rate
movements to changes in supply and demand within the municipal bond market.
Although the managers may adjust the fund's duration (a measure of sensitivity
to interest rates), they generally intend to keep it similar to that of the
Lehman Brothers Municipal Bond Index. Also, while the fund is permitted to use
various types of derivatives (contracts whose value is based on, for example,
indices or securities), the managers don't intend to use them as principal
investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 75% of total assets in securities that are
of the top four grades of credit quality, or else are issued or guaranteed by
the U.S. government.
The fund could put up to 25% of total assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, junk bonds may pay higher yields and have higher volatility and risk of
default.
6 | Scudder California Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] California taxpayers who are in a moderate to high tax bracket and who
are looking for current income may want to consider this fund.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's duration could
make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt fund performance. This risk is
greater with junk bonds. The fact that the fund invests primarily in securities
from a single state increases this risk, because any factors affecting the state
or region, such as economic or fiscal problems, could affect portfolio
securities. For example, California residents' high sensitivity to taxes could
make it hard to raise taxes in order to meet obligations.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
7 | Scudder California Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how returns of the fund's Class S shares have varied from
year to year, which may give some idea of risk. The table shows average annual
total returns for the fund and a broad-based market index (which, unlike the
fund, does not have any fees or expenses). The performance of both the fund and
the index varies over time. All figures on this page assume reinvestment of
dividends and distributions.
Total return figures would have been lower if certain expenses hadn't been
capped.
---------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
---------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
`90 `91 `92 `93 `94 `95 `96 `97 `98 '99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: __%
Best Quarter: __%, Q_ ____ Worst Quarter: __%, Q_ ____
---------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/99
---------------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------------
Fund -- Class S __ __ __
---------------------------------------------------------------
Index __ __ __
---------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
8 | Scudder California Tax Free Fund
<PAGE>
How Much Investors Pay
This fund has no sales charge or other shareholder fees. The fund does have
annual operating expenses and as a shareholder you pay them indirectly.
---------------------------------------------------------------
Class
Fee Table Class S AARP
---------------------------------------------------------------
Shareholder Fees (paid directly from your
investment) None
---------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
---------------------------------------------------------------
Management Fee
---------------------------------------------------------------
Distribution (12b-1) Fee
---------------------------------------------------------------
Other Expenses*
----------------
---------------------------------------------------------------
Total Annual Operating Expenses
---------------------------------------------------------------
* Includes costs of shareholder servicing, custody, and similar expenses,
which may vary with fund size and other factors.
---------------------------------------------------------------
Expense Example
---------------------------------------------------------------
This example helps you compare this fund's expenses to those of other funds. The
example assumes operating expenses above remain the same and that you invested
$10,000, earned 5% annual returns and reinvested all dividends and
distributions. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------
Class S
---------------------------------------------------------------
Class AARP $ $ $ $
---------------------------------------------------------------
9 | Scudder California Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
ticker symbol SCMAX fund number 012
Scudder Massachusetts Tax Free Fund
--------------------------------------------------------------------------------
Investment Approach
The fund seeks income that is exempt from Massachusetts personal and regular
federal income taxes. It does this by investing at least 80% of net assets in
Massachusetts municipal securities.
The fund can buy many types of municipal securities of all maturities. These may
include revenue bonds (which are backed by revenues from a particular source)
and general obligation bonds (which are typically backed by the issuer's ability
to levy taxes). They may also include municipal lease obligations and
investments representing an interest in these.
The portfolio managers look for securities that appear to offer the best total
return potential, and prefer those that cannot be called in before maturity. In
making their buy and sell decisions, the managers typically weigh a number of
factors against each other, from economic outlooks and possible interest rate
movements to changes in supply and demand within the municipal bond market.
Although the managers may adjust the fund's duration (a measure of sensitivity
to interest rates), they generally intend to keep it similar to that of the
Lehman Brothers Municipal Bond Index. Also, while the fund is permitted to use
various types of derivatives (contracts whose value is based on, for example,
indices or securities), the managers don't intend to use them as principal
investments.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests at least 75% of net assets in municipal securities of
the top four grades of credit quality.
The fund could put up to 25% of total assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, junk bonds may pay higher yields and have higher volatility and risk of
default.
10 | Scudder Massachusetts Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] Massachusetts taxpayers who are in a moderate to high tax bracket and
who are looking for current income may want to consider this fund.
--------------------------------------------------------------------------------
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices and, in turn, a
fall in the value of your investment. An increase in the fund's duration could
make it more sensitive to this risk.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt fund performance. This risk is
greater with junk bonds. The fact that the fund is not diversified and invests
primarily in securities from a single state increases this risk, because any
factors affecting the state or region, such as economic or fiscal problems,
could affect portfolio securities. For example, the state's technology or
biotech industries could experience a downturn or fail to develop as expected,
hurting the local economy.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of interest rate trends,
credit quality, or other matters
o some derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
o securities that rely on third-party insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
11 | Scudder Massachusetts Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
[ICON] While a fund's past performance isn't necessarily a sign of how it
will do in the future, it can be valuable for an investor to know.
This page looks at fund performance two different ways: year by year
and over time.
--------------------------------------------------------------------------------
The Fund's Track Record
The bar chart shows how returns of the fund's Class S shares have varied from
year to year, which may give some idea of risk. The table shows average annual
total returns for the fund and a broad-based market index (which, unlike the
fund, does not have any fees or expenses). The performance of both the fund and
the index varies over time. All figures on this page assume reinvestment of
dividends and distributions.
Total return figures would have been lower if certain expenses hadn't been
capped.
---------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class S
---------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00 00.00
`90 `91 `92 `93 `94 `95 `96 `97 `98 '99
--------------------------------------------------------------------------------
2000 Total Return as of June 30: __%
Best Quarter: __%, Q_ ____ Worst Quarter: __%, Q_ ____
---------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/99
---------------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------------
Fund -- Class S __ __ __
---------------------------------------------------------------
Index __ __ __
---------------------------------------------------------------
Index: Lehman Brothers Municipal Bond Index, a market value-weighted measure of
municipal bonds issued across the United States.
12 | Scudder Massachusetts Tax Free Fund
<PAGE>
How Much Investors Pay
This fund has no sales charge or other shareholder fees. The fund does have
annual operating expenses and as a shareholder you pay them indirectly.
---------------------------------------------------------------
Class
Fee Table Class S AARP
---------------------------------------------------------------
Shareholder Fees (paid directly from your
investment) None
---------------------------------------------------------------
Annual Operating Expenses (deducted from fund assets)
---------------------------------------------------------------
Management Fee
---------------------------------------------------------------
Distribution (12b-1) Fee
---------------------------------------------------------------
Other Expenses*
----------------
---------------------------------------------------------------
Total Annual Operating Expenses
---------------------------------------------------------------
* Includes costs of shareholder servicing, custody, and similar expenses,
which may vary with fund size and other factors.
---------------------------------------------------------------
Expense Example
---------------------------------------------------------------
This example helps you compare this fund's expenses to those of other funds. The
example assumes operating expenses above remain the same and that you invested
$10,000, earned 5% annual returns and reinvested all dividends and
distributions. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------
Class S
---------------------------------------------------------------
Class AARP $ $ $ $
---------------------------------------------------------------
13 | Scudder Massachusetts Tax Free Fund
<PAGE>
Other Policies and Risks
While the previous pages describe the main points of each fund's strategy and
risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder approval.
However, the policy of investing at least 80% of net assets in municipal
securities for each fund cannot be changed without shareholder approval.
o As a temporary defensive measure, any of these funds could shift up to 100%
of their assets into investments such as money market securities. This
could prevent losses, but would mean that the funds were not pursuing their
goals.
o Scudder Kemper measures credit quality at the time it buys securities,
using independent ratings or, for unrated securities, its own credit
analysis. If a security's credit quality changes, the security will usually
be sold unless the adviser or the Board of Trustees believes this would not
be in the shareholders' best interests.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on a fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (see back cover).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
14 | Other Policies and Risks
<PAGE>
--------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for managing
the funds, takes a team approach to asset management.
--------------------------------------------------------------------------------
Who Manages and Oversees the Funds
The investment adviser
The funds' investment adviser is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds, and currently has more than $290 billion in assets under
management.
Each fund is managed by a team of investment professionals, who individually
represent different areas of expertise and who together develop investment
strategies and make buy and sell decisions. Supporting the fund managers are
Scudder Kemper's many economists, research analysts, traders and other
investment specialists, located in offices across the United States and around
the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each fund. Below are the actual rates paid by each fund for
the 12 months through the most recent fiscal year end, as a percentage of each
fund's average daily net assets.
Fund Name Fee Paid
---------------------------------------------------------------
Scudder New York Tax Free Fund %
---------------------------------------------------------------
Scudder California Tax Free Fund %
---------------------------------------------------------------
Scudder Massachusetts Tax Free Fund %
---------------------------------------------------------------
15 | Who Manages and Oversees the Funds
<PAGE>
The portfolio managers
The following people handle the day-to-day management of each fund in this
prospectus.
Scudder New York Tax Free Fund Scudder Massachusetts Tax Free Fund
Ashton P. Goodfield Philip G. Condon
Lead Portfolio Manager Lead Portfolio Manager
o Began investment career in 1986 o Began investment career in 1978
o Joined the adviser in 1986 o Joined the adviser in 1983
o Joined the fund team in 1999 o Joined the fund team in 1989
Eleanor R. Brennan Rebecca L. Wilson
o Began investment career in 1986 o Began investment career in 1986
o Joined the adviser in 1995 o Joined the adviser in 1986
o Joined the fund team in 1999 o Joined the fund team in 1999
Scudder California Tax Free Fund
Eleanor R. Brennan
Lead Portfolio Manager
o Began investment career in 1986
o Joined the adviser in 1995
o Joined the fund team in 1999
Matthew J. Caggiano
o Began investment career in 1989
o Joined the adviser in 1989
o Joined the fund team in 1999
16 | Who Manages and Oversees the Funds
<PAGE>
The Class AARP
Since its beginning in 1985, the AARP Investment Program from Scudder has been
specially designed to address the needs of people age 50 and over. In keeping
with the organization's mission, AARP's goal is to encourage more of its members
to plan for retirement and beyond. To continue to meet the increasingly diverse
needs and goals of its members, the AARP Investment Program from Scudder has
recently been expanded to offer a wider range of investment options to AARP
members. The Class AARP generally has lower minimum investments, retains its own
identity with separate statements and continues the AARP Investment Program's
commitment to shareholder education.
While AARP takes no part in the investment decisions made by Scudder Kemper,
AARP, through its subsidiary, oversees the Program's service quality and
communications, and AARP provides insight and direction as to what best
represents the interests and concerns of its membership. In addition, AARP is
represented on each fund's Board.
17 | Who Manages and Oversees the Funds
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of each fund's
business. A majority of the Board is not affiliated with Scudder Kemper. The
independent members have primary responsibility for assuring that each fund is
managed in the best interests of its shareholders. The following people comprise
each fund's Board.
<TABLE>
<CAPTION>
Directors Honorary Directors
<S> <C>
Linda C. Coughlin George M. Lovejoy
o Managing Director of Scudder Kemper o President and Director, Fifty
Investments, Inc. Associates (real estate
o President of the fund corporation)
Henry P. Becton, Jr. Wesley W. Marple, Jr.
o President and General Manager, WGBH o Professor of Business
Educational Foundation Administration, Northeastern
University, College of Business
Dawn-Marie Driscoll Administration
o Executive Fellow, Center for Business
Ethics, Bentley College Kathryn L. Quirk
o President, Driscoll Associates o Managing Director of Scudder
(consulting firm) Kemper Investments, Inc.
o Vice President and Assistant
Peter B. Freeman Secretary of the fund
o Corporate director and trustee
Jean C. Tempel
o Venture Partner, Internet Capital
Corp.
</TABLE>
18 | Who Manages and Oversees the Funds
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover).
Scudder New York Tax Free Fund -- Class S
[TABLE TO BE INSERTED]
19 | Financial Highlights
<PAGE>
Scudder California Tax Free Fund -- Class S
[TABLE TO BE INSERTED]
20 | Financial Highlights
<PAGE>
Scudder Massachusetts Tax Free Fund -- Class S
[TABLE TO BE INSERTED]
21 | Financial Highlights
<PAGE>
How to invest in the funds
The following pages tell you how to invest in these funds and what to expect as
a shareholder. If you're investing directly with Scudder, all of this
information applies to you.
If you're investing through a "third party provider" -- for example, a workplace
retirement plan, financial supermarket or financial adviser -- your provider may
have its own policies or instructions, and you should follow those.
<PAGE>
How to Buy Class S Shares
Use these instructions to invest directly with Scudder. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
First investment Additional investments
-----------------------------------------------------------------------------------
<S> <C> <C>
$2,500 or more for regular $100 or more for regular
accounts accounts
$50 or more with an Automatic
Investment Plan
-----------------------------------------------------------------------------------
By mail or o Fill out and sign an o Send a check and a Scudder
express application investment slip to us at the
(see below) appropriate address below
o Send it to us at the
appropriate address, along o If you don't have an
with an investment check investment slip, simply
include a letter with your
name, account number, the
full name of the fund, and
your investment instructions
-----------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
-----------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
-----------------------------------------------------------------------------------
With an automatic -- o To set up regular investments
investment plan from a bank checking account,
call 1-800-SCUDDER
-----------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
-----------------------------------------------------------------------------------
On the Internet o Go to the "funds and prices" o Call 1-800-SCUDDER to ensure
section at www.scudder.com you have enabled electronic
services
o Access and print out an
on-line prospectus and a new o Go to www.scudder.com and
account application register
o Complete and return the o Follow the instructions for
application with your check buying shares with money from
your bank account
-----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
--------------------------------------------------------------------------------
23 | How to Buy Class S Shares
<PAGE>
How to Exchange or Sell Class S Shares
Use these instructions to exchange or sell shares in an account opened directly
with Scudder.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
--------------------------------------------------------------------------------------
<S> <C>
$2,500 or more to open a new Some transactions, including
account ($1,000 for IRAs) most for over $100,000, can
only be ordered in writing; if
$100 or more for exchanges you're in doubt, see page 29
between existing accounts
--------------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
--------------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800- 343-2890 and o Call 1-800- 343-2890 and
follow the instructions follow the instructions
--------------------------------------------------------------------------------------
By mail, Write a letter that includes: Write a letter that includes:
express or fax
(see [below/next o the fund, class, and account o the portfolio, class, and
page) number you're exchanging account number from which you
out of want to sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the name and class of the o your name(s), signature(s),
fund you want to exchange into and address, as they appear
on your account
o your name(s), signature(s),
and address, as they appear o a daytime telephone number
on your account
o a daytime telephone number
--------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
--------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
--------------------------------------------------------------------------------------
On the Internet o Go to www.scudder.com and --
register
o Follow the instructions for
making on-line exchanges
--------------------------------------------------------------------------------------
</TABLE>
24 | How to Exchange or Sell Class S Shares
<PAGE>
How to Buy Class AARP Shares
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more for regular $100 or more for regular
accounts accounts
$500 or more for IRAs $-- or more for IRAs
$50 or more with an Automatic
Investment Plan
--------------------------------------------------------------------------------------
By mail, o Send completed enrollment Send a personalized investment
AARP form and check (payable to slip or short note that
Investment "AARP Investment Program") includes:
Program from
Scudder o For enrollment forms, call o fund name
P.O. Box 2540 1-800-253-2277
Boston, MA o Class AARP
02208-2540
o account number
o check payable to "AARP
Investment Program"
--------------------------------------------------------------------------------------
By wire o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
--------------------------------------------------------------------------------------
By phone -- o Call 1-800-253-2277 for
instructions
--------------------------------------------------------------------------------------
With an automatic o Fill in the information o To set up regular investments
investment plan required on your enrollment from a bank checking account,
form and include a voided call 1-800-253-2277
check
--------------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-253-2277
--------------------------------------------------------------------------------------
On the Internet o Go to the "funds and prices" o Call 1-800-SCUDDER to ensure
section at www.scudder.com you have enabled electronic
services
o Access and print out an
on-line prospectus and a new o Go to www.scudder.com and
account application register
o Complete and return the o Follow the instructions for
application with your check buying shares with money from
your bank account
--------------------------------------------------------------------------------------
</TABLE>
25 | How to Buy Class AARP Shares
<PAGE>
How to Exchange or Sell Class AARP Shares
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
--------------------------------------------------------------------------------------
<S> <C> <C>
$1,000 or more to open a new Some transactions, including
account ($500 for IRAs) most for over $100,000, can
only be ordered in writing; see
$100 or more for exchanges the prospectus for more
between existing accounts information
--------------------------------------------------------------------------------------
By phone o Call 1-800-253-2277 for o Call 1-800-253-2277 for
instructions instructions
--------------------------------------------------------------------------------------
Using Easy-Access o Call 1-800- 631-4636 and o Call 1-800-631-4636 and
Line follow the instructions follow the instructions
--------------------------------------------------------------------------------------
By mail or fax Your instructions should Your instructions should
(see previous include: include:
page)
o your account number o your account number
o names of the fund and class o names of the fund and class
and number of shares or and number of shares or
dollar amount you want to dollar amount you want to
exchange redeem
--------------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from an account,
call 1-800-253-2277
--------------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-253-2277
--------------------------------------------------------------------------------------
On the Internet o Go to www.scudder.com and --
register
o Follow the instructions for
making on-line exchanges
--------------------------------------------------------------------------------------
</TABLE>
26 | How to Exchange or Sell Class AARP Shares
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m.
and 8 p.m. Eastern time on any fund business day by calling
1-800-SCUDDER for Class S and 1-800-253-2277 for Class AARP.
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 4 p.m. Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Scudder Service Corporation, and they have determined that it is a
"good order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Scudder
Service Corporation before they can be processed, you'll need to allow extra
time. A representative of your investment provider should be able to tell you
when your order will be processed.
27 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. Go to www.scudder.com for Class S and
aarp.scudder.com for Class AARP to get up-to-date information, review
balances or even place orders for exchanges.
--------------------------------------------------------------------------------
SAIL(TM), the Scudder Automated Information Line, is available to Class S
shareholders 24 hours a day by calling 1-800-343-2890. You can use SAIL to get
information on Scudder funds generally and on accounts held directly at Scudder.
You can also use it to make exchanges and to sell shares.
Easy-Access Line is available to Class AARP shareholders 24 hours a day by
calling 1-800-631-4636. This automated number provides current information on
each Class AARP of the funds and your account. If you have signed up for
telephone services, you can also use this number to exchange and redeem shares
of the Class AARP.
QuickBuy and QuickSell let you set up a link between a Scudder account and a
bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. To set up QuickBuy or QuickSell on a new account, see the
account application; to add it to an existing account, call 1-800-SCUDDER.
When you call us to sell shares, we may record the call, ask you for certain
information, or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to receive wires, we will deduct a $5 fee from all wires sent from
us to your bank. Your bank may charge its own fees for handling wires. The funds
can only accept wires of $100 or more.
28 | Policies You Should Know About
<PAGE>
Exchanges among Scudder funds are an option for shareholders who bought their
fund shares directly from Scudder and many other investors as well. Exchanges
are a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject purchase orders, for these or
other reasons.
When you want to sell more than $100,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 15 days) or when unusual circumstances prompt the
SEC to allow further delays.
29 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
How the funds calculate share prices
Each fund's share price is its net asset value per share, or NAV. To calculate
NAV, the funds use the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
30 | Policies You Should Know About
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o for Class S shareholders, charge you $10 a year if your account balance
falls below $2,500; for Class S and Class AARP shareholders, close your
account and send you the proceeds if your balance falls below $1,000; in
either case, we will give you 60 days' notice so you can either increase
your balance or close your account (these policies don't apply to
retirement accounts, to investors with $100,000 or more in Scudder fund
shares or in any case where a fall in share price created the low balance)
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash; the fund generally won't make a redemption
in kind unless your requests over a 90-day period total more than $250,000
or 1% of the value of the fund's net assets, whichever is less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
31 | Policies You Should Know About
<PAGE>
--------------------------------------------------------------------------------
[ICON] Because each shareholder's tax situation is unique, it's always a good
idea to ask your tax professional about the tax consequences of your
investments, including any state and local tax consequences.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The funds have a regular schedule for paying out any earnings to shareholders:
o Income dividends: declared daily and paid monthly
o Short-term and long-term capital gains: November or December, or otherwise
as needed
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested.
Buying and selling fund shares will usually have tax consequences for you. Your
sales of shares may result in a capital gain or loss for you; whether long-term
or short-term depends on how long you owned the shares. For tax purposes, an
exchange is the same as a sale.
32 | Understanding Distributions and Taxes
<PAGE>
Dividends from these funds are generally tax free for most shareholders, meaning
that investors can receive them without incurring federal, state, and (for some
investors) local income tax liability. However, there are a few exceptions:
o a portion of each fund's dividends may be taxable as ordinary income if it
came from investments in taxable securities
o because each fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may owe
taxes on a portion of your dividends if you are among those investors who
must pay AMT
The following tables show the usual tax status of transactions in fund shares as
well as that of any taxable distributions from the funds:
Generally taxed at ordinary income rates
-----------------------------------------------------------------
o short-term capital gains from selling fund shares
-----------------------------------------------------------------
o taxable income dividends you receive from a fund
-----------------------------------------------------------------
o short-term capital gains distributions you receive from a fund
-----------------------------------------------------------------
Generally taxed at capital gains rates
-----------------------------------------------------------------
o long-term capital gains from selling fund shares
-----------------------------------------------------------------
o long-term capital gains distributions you receive from a fund
-----------------------------------------------------------------
33 | Understanding Distributions and Taxes
<PAGE>
Each fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
34 | Understanding Distributions and Taxes
<PAGE>
Additional Information for Class AARP Shareholders
Web Site
aarp.scudder.com
You can review your portfolio and make online transactions, including purchases
and exchanges between Investment Program Mutual Funds, once you have registered
on the site. You can also customize the site according to your preference. The
Learning Center includes online versions of educational publications and past
issues of Financial Focus and Investment Insight, the Program's newsletters. You
may also contact us through the site's e-mail capability.
AARP Investment Program Representatives
Call 800-253-2277 8AM-8PM M-F, Eastern time
Call this number to speak with a trained representative who can answer your
investing questions and assist you with transaction-related services. You may
also use this number to request a variety of investment education guides and
prospectuses.
Confidential Fax Line
800-821-6234 24 hours a day, year-round
Signed exchange and redemption requests received after 4 p.m. Eastern time on a
business day or over a weekend or holiday will be executed the following
business day.
TDD Line
1-800-634-9454 9 AM-5PM, M-F, Eastern time
Dial this number with a TDD machine to communicate with registered AARP Mutual
Fund representatives specially trained to handle services for hearing-impaired
investors.
35 | Additional Information for Class AARP Shareholders
<PAGE>
Services
AARP Lump Sum Service Retirement specialists can help you make decisions about
your lump sum distribution from an employer's 401(k) or pension plan. An
information kit is provided. Call 1-800-253-2277.
AARP Legacy Service This service helps you organize important financial
documents, making it easier to share your investment information and goals with
your spouse or heirs and to plan for the orderly transfer of assets in the event
of a death. We also offer transfer ownership assistance to heirs for your AARP
accounts. Information kits are provided. Call 1-800-253-2277.
AARP Goal Setting and Asset Allocation Service A guidebook and self-scoring
worksheet are available to help you reach your goals by appropriately allocating
your assets across types of investments. Call 1-800-253-2277 to speak to a
specially trained representative.
Account Statements and Reports You will receive prompt confirmation statements
for all of your transactions. Your consolidated [monthly] statement details your
current account status and records all transactions. (AARP IRA and Keogh Plan
investors receive consolidated statements quarterly.)
You will also receive a semiannual report, an annual report, and a current
prospectus each year.
36 | Additional Information for Class AARP Shareholders
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. To reduce costs, we mail one copy per
household. For more copies, call 1-800-SCUDDER.
Statements of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that its legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Scudder or the SEC (see below). Materials you
get from Scudder are free; those from the SEC involve a copying fee. If you
like, you can look over these materials at the SEC's Public Reference Room in
Washington, DC. or request them electronically at [email protected].
AARP Investment
Program from
Scudder Funds Scudder SEC
PO Box 2291 PO Box 2540 450 Fifth Street,
Boston, MA Boston, MA N.W. Washington, DC
02107-2291 02208-2540 20549-0102
1-800-SCUDDER 1-800-253-2277 1-202-942-8090
www.scudder.com aarp.scudder.com www.sec.gov
Fund Name SEC File #
---------------------------------------------------------------
Scudder New York Tax Free Fund 811-3749
---------------------------------------------------------------
Scudder California Tax Free Fund 811-3729
---------------------------------------------------------------
Scudder Massachusetts Tax Free Fund 811-3749
---------------------------------------------------------------
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
SCUDDER NEW YORK TAX FREE FUND
Each a series of Scudder State Tax Free Trust
SCUDDER CALIFORNIA TAX FREE FUND
A series of Scudder California Tax Free Trust
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2000
--------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus.
The prospectuses of the Funds dated August 1, 2000, 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.
Annual Reports to Shareholders of Scudder Massachusetts Tax Free Fund,
Scudder New York Tax Free Fund, Scudder California Tax Free Fund dated March 31,
2000 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 Tax Free Fund................1
General Investment Objective and Policies of Scudder New York Tax Free Fund.....................2
General Investment Objective and Policies of Scudder California Tax Free Fund...................4
Master/feeder Fund Structure....................................................................6
High Quality Bonds..............................................................................6
Municipal Obligations...........................................................................7
Amortized Cost Valuation of Portfolio Securities.................................................
Management Strategies..........................................................................10
Special Considerations.........................................................................10
Investing in Massachusetts.....................................................................11
Investing in New York..........................................................................16
Investing in California........................................................................23
POLICIES AND TECHNIQUES APPLICABLE TO THE FUNDS.........................................................31
Investment Restrictions........................................................................40
PURCHASES...............................................................................................42
Additional Information About Opening an Account................................................42
Minimum Balances...............................................................................43
Additional Information About Making Subsequent Investments.....................................43
Additional Information About Making Subsequent Investments by QuickBuy.........................43
Checks.........................................................................................44
Wire Transfer of Federal Funds.................................................................44
Share Price....................................................................................44
Share Certificates.............................................................................44
Other Information..............................................................................45
EXCHANGES AND REDEMPTIONS...............................................................................45
Exchanges......................................................................................45
Redemption by Telephone........................................................................46
Redemption By QuickSell........................................................................47
Redemption by Mail or Fax......................................................................47
Redemption by Checkwriting.....................................................................47
Redemption-in-Kind.............................................................................48
Other Information..............................................................................48
FEATURES AND SERVICES OFFERED BY THE FUNDS..............................................................48
The No-Load Concept............................................................................48
Internet access................................................................................49
Dividends and Capital Gains Distribution Options...............................................49
Reports to Shareholders........................................................................49
Transaction Summaries..........................................................................50
THE SCUDDER FAMILY OF FUNDS.............................................................................50
SPECIAL PLAN ACCOUNTS...................................................................................52
Automatic Withdrawal Plan......................................................................52
Cash Management System -- Group Sub-Accounting Plan for Trust Accounts, Nominees and
Corporations..............................................................................52
Automatic Investment Plan......................................................................53
Uniform Transfers/Gifts to Minors Act..........................................................53
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS...............................................................53
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
PERFORMANCE INFORMATION.................................................................................54
Average Annual Total Return....................................................................54
Cumulative Total Return........................................................................54
Total Return...................................................................................55
SEC Yield......................................................................................55
Effective Yield..................................................................................
Tax-equivalent Yield...........................................................................55
Massachusetts Tax-free Yields..................................................................56
New York Tax-free Yields.......................................................................56
California Tax-free Yields.....................................................................57
Comparison of Fund Performance.................................................................58
ORGANIZATION OF THE FUNDS...............................................................................59
INVESTMENT ADVISER......................................................................................60
Personal Investments by Employees of the Adviser...............................................
TRUSTEES AND OFFICERS...................................................................................64
REMUNERATION............................................................................................66
Responsibilities of the Board -- Board and Committee Meetings..................................66
Compensation of Officers and Trustees..........................................................67
DISTRIBUTOR.............................................................................................68
TAXES...................................................................................................68
Federal Taxation...............................................................................68
State Taxation.................................................................................71
Scudder Massachusetts Tax Free Fund............................................................71
Scudder New York Tax Free Fund.................................................................72
Scudder California Tax Free Fund...............................................................72
PORTFOLIO TRANSACTIONS..................................................................................73
Brokerage Commissions..........................................................................73
Portfolio Turnover.............................................................................74
NET ASSET VALUE.........................................................................................75
ADDITIONAL INFORMATION..................................................................................75
Experts........................................................................................75
Shareholder Indemnification....................................................................76
Ratings of Municipal Obligations...............................................................76
Commercial Paper Ratings.......................................................................77
Glossary.......................................................................................77
Other Information..............................................................................78
FINANCIAL STATEMENTS....................................................................................79
</TABLE>
ii
<PAGE>
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Scudder Massachusetts Tax Free Fund ("SMTFF") and Scudder New York Tax
Free Fund ("SNYTFF") are each a non-diversified series of Scudder State Tax Free
Trust. Scudder California Tax Free Fund ("SCTFF") is a diversified series of
Scudder California Tax Free Trust. Collectively, the foregoing are referred to
as the "Funds" and the "Trusts," individually a "Fund" and a "Trust." Each Fund
offers two classes of shares, Class S and AARP Class. Each Trust is a no-load
open-end management investment company. Scudder State Tax Free Trust consists of
six series and Scudder California Tax Free Trust consists of two 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 funds 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 Objectives and Policies of Scudder Massachusetts Tax Free
Fund
SMTFF seeks income that is exempt from Massachusetts personal and
regular federal income taxes. The Fund pursues its objective by investing at
least 80% of its net assets in securities of Massachusetts municipalities and in
other securities that are commonly considered to have similar tax status. 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 "Scudder Massachusetts Tax Free
Fund's Investments," the Fund may also invest in taxable obligations.
Scudder 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.
It is a fundamental policy, that cannot be changed without the approval
of a majority of the Fund's outstanding voting securities (as defined below
under "Investment Restrictions"), that at least 80% of the net assets of the
Fund will be normally invested in municipal securities of issuers located in
Massachusetts and other qualifying issuers including Puerto Rico, the U.S.
Virgin Islands and Guam ("Massachusetts municipal securities") under normal
market conditions. The Fund generally will invest in those Massachusetts
municipal securities the income from which is, in the opinion of bond counsel
rendered on the date of issuance, exempt from both Massachusetts personal income
tax and regular federal income tax. 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
<PAGE>
may be issued to finance projects owned or used by either private or public
entities and which include bonds issued to finance industrial enterprises and
pollution control facilities.
The Fund may invest in other municipal securities such as variable rate
demand instruments, as well as municipal notes of issuers located in
Massachusetts and other qualifying issuers, which are generally used to provide
short-term capital needs and have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes. For federal income tax purposes,
the income earned from municipal securities may be entirely tax-free, taxable or
subject to only the alternative minimum tax.
Under normal market conditions, the Fund expects 100% of its portfolio
securities to consist of Massachusetts municipal securities. However, if
defensive considerations or an unusual disparity between after-tax income on
taxable and municipal securities makes it advisable, up to 20% of the Fund's net
assets may be held in cash or invested in short-term taxable investments,
including U.S. Government obligations and money market instruments and
repurchase agreements. It is impossible to accurately predict how long such
alternative strategies may be utilized.
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 net assets in municipal
securities the interest income from which is taxable or subject to the
alternative minimum tax ("AMT bonds"). 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. 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 Fund may also enter into repurchase agreements, reverse
repurchase agreements and stand-by commitments which may involve certain
expenses and risks, including credit risks. None of these securities and
techniques is expected to comprise a major portion of the Fund's investments. In
addition, the 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.
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, 1999, 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): 1% CCC and 3%
unrated.
General Investment Objectives and Policies of Scudder New York Tax Free Fund
SNYTFF seeks income that is exempt from New York State and New York
City personal income taxes and regular federal income taxes. The Fund pursues
its objective by investing at least 80% of its net assets in New York municipal
securities during periods of normal market conditions. In pursuit of its
objective, the Fund will invest principally in New York municipal securities
that are rated A or better by Moody's, S&P or Fitch, or are of equivalent
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quality as determined by the Adviser. There can be no assurance that the
objective of the Fund will be met or that all income to shareholders which is
exempt from regular federal income taxes will be exempt from state or city
taxes, or from the federal alternative minimum tax.
Scudder New York Tax Free Fund's Investments. As a matter of fundamental policy,
which cannot be changed without the approval of a majority of the Fund's
outstanding voting securities (as defined below under "Investment
Restrictions"), at least 80% of the net assets of the Fund will be invested in
New York municipal securities and other qualifying issuers including Puerto
Rico, the U.S. Virgin Islands and Guam during periods of normal market
conditions. Normally, at least 75% of the intermediate- and long-term securities
purchased by the Fund will be investment-grade municipal securities which are
those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or Fitch,
or unrated securities judged by the Adviser to be of equivalent quality, or
securities issued or guaranteed by the U.S. Government. The Fund may also invest
up to 25% of its total assets in fixed-income securities rated below
investment-grade, that is, rated below Baa by Moody's or below BBB by S&P or
Fitch, or in unrated securities of equivalent quality as determined by the
Adviser. The Fund may not invest in fixed-income securities rated below B by
Moody's, S&P or Fitch, or their equivalent. The Fund expects to invest
principally in securities rated A or better by Moody's, S&P or Fitch or unrated
securities judged by the Adviser to be of equivalent quality at the time of
purchase. Securities in these three rating categories are judged by the Adviser
to have an adequate if not strong capacity to repay principal and pay interest.
During the fiscal year ended March 31, 1999, based upon the
dollar-weighted average ratings of the Fund portfolio holdings at the end of
each month during that period, the Fund had the following percentage of its net
assets invested in debt securities rated below investment-grade (or if unrated,
considered by the Adviser to be equivalent to rated securities) in the category
indicated: 9.0% unrated.
The Fund's portfolio consists primarily of obligations issued by
municipalities located in New York State. It is the opinion of bond counsel,
rendered on the date of issuance, that income from these New York municipal
securities is exempt from regular federal, as well as New York State and New
York City personal income tax. The Fund may invest in municipal bonds, which
meet longer-term capital needs and generally have maturities of more than one
year when issued. These securities include general obligation and revenue bonds
and notes of issuers located in New York and of other qualifying issuers. The
Fund may invest in municipal notes, which are generally used to provide
short-term capital needs, and have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes. General obligation bonds and
notes are secured by the issuer's pledge of its full faith, credit and taxing
power for payment of principal and interest. Revenue bonds and notes are
generally paid from the revenues of a particular facility or a specific excise
tax or other revenue source. The Fund may also invest in taxable obligations for
temporary or defensive purposes. It is impossible to accurately predict how long
such alternative strategies will be utilized.
Under normal market conditions, the Fund expects to invest principally
in New York municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in New York municipal
securities with short-and medium-term maturities as well.
The Fund may also invest up to 20% of its net assets in AMT bonds. Fund
distributions from interest on certain municipal securities subject to the
alternative minimum tax such as private activity bonds, will be a preference
item for purposes of calculating individual and corporate alternative minimum
taxes, depending upon investors' particular situations. In addition, state and
local taxes may apply, depending upon state and local tax laws.
Ordinarily, the Fund expects that 100% of its portfolio securities will
be New York municipal securities. The Fund may also, for temporary defensive
purposes, hold cash or invest its assets in short-term taxable securities. It is
impossible to accurately predict how long such alternative strategies may be
utilized.
The Fund may invest in stand-by commitments, third party puts,
when-issued securities, and enter into repurchase agreements and reverse
repurchase agreements, which may involve certain expenses and risks, including
credit risks. The Fund may also invest in variable rate demand instruments.
These securities and techniques are not expected to comprise a major portion of
the Fund's investments. The Fund may also utilize various other strategic
transactions. See "Additional information about policies and investments" for
more information about these investment techniques.
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A portion of the Fund's income may be subject to federal, state and
local income taxes.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term taxable
investments such as (1) U.S. Treasury notes, bills and bonds; (2) obligations of
agencies and instrumentalities of the U.S. Government; and (3) money market
instruments, such as domestic bank certificates of deposit, finance company and
corporate commercial paper, and banker's acceptances. Notwithstanding the
foregoing, the Fund may invest more than 20% of its net assets in securities the
income from which may be subject to regular federal tax and New York State and
City personal income taxes during periods which, in the opinion of the Adviser,
require a defensive position for the protection of shareholders.
Junk bonds involve greater price volatility and higher degrees of
speculation with respect to the payment of principal and interest than
higher-quality fixed-income securities. In addition, the trading market for
these securities is generally less liquid than for higher-rated securities and
the Fund may have difficulty disposing of these securities at the time they wish
to do so. The lack of a liquid secondary market for certain securities may also
make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing their portfolios and calculating their net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
the Fund will be purchased upon issuance, which may involve special risks
because the securities so acquired are new issues. In such instances the Fund
may be a substantial purchaser of the issue and therefore have the opportunity
to participate in structuring the terms of the offering. Although this may
enable the Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
General Investment Objectives and Policies of Scudder California Tax Free Fund
SCTFF seeks income that is exempt from California personal and regular
federal income taxes. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
There can be no assurance that the objective of the Fund will be met or
that all income to shareholders which is exempt from regular federal income
taxes will be exempt from state or local taxes, or from the federal alternative
minimum tax.
Scudder California Tax Free Fund's Investments. Normally, at least 75% of the
intermediate- and long-term securities purchased by the Fund will be
investment-grade municipal securities which are those rated Aaa, Aa, A, or Baa
by Moody's or AAA, AA, A, or BBB by S&P or Fitch, or unrated securities judged
by the Adviser to be of equivalent quality, or securities issued or guaranteed
by the U.S. Government. The Fund may also invest up to 25% of its total assets
in fixed-income securities rated below investment-grade, that is, rated below
Baa by Moody's or below BBB by
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<PAGE>
S&P or Fitch, or in unrated securities considered to be 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.
Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. Securities rated below BBB are
commonly referred to as "junk bonds" and involve greater price volatility and
higher degrees of speculation with respect to the payment of principal and
interest than higher-quality fixed-income securities. In addition, the trading
market for these securities is generally less liquid than for higher-rated
securities and the Funds may have difficulty disposing of these securities at
the time they wish to do so. The lack of a liquid secondary market for certain
securities may also make it more difficult for the Funds to obtain accurate
market quotations for purposes of valuing their portfolios and calculating their
net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such a period, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of junk bonds because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
It is expected that a significant portion of the junk bonds acquired by
the Fund will be purchased upon issuance, which may involve special risks
because the securities so acquired are new issues. In such instances the Fund
may be a substantial purchaser of the issue and therefore have the opportunity
to participate in structuring the terms of the offering. Although this may
enable the Fund to seek to protect itself against certain of such risks, the
considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of junk bonds,
particularly in a thinly traded market. Factors adversely affecting the market
value of such securities are likely to affect adversely the Fund's net asset
value. In addition, the Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
The Fund expects to invest principally in securities rated A or better
by Moody's, S&P or Fitch or unrated securities judged by the Adviser to be of
equivalent quality at the time of purchase. Securities in these three rating
categories are judged by the Adviser to have an adequate if not strong capacity
to repay principal and pay interest.
The Fund invests in municipal securities of issuers located in
California. It is the opinion of bond counsel, rendered on the date of issuance,
that the income from these obligations is exempt from both California personal
income tax and regular federal income tax. The Fund invests in municipal bonds,
which meet longer-term capital needs and generally have maturities of more than
one year when issued. These securities include general obligation and revenue
bonds, industrial development and pollution control bonds of issuers located in
California. The Fund may invest in municipal notes, which are generally used to
provide short-term capital needs and have maturities of one year or less.
Municipal notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes and construction loan notes. General obligation bonds and
notes are secured by the issuer's pledge of its full faith, credit and taxing
power for payment of principal and interest. Revenue bonds and notes are
generally paid from the revenues of a particular facility, a specific excise tax
or other revenue source.
Under normal market conditions, the Fund expects to invest principally
in California municipal securities with long-term maturities (i.e., more than 10
years). The Fund has the flexibility, however, to invest in California municipal
securities with short- and medium-term maturities.
The Fund may also invest up to 20% of its total assets in AMT bonds.
Fund distributions from interest on certain municipal securities subject to the
alternative minimum tax, such as private activity bonds, will be a preference
5
<PAGE>
item for purposes of calculating individual and corporate alternative minimum
taxes, depending upon investors' particular situations. In addition, state and
local taxes may apply, depending upon your state and local tax laws.
Ordinarily, the Fund expects 100% of its portfolio securities to be
California municipal securities. It is a fundamental policy, that cannot be
changed without the approval of a majority of the Fund's outstanding voting
securities (as defined under "Investment Restrictions"), at least 80% of the net
assets of the Fund will be invested in California municipal securities and other
qualifying issuers including Puerto Rico, the U.S. Virgin Islands and Guam under
normal market conditions except as stated below. The Fund may also, for
temporary defensive purposes, hold cash or invest its assets in taxable
securities. It is impossible to accurately predict how long these alternative
strategies may be utilized.
When, in the opinion of the Adviser, defensive considerations or an
unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term taxable
investments such as (1) U.S. Treasury notes, bills and bonds; (2) obligations of
agencies and instrumentalities of the U.S. Government; and (3) money market
instruments, such as domestic bank certificates of deposit, finance company and
corporate commercial paper, and bankers' acceptances. Notwithstanding the
foregoing, the Fund may invest more than 20% of its net assets in securities the
income from which may be subject to federal and California income tax during
periods which, in the opinion of the Adviser, require a defensive position for
the protection of shareholders. Investors should be aware that shares of the
Fund do not represent a complete investment program.
The Fund may invest in stand-by commitments, third party puts,
when-issued securities and enter into repurchase agreements and reverse
repurchase agreements, which may involve certain expenses and risks, including
credit risks. The Fund may also invest in variable rate demand instruments.
These securities and techniques are not expected to comprise a major portion of
the Fund's investments. The Fund may also utilize various other strategic
transactions, including derivatives. See "Additional information about policies
and investments" for more information about these investment techniques.
During the fiscal year ended March 31, 1999, based upon the
dollar-weighted average ratings of the Fund's portfolio holdings at the end of
each month during that period, the Fund had the following percentages of its net
assets invested in debt securities rated (or if unrated, considered by the
Adviser to be equivalent to rated securities) in the categories indicated: 6%
unrated.
A portion of the Fund's income may be subject to federal, state and
local income taxes.
Master/feeder Fund Structure
Each Trust's Board of Trustees has the discretion to retain the current
distribution arrangement for a Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
High Quality Bonds
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
6
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in the past than investment-grade bonds, they are considered to be predominantly
speculative and, therefore, carry greater risk.
Each 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 a Fund, the Adviser will determine whether it is in the best
interest of that Fund to retain or dispose of the security.
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 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")
8
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prior to offer and sale unless an exemption from such
registration is available, municipal obligations which are not
publicly offered may nevertheless be readily marketable. A
secondary market exists for municipal obligations which were
not publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in a Fund's
investment restrictions. The Adviser determines whether a municipal obligation
is readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. In addition,
Stand-by Commitments and demand obligations also enhance marketability.
For the purpose of a Fund's investment restrictions, the identification
of the "issuer" of municipal obligations which are not general obligation bonds
is made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
Each Fund expects that it will not invest more than 25% of its total
assets in municipal obligations the security of which is derived from any one of
the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; or colleges and universities. Each Fund may invest
more than 25% of its total assets in municipal obligations of one or more of the
following types: public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. Government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments, which might affect all
municipal obligations of a similar type. However, each Fund believes that the
most important consideration affecting risk is the quality of particular issues
of municipal obligations, rather than factors affecting all, or broad classes
of, municipal obligations.
Each Fund may invest up to 25% of its total assets in fixed-income
securities rated below investment grade, that is, below Baa by Moody's, or below
BBB by S&P or Fitch, or in unrated securities considered to be of equivalent
quality. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. Each Fund may not invest in
fixed-income securities rated below B by Moody's, S&P or Fitch, or their
equivalent. Securities rated below BBB are commonly referred to as "junk bonds"
and involve greater price volatility and higher degrees of speculation with
respect to the payment of principal and interest than higher-quality
fixed-income securities. In addition, the trading market for these securities is
generally less liquid than for higher-rated securities and the Funds may have
difficulty disposing of these securities at the time they wish to do so. The
lack of a liquid secondary market for certain securities may also make it more
difficult for the Funds to obtain accurate market quotations for purposes of
valuing their portfolios and calculating their net asset values.
Issuers of junk bonds may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. 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
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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.
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
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ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected. Each Fund may
invest in municipal securities rated B by S&P, Fitch or Moody's although it
intends to invest principally in securities rated in higher grades. Although
each Fund's quality standards are designed to reduce the credit risk of
investing in a Fund, that risk cannot be entirely eliminated. Shares of a Fund
are not insured by any agency of Massachusetts or of the U.S. Government.
Investing in Massachusetts
The following information as to certain Massachusetts risk factors is
given to investors in view of SMTFF'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.
SMTFF is more susceptible to factors adversely affecting issuers of
Massachusetts municipal securities than comparable municipal bond funds that do
not focus on investments of Massachusetts issuers. In 1989, Massachusetts
experienced growth rates significantly below the national average and an
economic recession in 1990 and 1991 caused negative growth rates in
Massachusetts. All sectors of the economy experienced job losses, including high
technology, construction and financial industries. In addition, the economy
experienced shifts in employment from labor-intensive manufacturing industries
to technology and service-based industries. In 1993, however, total
Massachusetts employment showed positive annual growth 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 was 4.3%; it fell to 4.0% in 1997 and 3.3% in 1998.
The national unemployment rate was 5.4% in 1996, 4.9% in 1997 and 4.5% in 1998.
During the 1989 to 1991 recession, real income levels declined in Massachusetts.
Since 1994, however, real personal per capita income levels in Massachusetts
have increased faster than the national average. Massachusetts had the third
highest level of per capital personal income in the United States in 1995 and
1997.
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 March 1999
was 2.9% compared to a national average of 4.4%. The unemployment rate is
expected to remain steady through the Year 2000. In addition, employment in
manufacturing increased by almost 2% in 1997, and another 2.2% in 1998. Per
capita personal income has shown growth rates of 6.2% in 1996, 6.0% in 1997 and
5.1% in 1998.
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 70% of the estimated $10.8 billion cost
of projects including 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 this
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 ended 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.
For the fiscal year ended 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.
For the fiscal year ended 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
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Commonwealth of approximately $1.173 billion. Budgeted revenues and other
sources for fiscal 1996 totaled approximately $17.327 billion, including tax
revenues of approximately $12.049 billion, approximately $365 million higher
than prior official estimate in May, 1996. Budgeted revenues and other sources
increased by approximately 5.7% from fiscal 1995 to fiscal 1996, while tax
revenues increased by approximately 7.9% for the same period. Income tax
withholding payments increased by approximately 8.0% from fiscal 1995, and total
income tax collections by approximately 12.3%. Budgeted expenditures and other
uses in fiscal 1996 totaled approximately $16.896 billion, an increase of
approximately $645.7 million, or 4.0%, over fiscal 1995.
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $179.4 million, bringing the Stabilization Fund balance to
approximately $627.1 million, which exceeded the amount that can remain in the
Stabilization Fund by law, $543.3 million. In fiscal 1997, the statutory ceiling
on the Stabilization Fund was raised from 5% of total tax revenues to 5% of
total budgetary revenues. At the end of fiscal 1997, the Stabilization Fund's
balance was $799.3 million. Under state finance law, year-end surplus amounts
(as defined in the law) in excess of the amount that can remain in the
Stabilization Fund are transferred to the Tax Reduction Fund, to be applied,
subject to legislative appropriation, to the reduction of personal income taxes.
The budgeted operating funds of the Commonwealth ended fiscal 1997 with
a surplus of revenues and other sources over expenditures and other uses of
$221.0 million and aggregate ending fund balances in the budgeted operating
funds of the Commonwealth of approximately $1.394 billion. Budgeted revenues and
other sources for fiscal 1997 totaled approximately $18.170 billion, including
tax revenues of $12.864 billion, an increase of approximately 6.8% over fiscal
1996. Commonwealth budgeted expenditures and other uses in fiscal 1997 totaled
$17.949 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.
The budgeted operating funds of the Commonwealth ended fiscal 1998 with
a surplus of revenues and other sources over expenditures and other uses of
$798.1 million and aggregate ending fund balances in the budgeted operating
funds of the Commonwealth of approximately $2.192 billion. Budgeted revenues and
other sources for fiscal 1998 totaled approximately $19.8 billion, including tax
revenues of $14.026 billion. Commonwealth budgeted expenditures and other uses
in fiscal 1998 totaled $19.002 billion. At the end of fiscal 1998, the
Commonwealth showed a year-end cash position of approximately $1.579 billion,
which did not include the Stabilization Fund's ending balance of $1.140 billion.
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 AAA by S&P and Aaa by Moody's. From time to time, the rating
agencies may further change their ratings.
State Budget. The fiscal 1999 budget contained tax cuts with an aggregate fiscal
cost of approximately $226 million, including a proposal to cut the tax rate on
earned and unearned income from 5.95% to 5.00% over three years. The tax cuts
initiated in the previous and current administrations translate to a total of $2
billion in annual tax savings to taxpayers. Budgeted revenues and other sources
to be collected in fiscal 1999 totaled $19.726 billion. This amount includes
fiscal 1999 tax revenues of $14.0 billion. Collections through April 1999
totaled $11.554 billion, up 4.3% or $474 million, from the same period in Fiscal
Year 1998.
Fiscal 1999 non-tax revenues totaled $5.726 billion, approximately
$47.4 million less than fiscal 1998 non-tax revenues after adjusting for the
shifts to and from certain non-budgeted items. Federal reimbursements increased
by more than $80 million, from $3.361 billion in fiscal 1998 to $3.441 billion
in fiscal 1999. Fiscal 1999 is projected to end with a cash balance of $975.9
million.
On January 27, 1999 the Governor submitted the proposed budget for the
2000 fiscal year. Budgeted revenues and other sources to be collected in fiscal
2000 are estimated by the Executive Office for Administration and Finance to be
approximately $20.241 billion. This amount includes estimated fiscal 2000
revenues of $14.459 billion, an increase of $459 million, or 3.3% over Fiscal
Year 1999 levels. This projection incorporates proposed tax cuts of $226
million.
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Fiscal 2000 non-tax revenues are projected to total approximately
$5.782 billion, approximately $57 million less than fiscal 1999 non-tax revenues
after adjusting for the shifts to and from certain non-budgeted items. Federal
reimbursements increase by approximately $7.8 million, from approximately $3.441
billion in fiscal 1999 to $3.449 billion in fiscal 2000. The fiscal 2000 budget
is based on numerous spending and revenue estimates, the achievement of which
cannot be assured.
Debt Limits and Outstanding Debt. Growth of tax revenues in the Commonwealth is
limited by law. Tax revenues in each of fiscal years 1988 to 1992 were lower
than the limits set by law. In addition, during each of the fiscal years 1989
through 1991, the official tax revenue forecasts made at the beginning of the
year proved to be substantially more optimistic than the actual results. The
fiscal 1992 budget initially was based on the joint revenue estimate of $8.292
billion, a 7% decrease from 1991, while actual tax revenues were $9.484 billion,
a 5.4% increase over fiscal 1991. The fiscal 1993 budget initially was based on
the joint revenue estimate of $9.685 billion, an increase of 2.1% over 1992. The
actual 1993 tax revenues were $9.930 billion, a 4.7% increase over 1992. On May
13, 1993, the tax revenue forecast of the Chairpersons of the House and Senate
Ways and Means Committees and the Secretary for Administration and Finance for
fiscal 1994 was $10.540 billion, an increase of 6.1% over 1993. Actual fiscal
1994 tax revenues were $10.607 billion, a 6.8% increase over fiscal 1993.
In May 1994, the Chairpersons of the House and Senate Ways and Means
Committees and the Secretary for Administration and Finance jointly endorsed an
estimate of tax revenues for fiscal 1994 of $11.328 billion, an increase of $634
million, or 5.9%, from then expected tax revenues for fiscal 1994 of $10.694
billion. The fiscal 1995 budget was based upon this tax revenue estimate, less
$19.3 million of tax cuts signed by the Governor in the fiscal 1995 budget.
Fiscal 1995 tax revenue collections were approximately $11.163 billion. Fiscal
1996 tax revenue collections were $12.049 billion. Fiscal 1997 tax revenue
collections were $12.864 billion. Fiscal 1998 tax revenue collections were
$14.026 billion. For Fiscal Year 1999, tax revenue collections were $11.554
billion through April 1999 and are expected to total $14 billion. Fiscal 2000
tax collections are projected to total $14.459 billion, an increase of 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
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EOPS, on certificates of participation issued to finance the new Plymouth County
Correctional Facility, and (iv) the obligation of the Commonwealth to make lease
payments from amounts appropriated by the Legislature with respect to the
Massachusetts Information Technology Center in the city of Chelsea,
Massachusetts. In addition, the Commonwealth has liabilities under certain
tax-exempt capital leases. Commonwealth-guaranteed debt consists of certain
liabilities arising out of the Commonwealth's guarantees of the bonds of the two
higher education building authorities and certain bond anticipation notes of the
Massachusetts Turnpike Authority. Commonwealth-supported debt arises from
statutory requirements from payments by the Commonwealth with respect to debt
service of the Massachusetts Bay Transportation Authority (including the Boston
Metropolitan District), the Massachusetts Convention Center Authority, the
Massachusetts Government Land Bank, the Steamship Authority and certain regional
transit authorities. Hence, the Commonwealth's fiscal condition could adversely
affect the market values and marketability of, or result in default in payment
on, obligations of certain authorities and agencies.
Local Governments. Proposition 2 1/2, an initiative petition adopted by the
voters of the Commonwealth of Massachusetts on November 4, 1980, constrains
levels of property taxation and limits the charges and fees imposed on cities
and towns by certain governmental entities, including county governments. At the
time Proposition 2 1/2 was enacted, many cities and towns had property tax
levels in excess of the limit and were therefore required to roll back property
taxes with a concurrent loss of revenues. While many communities have responded
to the limits of Proposition 2 1/2 through statutorily permitted overrides and
exclusions (such as exclusion of debt service on specific bonds and notes),
Proposition 2 1/2 has and will continue to restrain significantly the ability of
cities and towns to pay for local services, including certain debt service. To
mitigate the impact of Proposition 2 1/2 on local programs and services since
1980, the Commonwealth has increased payments to its cities, towns and regional
school districts.
A statute adopted by voter initiative petition in November, 1990,
regulates the distribution of Local Aid to cities and towns. Direct Local Aid
decreased from $2.937 billion in fiscal 1990 to $2.360 billion in fiscal 1992;
increased to $2.547 billion in fiscal 1993 and increased to $2.727 billion in
fiscal 1994. Fiscal 1995 expenditures for direct Local Aid were $2.976 billion.
Fiscal 1996 expenditures for direct Local Aid were $3.246 billion. Fiscal 1997
expenditures for direct Local Aid were $3.534 billion, which is approximately
8.87% above fiscal 1996 level. Fiscal 1998 expenditures for direct Local Aid
were $3.904 billion. The estimated local aid spending for fiscal 1999 was $4.218
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 since the
enactment of the law, 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, 1998 and 1999
Medicaid expenditures were $3.151 billion, $3.313 billion, $3.398 billion,
$3.416 billion, $3.456, $3.666 and $3.893 billion, respectively. The average
annual growth rate from fiscal 1994 to fiscal 1998 was 2.0% with virtually no
growth from fiscal 1995 to fiscal 1997. There was a 6.1% increase from fiscal
1997 to fiscal 1998 and a 6.2% growth from fiscal 1998 to fiscal 1999. The
Executive Office for Administration and Finance estimates that fiscal 2000
Medicaid expenditures will be approximately $4.184 billion. The recent growth is
due to health care reform to expand healthcare coverage.
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.
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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 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. 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. In fiscal 1998, the pension expenditure
was $1.064 billion, a decrease of 4.0% over fiscal 1997 costs of $1.069 billion.
Fiscal 1999 showed a further decrease of $93.88 million and $910 million is
budgeted for fiscal 2000.
Investing in New York
Some of the significant financial considerations relating to SNYTFF's
investments in New York municipal securities are summarized below. This summary
information is not intended to be a complete description and is principally
derived from the Annual Information Statement of the State of New York as
supplemented and contained in official statements relating to issues of New York
Municipal Securities that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
State Economy. New York is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
In the calendar years 1987 through 1997, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because New York City (the "City") is a regional employment center for a
multi-state region, State personal income measured on a residence basis
understates the relative importance of the State to the national economy and the
size of the base to which State taxation applies.
The Additional Information Statement reflects estimates of receipts and
disbursements as formulated in the State Financial Plan released on June 25,
1998, as updated on a quarterly basis. The third quarterly update ("Third
Quarterly Update") was released on January 27, 1999 in connection with the
1999-2000 Executive Budget. There can be no assurance that the State economy
will not experience worse-than-predicted results, with corresponding material
and adverse effects on the State's projections of receipts and disbursements.
State Budget. The State Constitution requires the governor (the
"Governor") to submit to the State legislature (the "Legislature") a balanced
executive budget which contains a complete plan of expenditures for the ensuing
fiscal year and all moneys and revenues estimated to be available therefor,
accompanied by bills containing all proposed appropriations or reappropriations
and any new or modified revenue measures to be enacted in connection with the
executive budget. The entire plan constitutes the proposed State financial plan
for that fiscal year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each year.
In recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State's 1998-99 fiscal year began on April 1, 1998 and
ended on March 31, 1999. The Legislature adopted the debt service component of
the State budget for the 1998-99 fiscal year on March 30, 1998 and the remainder
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of the budget on April 18, 1998. In the period prior to adoption of the budget
for the 1998-99 fiscal year, the Legislature also enacted appropriations to
permit the State to continue its operations and provide for other purposes.
The 1998-99 State Financial Plan projected a closing balance in the
General Fund of $1.42 billion comprised of a reserve of $761 million available
for future needs, a balance of $400 million in the Tax Stabilization Reserve
Fund ("TSRF"), a balance of $158 million in the Community Projects Fund ("CPF")
and a balance of $100 million in the Contingency Reserve Fund ("CRF"). The TSRF
can be used in the event of an unanticipated General Fund cash operating
deficit, as provided under the State Constitution and State Finance Law. The CPF
is used to finance various legislative and executive initiatives. The CRF
provides resources to help finance any extraordinary litigation costs during the
fiscal year.
The Third Quarterly Update of the 1998-99 Financial Plan projected a
year-end available cash surplus of $1.79 billion in the General Fund, an
increase of $749 million over the surplus estimate in the Mid-Year Update.
Strong growth in receipts as well as lower-than expected disbursements during
the first nine months of the fiscal year account for the higher surplus
estimate. As of February 9, 1999, this amount was projected to be reduced by the
transfer of $1.04 billion to the tax refund reserve. The projected remaining
closing balance of $799 million in the General Fund is comprised of $473 million
in the TSRF, $226 million in the CPF, and $100 million in the CRF.
The Governor presented his 1999-2000 Executive Budget to the
Legislature on January 27, 1999. The 1999-2000 Financial Plan projects General
Fund disbursements and transfers to other funds of $37.10 billion, an increase
of $482 million over projected spending for the current year. Grants to local
governments constitute approximately 67 percent of all General Fund spending,
and include payments to local governments, non-profit providers and individuals.
Disbursements in this category are projected to decrease $87 million (0.4
percent) to $24.81 billion in 1999-2000, in part due to a $175 million decline
in proposed spending for legislative initiatives.
The State is projected to close the 1999-2000 fiscal year with a
General Fund balance of $2.36 billion. The balance is comprised of $1.79 billion
in tax reduction reserves, $473 million in the TSRF and $100 million in the CFR.
The entire $226 million balance in the Community Projects Fund is expected to be
used in 1999-2000, with $80 million spent to pay for existing projects and the
remaining balance of $146 million, against which there are currently no
appropriations as a result of the Governor's 1998 vetoes, used to fund other
expenditures in 1999-2000.
The State currently projects spending to grow by $1.09 billion (2.9
percent) in 2000-01 and an additional $1.8 billion (4.7 percent) in 2001-02.
General Fund spending increases at a higher rate in 2001-02 than in 2000-01,
driven primarily by higher growth rates for Medicaid, welfare, Children and
Families Services, and Mental Retardation, as well as the loss of federal money
that offsets General Fund spending.
Over the long-term, uncertainties with regard to the economy present
the largest potential risk to future budget balance in New York State. For
example, a downturn in the financial markets or the wider economy is possible, a
risk that is heightened by the lengthy expansion currently underway. The
securities industry is more important to the New York economy than the national
economy, potentially amplifying the impact of an economic downturn. A large
change in stock market performance during the forecast horizon could result in
wage and unemployment levels that are significantly different from those
embodied in the forecast. Merging and downsizing by firms, as a consequence of
deregulation or continued foreign competition, may also have more significant
adverse effects on employment than expected. Finally, a "forecast error" of one
percentage point in the estimated growth of receipts could cumulatively raise or
lower results by over $1 billion by 2002.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. The projections assume
no changes in federal tax law, which could substantially alter the current
receipts forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire on April 1,
1999. Actual results, however, could differ materially and adversely from their
projections, and those projections may be changed materially and adversely from
time to time.
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Debt Limits and Outstanding Debt. There are a number of methods by
which the State of New York may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.
The proposed 1998-99 through 2003-04 Capital Program and Financing Plan
was released with the Executive Budget on January 27, 1999. The recommended
five-year Capital Program and Financing Plan reflects debt reduction initiatives
that would reduce future State-supported debt issuances by significantly
increasing the share of the Plan financed with pay-as-you-go resources. Compared
to the last year of the July 1998 update to the Plan, outstanding
State-supported debt would be reduced by $4.7 billion (from $41.9 billion to
$37.2 billion).
As described therein, efforts to reduce debt, unanticipated delays in
the advancement of certain projects and revisions to estimated proceeds needs
will modestly reduce projected borrowings in 1998-99. The State's 1998-99
borrowing plan now projects issuances of $331 million in general obligation
bonds (including $154 million for purposes of redeeming outstanding BANs) and
$154 million in general obligation commercial paper. The State has issued $179
million in Certificates of Participation to finance equipment purchases
(including costs of issuance, reserve funds, and other costs) during the 1998-99
fiscal year. Of this amount, it is anticipated that approximately $83 million
will be used to finance agency equipment acquisitions, and $96 million to
address Statewide technology issues related to Year 2000 compliance.
Approximately $228 million for information technology related to welfare reform,
originally anticipated to be issued during the 1998-99 fiscal year, is now
expected to be delayed until 1999-2000.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.85 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
5, 1999, S&P affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On March 5, 1999, Moody's affirmed its A2 rating with a stable outlook to the
State's general obligations.
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New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to regulations promulgated by the
Superintendent of Insurance establishing certain excess medical malpractice
premium rates; (5) challenges to the constitutionality of Public Health Law
2807-d, which imposes a gross receipts tax from certain patient care services;
(6) action seeking enforcement of certain sales and excise taxes on tobacco
products and motor fuel sold to non-Indian consumers on Indian reservations; (7)
a challenge to the Governor's application of his constitutional line item veto
authority; and (8) a challenge to the enactment of the Clean Water/Clean Air
Bond Act of 1996.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the 1998-99 fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities. The fiscal stability of New York State is related, in
part, to the fiscal stability of its Authorities, which generally have
responsibility for financing, constructing and operating revenue-producing
public benefit facilities. Authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially and adversely affected, if any of the Authorities were to default on
their respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or
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otherwise, for debt service. This operating assistance is expected to continue
to be required in future years. In addition, certain statutory arrangements
provide for State local assistance payments otherwise payable to localities to
be made under certain circumstances to certain Authorities. The State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to Authorities under these arrangements. However, in the
event that such local assistance payments are so diverted, the affected
localities could seek additional State funds.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. JDA recently resumed its lending activities
under a revised set of lending programs and underwriting guidelines.
New York City and Other Localities. The fiscal health of the State may
also be impacted by the fiscal health of its localities, particularly the City,
which has required and continues to require significant financial assistance
from the State. The City depends on State aid both to enable the City to balance
its budget and to meet its cash requirements. There can be no assurance that
there will not be reductions in State aid to the City from amounts currently
projected or that State budgets will be adopted by the April 1 statutory
deadline or that any such reductions or delays will not have adverse effects on
the City's cash flow or expenditures. In addition, the Federal budget
negotiation process could result in a reduction in or a delay in the receipt of
Federal grants which could have additional adverse effects on the City's cash
flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+
and on November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998,
S&P assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.
Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded approximately $28 billion of the City's general obligations from Baa1
to A3. On June 9, 1998, Moody's affirmed its A3 rating to the City's general
obligations and stated that its outlook was stable.
On March 8, 1999, Fitch IBCA upgraded New York City's $26 billion
outstanding general obligation bonds from A- to A.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
funds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do not
constitute an enforceable obligation or debt of either the State or the City.
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Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the Financial
Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and CUNY and reflected the
City's expense and capital budgets for the 1998 fiscal year, which were adopted
on June 6, 1997. The 1998-2001 Financial Plan projected revenues and
expenditures for the 1998 fiscal year balanced in accordance with GAAP. The
1998-99 Financial Plan projects General Fund receipts (including transfers from
other funds) of $36.22 billion, an increase of $1.02 billion over the estimated
1997-1998 level. Recurring growth in the State General Fund tax base is
projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates for
1996-97 or 1997-98, but roughly equivalent to the rate for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the impact
of scheduled tax reductions that will lower receipts by $38 million, as well as
the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 billion to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99 in the
General Fund, primarily as a result of the use of the 1997-98 cash surplus. In
1998-99, the General Fund GAAP Financial Plan shows total revenues of $34.68
billion, total expenditures of $35.94 billion, and net other financing sources
and uses of $42 million.
Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the 1999 fiscal year, there
can be no assurance that the gap-closing actions proposed in the 1998-2001
Financial Plan can be successfully implemented or that the City will maintain a
balanced budget in future years without additional State aid, revenue increases
or expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon
the City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of
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$5.7 billion of general obligation bonds and $5.7 billion of bonds to be issued
by the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. Indebtedness subject to the
constitutional debt limit includes liability on capital contracts that are
expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation were voided, projected
contracts for the City capital projects would exceed the City's debt limit
during fiscal year 1997-98. Future developments concerning the City or entities
issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's 1998 fiscal year financial plan
projected $2.4 billion of seasonal financing, the City expected to undertake
only approximately $1.4 billion of seasonal financing. The City issued $2.4
billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Certain localities, in addition to the City, have experienced financial
problems and have requested and received additional New York State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the State's projections of its receipts and disbursements for the 1997-98 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken by
the State to assist Yonkers could result in increased State expenditures for
extraordinary local assistance.
On June 30, 1998, the City of Yonkers satisfied the statutory
conditions for ending the supervision of its finances by a State-ordered control
board. Pursuant to State law, the control board's powers over City finances
lapsed six months after the satisfaction of these conditions, on December 31,
1998.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
The 1998-99 budget includes $29.4 million in unrestricted aid targeted
to 57 municipalities across the State. Other assistance for municipalities with
special needs totals more than $25.6 million. Twelve upstate cities will receive
$24.2 million in one-time assistance from a cash flow acceleration of State aid.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. State law requires the Comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
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From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing the State assistance in
the future.
Year 2000 Compliance. The State is currently addressing Year 2000
("Y2K") data processing compliance issues. Since its inception, the computer
industry has used a two-digit date convention to represent the year. In the year
2000, the date field will contain "00" and, as a result, many computer systems
and equipment may not be able to process dates properly or may fail since they
may not be able to distinguish between the years 1900 and 2000. The Year 2000
issue not only affects computer programs, but also the hardware, software and
networks they operate on. In addition, any system or equipment that is dependent
on an embedded chip, such as telecommunication equipment and security systems,
may also be adversely affected.
The Office for Technology is monitoring compliance progress for the
State's mission-critical and high-priority systems and is reporting compliance
progress to the Governor's office on a quarterly basis. As of December 1998, the
State had completed 93 percent of overall compliance effort for its
mission-critical systems; 18 systems are now Year 2000 compliant and the
remaining systems are on schedule to be compliant by the first quarter of 1999.
As of December 1998, the State has completed 70 percent of overall compliance
effort on the high-priority systems; 168 systems are now Year 2000 compliant and
the remaining systems are on schedule to be compliant by the second quarter of
1999. Compliance testing is expected to be completed by the end of calendar
1999.
While New York State is taking what it believes to be appropriate
action to address Year 2000 compliance, there can be no guarantee that all of
the State's systems and equipment will be Year 2000 compliant and that there
will not be an adverse impact upon State operations or finances as a result.
Since Year 2000 compliance by outside parties is beyond the State's control to
remediate, the failure of outside parties to achieve Year 2000 compliance could
have an adverse impact on State operations or finances as well.
Investing in California
SCTFF invests primarily in California municipal securities. The following
information constitutes only a brief summary, does not purport to be a complete
description, and is based on information available as of the date of the
prospectus from official statements and prospectuses relating to securities
offerings of the State of California and various local agencies in California.
While the sponsors have not independently verified such information, they have
no reason to believe that such information is not correct in all material
respects.
Economic Factors
Fiscal Years Prior to 1995-96. Pressures on the State's budget in the late
1980's and early 1990's were caused by a combination of external economic
conditions and growth of the largest General Fund Programs -- K-14 education,
health, welfare and corrections -- at rates faster than the revenue base. These
pressures could continue as the State's overall population and school age
population continue to grow, and as the State's corrections program responds to
a "Three Strikes" law enacted in 1994, which requires mandatory life prison
terms for certain third-time felony offenders. In addition, the State's health
and welfare programs are in a transition period as a result of recent federal
and State welfare reform initiatives.
As a result of these factors and others, and especially because a severe
recession between 1990-94 reduced revenues and increased expenditures for social
welfare programs, from the late 1980's until 1992-93, the State had periods of
significant budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve in the Special Fund for Economic Uncertainties
("SFEU") -- approaching $2.8 billion at its peak at June 30, 1993. Between the
1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments and
from local governments to local school districts.
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Despite these budget actions, as noted, the effects of the recession
led to large, unanticipated deficits in the SFEU, as compared to projected
positive balances. In the 1993 through 1996 Fiscal Years, the accumulated
deficit was so large that it was impractical to budget to retire such deficits
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over to the end
of the fiscal year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish cash reserves, the
State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of notes
and revenue anticipation warrants were issued in the period from June 1992 to
July 1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July 1994 and matured in April 1996.
1995-96 and 1997-98 Fiscal Years. With the end of the recession, and a
growing economy beginning in 1994, the State's financial condition improved
markedly in the last three fiscal years, through a combination of increasing
revenues, slowdown in growth of social welfare programs, and continued spending
restraint. The last of the recession-induced budget deficits was repaid,
allowing the SFEU to post a positive cash balance for only the second time in
the 1990's, totaling $281 million as of June 30, 1997. The State's cash position
also improved and no deficit borrowing has occurred over the end of these last
three fiscal years.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96, $1.6 billion in 1996-97 and $2.4 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was eliminated.
1998-99 Fiscal Year Budget
When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal Year
of $55.4 billion, and proposed expenditures in the same amount. By the time the
Governor released the May Revision to the 1998-99 Budget ("May Revision") on May
14, 1998, the Administration projected that revenues for the 1997-98 and 1998-99
Fiscal Years combined would be more than $4.2 billion higher than was projected
in January. The Governor proposed that most of this increased revenue be
dedicated to fund a 75% cut in the Vehicle License Fee (VLF").
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and
the Governor signed it on August 21, 1998. Some 33 companion bills necessary to
implement the budget were also signed. In signing the Budget Bill, the Governor
used his line-item veto power to reduce expenditures by $1.360 billion from the
General Fund and $160 million from Special Funds. Of this total, the Governor
indicated that about $250 million of vetoed funds were "set aside" to fund
programs for education. Vetoed items included education funds, salary increases
and many individual resources and capital projects.
The 1998-99 Budget Act was based on projected General Fund revenues
and transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion. The revenue projections
were based on the May Revision.
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After giving effect to the Governor's vetoes, the Budget Act provided
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projected a balance in the SFEU at June 30,1999 (but
without including the "set aside" veto amount) of $1.255 billion. The Budget Act
assumed the State would carry out its normal intra-year cash flow borrowing in
the amount of $ 1.7 billion of revenue anticipation notes, which were issued on
October 1, 1998.
The most significant feature of the 1998-99 Budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which provides
for a phased-in reduction of the VLF. Since the VLF is currently transferred to
cities and counties, the bill provides for the General Fund to replace the lost
revenues. Commencing January 1, 1999, the VLF has been reduced by 25%, at a cost
to the General Fund of approximately $500 million in the 1998-99 Fiscal Year and
about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 Budget includes both a
temporary and permanent increase in the personal income tax dependent credit
($612 million General Fund cost in 1998-99 but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted business
tax credits ($106 million).
Other significant elements of the 1998-99 Budget Act are as follows:
1. Proposition 98 funding for K-12 schools was increased by $2.2
billion in General Fund moneys over revised 1997-98 levels,
about $1 billion higher than the minimum Proposition 98
guaranty. An additional $600 million was appropriated to
"settle up" prior years' Proposition 98 entitlements, and was
primarily devoted to one-time uses such as block grants,
deferred maintenance, and computer and laboratory equipment.
Of the 1998-99 funds, major new programs include money for
instructional and library materials, deferred maintenance,
support for increasing the school year to 180 days and
reduction of class sizes in Grade 9. The Budget also included
$250 million as repayment of prior years' loans to schools, as
part of the settlement of the CTA v. Gould lawsuit.
2. Funding for higher education increased substantially above the
level called for in the Governor's four-year compact. General
Fund support was increased by $339 million (15.6%) for the
University of California and $271 million (14.1%) for the
California State University system. In addition, Community
Colleges received an increase of $183 million (9%).
3. The Budget included increased funding for health, welfare and
social services programs. A 4.9% grant increase was included
in the basic welfare grants, the first increase in those
grants in 9 years. Future increases will depend on sufficient
General Fund revenue to trigger the phased cuts in VLF
described above.
4. Funding for the judiciary and criminal justice programs
increased by about 15% over 1997-98, primarily to reflect
increased State support for local trial courts and rising
prison population.
5. Various other highlights of the Budget included new funding
for resources projects, dedication of $240 million of General
Fund moneys for capital outlay projects, funding of a State
employee salary increase, funding of 2,000 new Department of
Transportation positions to accelerate transportation
construction projects, and funding of the Infrastructure and
Economic Development Bank ($50 million).
6. The State of California received approximately $167 million of
federal reimbursements to offset costs related to the
incarceration of undocumented alien felons for federal fiscal
year 1997. The State anticipates receiving approximately $173
million in federal reimbursements for federal fiscal year
1998.
Proposed 1999-2000 Budget
On June 29, 1999, Governor Davis signed the new state budget for Fiscal
Year 1999-2000 (the "Budget").
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The Budget anticipates $74.3 billion in expenditures in FY 1999-00,
with an $881 million SFEU reserve at June 30, 2000. The Budget represented a 10%
increase from the 1998-99 budget. Some of the principal budget matters are
summarized below:
1. Spending for education is increased by $2.3 billion to a
record $26.4 billion. New program initiatives were proposed
for: reading improvement, new textbooks school safety,
improving teacher quality, funding teacher bonuses, providing
greater accountability for school performance, increasing
preschool and child care programs and funding deferred
maintenance of school facilities. The Budget also proposed
increased funding for higher education at the University of
California and California State University.
2. About $1 billion would be directed toward infrastructure
costs, including $425 million in funding for the
Infrastructure Bank, construction of a new prison in the
Central Valley, additional equipment for train and ferry
service, and payment of deferred maintenance for State parks.
3. The Governor proposes to maintain the SFEU budget reserve at a
level of $881 million at June 30, 2000, about $470 million
above the Budget proposal.
Constitutional, Legislative and Other Factors. Certain California constitutional
amendments, legislative measures, executive orders, administrative regulations
and voter initiatives could produce the adverse effects described below, among
others.
Revenue Distribution. Certain Debt Obligations in the Portfolio may be
obligations of issuers that rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's general fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of the
State's general fund will be distributed in the future to counties, cities and
their various entities is unclear.
Health Care Legislation. Certain Debt Obligations in the Portfolio may
be obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State of
California will be paid for non-emergency acute inpatient services rendered to
Medi-Cal beneficiaries. The State may also terminate these contracts without
notice under certain circumstances and is obligated to make contractual payments
only to the extent the California legislature appropriates adequate funding
therefor.
California enacted legislation in 1982 that authorizes private health
plans and insurers to contract directly with hospitals for services to
beneficiaries on negotiated terms. Some insurers have introduced plans known as
"preferred provider organizations" ("PPOs"), which offer financial incentives
for subscribers who use only the hospitals which contract with the plan. Under
an exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or
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gross revenues. Conversely, participation may maintain or increase the patient
base, but may result in reduced payment and lower net income to the contracting
hospitals.
These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide Health
Planning and Development for health facility construction loans. If a default
occurs on insured Debt Obligations, the State Treasurer will issue debentures
payable out of a reserve fund established under the insurance program or will
pay principal and interest on an unaccelerated basis from unappropriated State
funds. At the request of the Office of Statewide Health Planning and
Development, Arthur D. Little, Inc. prepared a study in December 1983, to
evaluate the adequacy of the reserve fund established under the insurance
program and based on certain formulations and assumptions found the reserve fund
substantially underfunded. In September of 1986, Arthur D. Little, Inc. prepared
an update of the study and concluded that an additional 10% reserve be
established for "multi-level" facilities. For the balance of the reserve fund,
the update recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.
Mortgages and Deeds. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of foreclosure and the other on the type of debt secured.
Under the former, a deficiency judgment is barred when the foreclosure is
accomplished by means of a nonjudicial trustee's sale. Under the latter, a
deficiency judgment is barred when the foreclosed mortgage or deed of trust
secures certain purchase money obligations. Another California statute, commonly
known as the "one form of action" rule, requires creditors secured by real
property to exhaust their real property security by foreclosure before bringing
a personal action against the debtor. The fourth statutory provision limits any
deficiency judgment obtained by a creditor secured by real property following a
judicial sale of such property to the excess of the outstanding debt over the
fair value of the property at the time of the sale, thus preventing the creditor
from obtaining a large deficiency judgment against the debtor as the result of
low bids at a judicial sale. The fifth statutory provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to which
a deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. The debtor may
reinstate the mortgage, in the manner described above, up to five business days
prior to the scheduled sale date. Therefore, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow of revenues
available to an issuer for the payment of debt service on the outstanding
obligations if such defaults occur with respect to a substantial number of
mortgages or deeds of trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of
the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of the
Federal or State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain Debt Obligations in the Portfolio may be obligations which
finance the acquisition of single family home mortgages for low and moderate
income mortgagors. These obligations may be payable solely from revenues derived
from the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
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Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and then only
if the borrower prepays an amount in excess of 20% of the original principal
amount of the mortgage loan in a 12-month period; a prepayment charge cannot in
any event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the outstanding debt obligations which financed such home
mortgages.
Proposition 13. Certain of the Debt Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA was to limit ad
valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem
tax on real property to 1% of full cash value to be collected by the counties
and apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975/76 tax bill under `full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement Article
XIIIA provides that notwithstanding any other law, local agencies may not levy
any ad valorem property tax except to pay debt service on indebtedness approved
by the voters prior to July 1, 1978, and that each county will levy the maximum
tax permitted by Article XIIIA.
Proposition 9. On November 6, 1979, an initiative known as "Proposition
9" or the "Gann Initiative" was approved by the California voters, which added
Article XIIIB to the California Constitution. Under Article XIIIB, State and
local governmental entities have an annual "appropriations limit" and are not
allowed to spend certain moneys called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB does not affect
the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services provided by these entities. Article XIIIB also provides that if these
entities' revenues in any year exceed the amounts permitted to be spent, the
excess is to be returned by revising tax rates or fee schedules over the
subsequent two years.
Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (modified by Proposition 111 as discussed below), K-14 schools
are guaranteed the greater of (a) in general, a fixed percent of General Fund
revenues ("Test 1"), (b) the amount appropriated to K-14 schools in the prior
year, adjusted for changes in the cost of living (measured as in Article XIII B
by reference to State per capita personal income) and enrollment ("Test 2"), or
(c) a third test, which would replace Test 2 in any year when the percentage
growth in per capita General Fund revenues from the prior year plus one half of
one percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount appropriated
in the prior year adjusted for changes in enrollment and per capita General Fund
revenues, plus an additional small adjustment factor. If Test 3 is used in any
year, the difference between Test 3 and Test 2 would become a "credit" to
schools which would be the basis of payments in future years when per capita
General Fund revenue growth exceeds per capita personal income growth.
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Proposition 98 permits the Legislature -- by two-thirds vote of both
houses, with the Governor's concurrence -- to suspend the K-14 schools' minimum
funding formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues
for several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. In 1992, a lawsuit was filed, California Teachers'
Association v. Gould, which challenged the validity of these off-budget loans.
During the course of this litigation, a trial court determined that almost $2
billion in "loans" which had been provided to school districts during the
recession violated the constitutional protection of support for public
education. A settlement was reached on April 12, 1996 which ensures that future
school funding will not be in jeopardy over repayment of these so-called loans.
Proposition 111. On June 30, 1989, the California Legislature enacted
Senate Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 -- on the June 5, 1990 ballot
as Proposition 111 -- was approved by the voters and took effect on July 1,
1990. Among a number of important provisions, Proposition 111 recalculated
spending limits for the State and for local governments, allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduced the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
Proposition 62. On November 4, 1986, California voters approved an
initiative statute known as Proposition 62. This initiative provided the
following:
1. Requires that any tax for general governmental purposes
imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental
entity's legislative body and by a majority vote of the
electorate of the governmental entity;
2. Requires that any special tax (defined as taxes levied for
other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the
voters within that jurisdiction;
3. Restricts the use of revenues from a special tax to the
purposes or for the service for which the special tax was
imposed;
4. Prohibits the imposition of ad valorem taxes on real property
by local governmental entities except as permitted by Article
XIIIA;
5. Prohibits the imposition of transaction taxes and sales taxes
on the sale of real property by local governments;
6. Requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority vote of the
electorate within two years of the adoption of the initiative;
7. Requires that, in the event a local government fails to comply
with the provisions of this measure, a reduction in the amount
of property tax revenue allocated to such local government
occurs in an amount equal to the revenues received by such
entity attributable to the tax levied in violation of the
initiative; and
8. Permits these provisions to be amended exclusively by the
voters of the State of California.
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In September 1988, the California Court of Appeal in City of
Westminster v. County of Orange, 204 Cal.App. 3d 623, 215 Cal.Rptr. 511
(Cal.Ct.App. 1988), held that Proposition 62 is unconstitutional to the extent
that it requires a general tax by a general law city, enacted on or after August
1, 1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is
impossible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62. The
California Court of Appeal in City of Woodlake v. Logan, (1991) 230 Cal.App.3d
1058, subsequently held that Proposition 62's popular vote requirements for
future local taxes also provided for an unconstitutional referenda. The
California Supreme Court declined to review both the City of Westminster and the
City of Woodlake decisions.
In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28,
1995) 11 Cal.4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal.4th 344e,
the California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.
In McBrearty v. City of Brawley, 59 Cal. App. 4th 1441, 69 Cal. Rptr.
2d 862 (Cal. Ct. App. 1997), the Court of Appeal held that the city of Brawley
must either hold an election or cease collection of utility taxes that were not
submitted to a vote. In 1991, the city of Brawley adopted an ordinance imposing
a utility tax on its residents and began collecting the tax without first
seeking voter approval. In 1996, the taxpayer petitioned for writ of mandate
contending that Proposition 62 required the city to submit its utility tax on
residents to vote of local electorate. The trial court issued a writ of mandamus
and the city appealed.
First, the Court of Appeal held that the taxpayer's cause of action
accrued for statute of limitation purposes at the time of the Guardino decision
rather than at the time when the city adopted the tax ordinance which was July
1991. Second, the Court held that the voter approval requirement in Porposition
62 was not an invalid mechanism under the state constitution for the involvement
of the electorate in the legislative process. Third, the Court rejected the
city's argument that Guardino should only be applied on a prospective basis.
Finally, the Court held Proposition 218 (see discussion below) did not impliedly
protect any local general taxes imposed prior to January 1, 1995 against
challenge.
Assembly Bill 1362 (Mazzoni), introduced February 28, 1997, which would
have made the Guardino decision inapplicable to any tax first imposed or
increased by an ordinance or resolution adopted before December 14, 1995, was
vetoed by the Governor on October 11, 1997. The California State Senate passed
the Bill on May 16, 1996 and the California State Assembly passed the bill on
September 11, 1996. It is not clear whether the Bill, if enacted, would have
been constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
Proposition 218. On November 5, 1996, the voters of the State approved
Proposition 218, a constitutional initiative, entitled the "Right to Vote on
Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and XIII D
to the California Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect both existing and
future taxes, assessments, fees and charges. Proposition 218 became effective on
November 6, 1996. The Sponsors are unable to predict whether and to what extent
Proposition 218 may be held to be constitutional or how its terms will be
interpreted and applied by the courts. As discussed below, a California
appellate court in the case of Consolidated Fire Protection Dist. et al. v.
Howard Jarvis Taxpayers' Assoc., 63 Cal. App. 4th 211 (1998) upheld one of the
provisions of Proposition 218. However, if upheld, Proposition 218 could
substantially restrict certain local governments' ability to raise future
revenues and could subject certain existing sources of revenue to reduction or
repeal, and increase local government costs to hold elections, calculate fees
and assessments, notify the public and defend local government fees and
assessments in court.
Article XIII C of Proposition 218 requires majority voter approval for
the imposition, extension or increase of general taxes and two-thirds voter
approval for the imposition, extension or increase of special taxes, including
special taxes deposited into a local government's general fund. Proposition 218
also provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
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November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the
initiative's power to give voters the power to reduce or repeal local taxes,
assessments, fees and charges, regardless of the date such taxes, assessments,
fees or charges were imposed. This extension of the initiative's power to some
extent constitutionalizes the March 6, 1995 State Supreme Court decision in
Rossi v. Brown, which upheld an initiative that repealed a local tax and held
that the State constitution does not preclude the repeal, including the
prospective repeal, of a tax ordinance by an initiative, as contrasted with the
State constitutional prohibition on referendum powers regarding statutes and
ordinances which impose a tax. Generally, the initiative process enables
California voters to enact legislation upon obtaining requisite voter approval
at a general election. Proposition 218 extends the authority stated in Rossi v.
Brown by expanding the initiative power to include reducing or repealing
assessments, fees and charges, which had previously been considered
administrative rather than legislative matters and therefore beyond the
initiative power.
The initiative power granted under Article XIII C of Proposition 218,
by its terms, applies to all local taxes, assessments, fees and charges and is
not limited to local taxes, assessments, fees and charges that are property
related.
Article XIII D of Proposition 218 adds several new requirements making
it generally more difficult for local agencies to levy and maintain
"assessments" for municipal services and programs. "Assessment" is defined to
mean any levy or charge upon real property for a special benefit conferred upon
the real property.
Article XIII D of Proposition 218 also adds several provisions
affecting "fees" and "charges" which are defined as "any levy other than an ad
valorem tax, a special tax, or an assessment, imposed by a local government upon
a parcel or upon a person as an incident of property ownership, including a user
fee or charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. This aspect of Proposition 218, section 4
of Article XIIID, was found not to constitute an unlawful referendum pursuant to
Article II, section 9 of the California Constitution. Following Guardino, supra,
in this regard, the court held that these "balloting procedures" were
constitutional. Consolidated Fire Protection., supra, at 225-26. Moreover,
except for fees or charges for sewer, water and refuse collection services, no
property related fee or charge may be imposed or increased without majority
approval by the property owners subject to the fee or charge or, at the option
of the local agency, two-thirds voter approval by the electorate residing in the
affected area.
Proposition 87. On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is approved
by voters on or after January 1, 1989.
POLICIES AND TECHNIQUES APPLICABLE TO THE FUNDS
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
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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. Each Fund subject to the receipt of any required
regulatory authorization, may acquire "stand-by commitments," which will enable
a 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). A Fund may enter into such
transactions subject to the limitations in the rules under the 1940 Act. A
stand-by commitment is a right acquired by 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 a Fund's option, at a specified price. Stand-by commitments are
also known as "puts." Each Fund's investment policies permit the acquisition of
stand-by commitments solely to facilitate portfolio liquidity. The exercise by a
Fund of a stand-by commitment is subject to the ability of the other party to
fulfill its contractual commitment.
Stand-by commitments acquired by a Fund will have the following
features: (1) they will be in writing and will be physically held by the Funds'
custodian, State Street Bank and Trust Company; (2) a 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) a 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 a Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period a Fund owned the securities, plus (ii)
all interest accrued on the securities since the last interest payment date. A
Fund expects to refrain from exercising a stand-by commitment in the event that
the amount receivable upon exercise of the stand-by commitment is significantly
greater than the then current market value of the underlying municipal
obligations, determined as described below under "Net Asset Value," in order to
avoid imposing a loss on a seller and thus jeopardizing a Fund's business
relationship with that seller.
Each Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by a Fund in either manner for outstanding stand-by commitments will not
exceed 1/2 of 1% of the value of the total assets of 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 a Fund
had not acquired such stand-by commitment.
It is difficult to evaluate the likelihood of use or the potential
benefit of a stand-by commitment. Therefore, it is expected that the Trustees
will determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where the Fund has paid for a stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held.
Management understands that the Internal Revenue Service (the "IRS")
has issued a revenue ruling to the effect that, under specified circumstances, a
registered investment company will be the owner of tax-exempt municipal
obligations acquired subject to a put option. The IRS has also issued private
letter rulings to certain taxpayers (which do not serve as precedent for other
taxpayers) to the effect that tax-exempt interest received by a regulated
investment company with respect to such obligations will be tax-exempt in the
hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Fund intends to take the position that it is the owner of any
municipal obligations acquired subject to a stand-by commitment and that
tax-exempt interest earned with respect to such municipal obligations will be
tax-exempt in its hands. There is no assurance that the IRS will agree with such
position in any
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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 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
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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 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 Rule
144A) or because they are subject to other legal or contractual delays in or
restrictions on resale. This investment practice, therefore, could have the
effect of increasing the level of illiquidity of a Fund. It is the Fund's policy
that illiquid securities (including repurchase agreements of more than seven
days duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 15%
of the value of the net assets of SMTFF, SNYTFF and SCTFF. The Trust's Board of
Trustees has approved guidelines for use by the Adviser in determining whether a
security is illiquid.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; (iii) 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. Issuers of restricted securities may not be subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between a Fund's decision to sell a
restricted or illiquid security and the point at which a Fund is permitted or
able to sell such security, a Fund might obtain a price less favorable than the
price that prevailed when it decided to sell. Where a registration statement is
required for the resale of restricted securities, a Fund may be required to bear
all or part of the registration expenses. 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, a Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Adviser may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Repurchase Agreements. Each 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.
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For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund may be required to return the Obligation to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, the
Fund would be at risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt obligation purchased for the
Fund, the Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
Obligation, in which case the Fund may incur a loss if the proceeds to the Fund
of the sale to a third party are less than the repurchase price. However, if the
market value of the Obligation subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Fund will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
Reverse Repurchase Agreements. Each Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
will maintain a segregated account, as described under "Use of Segregated and
Other Special Accounts" in connection with outstanding reverse repurchase
agreements. Reverse repurchase agreements are deemed to be borrowings subject to
the Fund's investment restrictions applicable to that activity. The Fund will
enter into a reverse repurchase agreement only when the Adviser believes that
the interest income to be earned from the investment of the proceeds of the
transaction will be greater than the interest expense of the transaction. There
is no current intention to invest more than 5% of the Fund's net assets in
reverse repurchase agreements.
Indexed Securities. Each Fund may each invest in indexed securities, the value
of which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which
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.
Securities Backed by Guarantees. Certain Funds may invest in securities backed
by guarantees from banks, insurance companies and other financial institutions.
Consequently, changes in the credit quality of these institutions could have an
adverse impact on securities they have guaranteed or backed, which could cause
losses to a Fund and affect its share price.
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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, 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
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Fund's purchase of a call option on a security, financial future, index,
currency or other instrument might be intended to protect a Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
Each Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A Fund
will only sell OTC options that are subject to a buy-back provision permitting a
Fund to require the Counterparty to sell the option back to a Fund at a formula
price within seven days. A Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the 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.
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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 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
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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
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.
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
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segregate cash or liquid assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by a Fund requires that
Fund to segregate cash or liquid assets equal to the exercise price.
OTC options entered into by a Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when a Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, and that Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade 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.")
Inverse Floaters. Each of the Funds may invest in inverse floaters. Inverse
floaters are debt instruments with a floating rate of interest that bears an
inverse relationship to changes in short-term market interest rates. Investments
in this type of security involve special risks as compared to investments in,
for example, a fixed rate municipal security. The fund could lose money and its
NAV could decline if movements in interest rates are incorrectly anticipated.
Moreover, the markets for securities of this type may be less developed and may
have less liquidity than the markets for more traditional municipal securities.
Trustees' Power to Change Objective and Policies. Except as specifically stated
to the contrary, the objectives and policies stated above may be changed by the
Trustees without a vote of the shareholders of the Funds.
Investment Restrictions
Unless specified to the contrary, the following restrictions may not be
changed without the approval of a majority of the outstanding voting securities
of that Fund which, under the 1940 Act and the rules thereunder and as used in
this Statement of Additional Information, means the lesser of (1) 67% of the
shares of a Fund present at a meeting if the holders of more than 50% of the
outstanding shares of a Fund are present in person or by proxy, or (2) more than
50% of the outstanding shares of the Fund. Any investment restrictions herein
which involve a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by, the Fund.
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As a matter of fundamental policy SMTFF and SNYTFF have each elected to
be classified as a non-diversified series of an open-end investment company;
SCTFF has elected to be classified as a diversified series of an open-end
investment company. In addition, as a matter of fundamental policy SMTFF, SNYTFF
and SCTFF each will not:
(1) borrow money, except as permitted under the 1940 Act 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 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 and as interpreted or modified by
regulatory authority having jurisdiction, from time to time
(except that Scudder New York Tax Free Money Fund reserves the
freedom of action to concentrate its investments in
instruments issued by domestic banks);
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) purchase physical commodities or contracts relating to
physical commodities; or
(7) make loans except as permitted under the 1940 Act and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time.
As a matter of fundamental policy, SMTFF 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 fundamental policy, SNYTFF will:
(9) have at least 80% of its net assets invested in New York
municipal securities during periods of normal market
conditions.
As a matter of nonfundamental policy, SMTFF, SNYTFF and SCTFF each 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
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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.
Interfund Borrowing and Lending Program. The Funds have received exemptive
relief from the SEC which permits the Funds to participate in an interfund
lending program among certain investment companies advised by the Adviser. The
interfund lending program allows the participating funds to borrow money from
and loan money to each other for temporary or emergency purposes. The program is
subject to a number of conditions designed to ensure fair and equitable
treatment of all participating funds, including the following: (1) no fund may
borrow money through the program unless it receives a more favorable interest
rate than a rate approximating the lowest interest rate at which bank loans
would be available to any of the participating funds under a loan agreement; and
(2) no fund may lend money through the program unless it receives a more
favorable return than that available from an investment in repurchase agreements
and, to the extent applicable, money market cash sweep arrangements. In
addition, a fund may participate in the program only if and to the extent that
such participation is consistent with the fund's investment objectives and
policies (for instance, money market funds would normally participate only as
lenders and tax exempt funds only as borrowers). Interfund loans and borrowings
may extend overnight, but could have a maximum duration of seven days. Loans may
be called on one day's notice. A fund may have to borrow from a bank at a higher
interest rate if an interfund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional costs. The program is subject to the oversight and periodic review of
the Boards of the participating funds. To the extent the Fund is actually
engaged in borrowing through the interfund lending program, the Fund, as a
matter of non-fundamental policy, may not borrow for other than temporary or
emergency purposes (and not for leveraging), except that the Fund may engage in
reverse repurchase agreements and dollar rolls for any purpose.
PURCHASES
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 Class S
and $1000 of AARP Class 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 for Class S and
$1,000 for AARP Class), name of bank or trust company from which the wire will
be sent, the exact registration of the 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. Investors interested in investing in the AARP
Class should call 800-253-2277 for further instructions.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts and is $1,000 for the AARP Class.
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Minimum Balances
Shareholders should maintain a share balance worth at least $2,500
Class S and $1,000 for AARP Class ($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 for Class S and $1,000 for AARP
Class; 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 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 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 not available for Scudder IRA
accounts.
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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.
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 the Funds do not follow such procedures, they may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Investors interested in making subsequent investments in AARP Class
should call 800-253-2277 for further instruction.
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.
Share Certificates
Due to the desire of the Trusts' management to afford ease of
redemption, certificates will not be issued to indicate ownership in a 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.
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All issued and outstanding shares of what were formerly AARP Funds that
were subsequently consolidated or merged into existing Scudder Funds were
simultaneously cancelled on the books of the AARP Funds. Share certificates
representing interests in shares of the AARP Fund will represent a number of
shares of the AARP Class of the Scudder Fund into which the AARP Fund was
consolidated or merged. The AARP Class of shares of each fund will not issue
certificates representing shares in connection with the consolidation or merger.
Other Information
Each 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 Boards 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
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 for Class S and $1,000 for
AARP Class. 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.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder Fund to an
existing account in another Scudder Fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone
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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 or classes of Scudder Funds. For more
information, please call 1-800-225-5163. Investors interested in exchanging AARP
Class shares of a Fund should call 800-253-2277 for more information.
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.
Each 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
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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 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
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. Each 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 Funds, Scudder
Service Corporation and State Street Bank and Trust Company reserve the right at
any time to suspend or terminate the "Checkwriting" procedure.
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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 Rule 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers 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.
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Investors are encouraged to review the fee and expense tables and the
consolidated financial highlights of the Funds' prospectus for more specific
information about the rates at which management fees and other expenses are
assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is www.scudder.com.
The address for the AARP Class of shares is aarp.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.
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.
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 for Class S and 1-800-253-2277 for AARP Class 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 for Class S and 1-800-253-2277 for AARP Class. 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.
Reports to Shareholders
The Trusts issue 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.
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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 for
Class S and 1-800-253-2277 for AARP Class.
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; a list of Scudder's
funds follows.
MONEY MARKET
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series+
Scudder Government Money Market Series+
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series+
Scudder California Tax Free Money Fund*
Scudder New York Tax Free Money Fund*
TAX FREE
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund*
Scudder Massachusetts Tax Free Fund*
Scudder New York Tax Free Fund*
Scudder Pennsylvania Tax Free Fund*
U.S. INCOME
Scudder Short Term Bond Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
GLOBAL INCOME
Scudder Global Bond Fund
Scudder Emerging Markets Income Fund
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio
Scudder Pathway Series: Balanced Portfolio
Scudder Pathway Series: Growth Portfolio
Scudder Pathway Series: International Portfolio
-----------------------------------------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
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U.S. GROWTH AND INCOME
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
U.S. GROWTH
Value
Scudder Large Company Value Fund
Scudder Value Fund**
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund**
Scudder Large Company Growth Fund
Scudder Select 1000 Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
GLOBAL EQUITY
Worldwide
Scudder Global Fund
Scudder International Fund***
Scudder Global Discovery Fund**
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Health Care Fund
Scudder Technology Fund
***Only the International Shares are part of the Scudder Family of Funds
SCUDDER PREFERRED SERIES
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
------------------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
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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.
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
Detailed information on any Scudder investment plan, including
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plans. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Automatic Withdrawal Plan
Non-retirement plan shareholders who currently own or purchase $10,000
or more of shares of a Fund may establish an Automatic Withdrawal Plan. The
investor can then receive monthly, quarterly or periodic redemptions from his or
her account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Trust or its agent on written notice, and will be terminated
when all shares of the Fund under the Plan have been liquidated or upon receipt
by the Trust of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163 for Class S and 1-800-253-2277 for AARP Class.
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."
52
<PAGE>
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50 for Class S and AARP Shares.
Shareholders may arrange to make periodic investments in the AARP Class
of each Fund through automatic deductions from checking accounts. The minimum
pre-authorized investment amount is $500. New shareholders who open a Gift to
Minors Account pursuant to the Uniform Gift to Minors Act (UGMA) and the Uniform
Transfer to Minors Act (UTMA) and who sign up for the Automatic Investment Plan
will be able to open a Fund account for less than $500 if they agree to increase
their investment to $500 within a 10 month period. Investors may also invest in
any AARP Class for $500 a month if they establish a plan with a minimum
automatic investment of at least $100 per month. This feature is only available
to Gifts to Minors Account investors. The Automatic Investment Plan may be
discontinued at any time without prior notice to a shareholder if any debit from
their bank is not paid, or by written notice to the shareholder at least thirty
days prior to the next scheduled payment to the Automatic Investment Plan.
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
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.
53
<PAGE>
PERFORMANCE INFORMATION
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.
Average Annual Total Return for periods ended March 31, 1999
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
Scudder Massachusetts Tax Free Fund+ 5.29 7.21 8.06% --
Scudder New York Tax Free Fund 5.46 7.13 7.91 --
Scudder California Tax Free Fund 5.78 7.54 8.15 --
+ If the Adviser had not maintained Fund expenses and had imposed a full
management fee, average annual total returns 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.
Cumulative Total Returns for the period ended March 31, 1999
One Five Ten Life of
Year Years Years Fund
---- ----- ----- ----
Scudder Massachusetts Tax Free Fund+ 5.29 41.66 117.19% --
Scudder New York Tax Free Fund 5.46 41.10 114.12 --
Scudder California Tax Free Fund 5.78 43.85 118.99 --
+ If the Adviser had not maintained Fund expenses and had imposed a full
management fee, cumulative total returns would have been lower.
54
<PAGE>
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
SEC Yield
Yield for each Fund 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.
30-day Net-Annualized SEC Yields for the period ended March 31, 1999
Scudder Massachusetts Tax Free Fund 3.98
Scudder New York Tax Free Fund 3.84
Scudder California Tax Free Fund 3.92
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.
SMTFF. Taxpayers with an effective combined marginal tax rate of 43.19% would
need to earn a taxable yield of 7.01% to receive after-tax income equal to the
3.98% tax-free yield of SMTFF for the 30-day period ended on March 31, 1999.
SNYTFF. Taxpayers with an effective combined marginal income tax rate of 43.74%
would need earn a taxable yield of 6.83% to receive after-tax income equal to
the 3.84% tax-free yield of Scudder New York Tax Free Fund for the 30-day period
ended March 31, 1999.
SCTFF. Taxpayers with an effective combined marginal income tax rate of 45.22%
would have to earn 3.92% to receive the after-tax income equal to the 7.16%
tax-free yield of Scudder California Tax Free Fund for the 30-day period ended
March 31, 1999.
Quotations of each Fund's performance are historical 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.
55
<PAGE>
Massachusetts Tax-free Yields
The table below shows Massachusetts taxpayers what an investor would
have to earn from a comparable taxable investment to equal SMTFF's double
tax-free yield.
<TABLE>
<CAPTION>
----------------------------------------------------- --------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a
Taxable Investment Would Have to Earn*:
----------------------------------------------------- --------------------------------------------------------------------
1999 Taxable Income: Combined Marginal Tax 5% 7% 9%
Rate:
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
INDIVIDUAL
----------------------------------------------------- -------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0-25,750 20.06% 6.25% 8.76% 11.26%
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
25,751-62,450 27.24 6.87 9.62 12.37
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
62,451-130,250 31.33 7.28 10.19 13.11
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
130,251-283,150 35.91 7.80 10.92 14.04
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
OVER 283,150 43.19 8.80 12.32 15.84
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
JOINT RETURN
----------------------------------------------------- -------- -----------------------------------------------------------
$0-43,050 20.06% 6.25% 8.76% 11.26%
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
43,051-104,050 27.22 6.87 9.62 12.37
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
104,051-158,550 29.93 7.28 10.19 13.11
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
158,551-283,150 34.28 7.80 10.92 14.04
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
OVER 283,150 43.19 8.80 12.32 15.84
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
</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.
New York Tax-free Yields
The table below shows New York City taxpayers what an investor would
have to earn from a comparable taxable investment to equal SNYTFF's triple
tax-free yield.
<TABLE>
<CAPTION>
----------------------------------------------------- --------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a
Taxable Investment Would Have to Earn*:
----------------------------------------------------- --------------------------------------------------------------------
1999 Taxable Income: Combined Marginal Tax 5% 7% 9%
Rate+:
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
INDIVIDUAL
----------------------------------------------------- -------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0-16,000 18.40% 6.13% 8.58% 11.03%
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
8,001-11,000 18.51 6.14 8.59 11.04
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
56
<PAGE>
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
11,001-13,000 18.66 6.15 8.61 11.07
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
13,001-20,000 19.14 6.18 8.66 11.13
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
20,000-25,750 19.51 6.21 8.70 11.18
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
25,751-62,451 27.94 6.94 9.71 12.49
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
62,451-130,250 31.99 7.35 10.29 13.23
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
130,251-283,150 36.53 7.88 11.03 14.18
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
OVER 283,150 43.74 8.89 12.44 16.00
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
JOINT RETURN
----------------------------------------------------- -------- -----------------------------------------------------------
$0-16,000 18.40% 6.13% 8.58% 11.03%
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
16,001-22,000 18.52 6.14 8.59 11.04
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
22,001-26,000 18.66 6.15 8.61 11.07
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
26,001-40,000 19.14 6.18 8.66 11.13
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
40,001-43,050 19.25 6.19 8.67 11.15
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
43,051-104,050 27.92 6.94 9.71 12.49
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
104,051-158,550 30.60 7.20 10.09 12.97
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
158,551-283,150 34.91 7.68 10.75 13.83
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
OVER 283,150 43.74 8.89 12.44 16.00
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
</TABLE>
* These illustrations assume a marginal federal income tax rate of 15% to
39.6% and that the federal alternative minimum tax is not applicable.
Upper income individuals may be subject to an effective federal income
tax rate in excess of the applicable marginal rate as a result of the
phase-out of personal exemptions and itemized deductions made permanent
by the Revenue Reconciliation Act of 1993. Moreover, upper income
taxpayers will also be subject to a tax table benefit recapture imposed
by New York state that will have the effect of increasing their
effective tax rate. Individuals subject to these phase-out provisions
would have to invest in taxable securities with a yield in excess of
those shown of the table in order to achieve an after-tax yield on a
comparable tax-exempt security.
+ Combined marginal tax rates are adjusted for the deductibility of state
and City taxes.
California Tax-free Yields
The table below shows California taxpayers what an investor would have
to earn from a comparable taxable investment to equal SCTFF's double tax-free
yield.
<TABLE>
<CAPTION>
----------------------------------------------------- --------------------------------------------------------------------
To Equal Hypothetical Tax-Free Yields of 5%, 7% and 9%, a
Taxable Investment Would Have to Earn*:
----------------------------------------------------- --------------------------------------------------------------------
1999 Taxable Income: Combined Marginal Tax 5% 7% 9%
Rate:
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
INDIVIDUAL
----------------------------------------------------- -------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0-5,131 15.85% 5.94% 8.32% 10.70%
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
57
<PAGE>
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
5,132-12,161 16.34 5.98 8.37 10.76
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
12,162-19,193 17.10 6.03 8.44 10.86
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
19,194-25,750 17.86 6.09 8.52 10.96
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
25,751-26,644 18.36 6.12 8.57 11.02
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
26,645-33,673 21.67 6.38 8.94 11.49
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
33,674-62,450 27.79 6.92 9.69 12.46
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
62,451-130,250 32.85 7.45 10.42 13.40
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
130,251-283,150 37.80 8.04 11.25 14.47
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
OVER 283,150 45.22 9.13 12.78 16.43
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
JOINT RETURN
----------------------------------------------------- -------- -----------------------------------------------------------
$0-10,262 15.85% 5.94% 8.32% 10.70%
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
10,263-24,322 16.34 5.98 8.37 10.76
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
24,323-38,386 17.10 6.03 8.44 10.86
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
38,387-43,050 17.42 6.05 8.48 10.90
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
43,051-53,288 20.34 6.28 8.79 11.30
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
53,289-67,346 23.22 6.51 9.12 11.72
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
67,347-104,050 27.36 6.88 9.64 12.39
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
104,051-158,550 30.88 7.23 10.13 13.02
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
158,551-283,150 35.81 7.79 10.90 14.02
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
OVER 283,150 45.22 9.13 12.78 16.43
-------------------------- -------------------------- -------- ------------------- ------------------- -------------------
</TABLE>
* These illustrations assume a marginal federal tax rate of 15% 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.
+ Combined marginal tax rates are adjusted for deductibility of state
taxes.
Comparison of Fund Performance
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.
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.
58
<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.
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.
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.
ORGANIZATION OF THE FUNDS
SMTFF and SNYTFF are each 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, as amended from time to time. 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 Trustees have the right 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.
SCTFF is a diversified series of Scudder California Tax Free Trust. The
Trust is a Massachusetts business trust established under a Declaration of Trust
dated May 3, 1983, as amended from time to time. Such Declaration of Trust
59
<PAGE>
was amended and restated on December 8, 1987. Its authorized capital consists of
an unlimited number of shares of beneficial interest of $.01 par value. The
shares are currently divided into two 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 are fully paid and
nonassessable by the Trust, and redeemable as described in this Statement of
Additional Information and in the Funds' prospectus.
The assets of each 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 each 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 each Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of each 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 Trusts 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 Declarations of Trust provides that obligations of the Trusts are
not binding upon the Trustees individually but only upon the property of a
Trust, that the Trustees and officers will not be liable for errors of judgment
or mistakes of fact or law, and that a 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 a 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 a Trust. However, nothing in the Declarations 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
Scudder Kemper Investments, Inc., 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,
60
<PAGE>
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 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. and The
Japan Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLinkSM Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLinkSM Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLinkSM
is a service mark of AMA Solutions, Inc.
In selecting the securities in which each Fund may invest, the
conclusions and investment decisions of the Adviser with respect to a Fund are
based primarily on the analyses of its own research department. The Adviser
receives published reports and statistical compilations of the issuers
themselves, as well as analyses from brokers and 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.
In certain cases the investments for the Funds are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser
that have similar names, objectives and investment styles as the Funds. You
should be aware that the Funds are likely to differ from these other mutual
funds in size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Funds can be expected to vary from those of the other mutual
funds.
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 the Adviser, which are substantially
identical to the current investment management agreements, except for the date
of execution and termination. The agreements became effective
61
<PAGE>
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 10, 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.
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.
SMTFF. For these services, SMTFF 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 March 31, 1997, 1998 and
1999, pursuant to these agreements, the investment management fees incurred by
SMTFF were $1,933,810, $2,110,713 and $2,375,568, respectively, of which
$206,036 was unpaid at March 31, 1999.
SNYTFF. For these services, SNYTFF pays a fee of 0.625 of 1% on an annual basis
of the first $200 million of average daily net assets of the Fund and 0.60 of 1%
on an annual basis of such net assets in excess of $200 million payable monthly,
provided the Fund will make such interim payments as may be requested by the
Adviser not to exceed 75% of the amount of the fee then accrued on the books of
the Fund and unpaid. For the fiscal years ended March 31, 1997, 1998 and 1999
the investment management fees incurred by SNYTFF were $1,165,330, $1,184,089
and $1,285,712, respectively, of which $110,428 was unpaid at March 31, 1999.
SCTFF. For these services, SCTFF pays an annual fee of 0.625 of 1% of the first
$200 million of average daily net assets of such Fund and 0.60 of 1% of such net
assets in excess of $200 million. For the fiscal years ended March 31, 1997,
1998 and 1999 the investment management fees incurred by SCTFF were $1,800,657,
$1,892,742 and $2,058,110, respectively, of which $174,541 was unpaid at March
31, 1999.
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.
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<PAGE>
Each Agreement further provides that as between each Fund and the
Adviser each Fund will be responsible for all expenses, including clerical
expense, of offer, sale, underwriting and distribution of a Fund's shares only
so long as a Fund employs a principal underwriter to act as the distributor of a
Fund's shares pursuant to an underwriting agreement which provides that the
underwriter will assume such expenses. The Trust's underwriting agreement
provides that the principal underwriter shall pay all expenses of offer and sale
of a Fund's shares except the expenses of preparation and filing of registration
statements under the Securities Act of 1933 and under state securities laws,
issue and transfer taxes, if any, and a portion of the prospectuses used by a
Fund. In the event that a Fund ceases to employ a principal underwriter to act
as the distributor of a Fund's shares, the expenses of distributing a Fund's
shares will be borne by the Adviser unless a Fund shall have adopted a plan
pursuant to Rule 12b-1 under the 1940 Act providing that a Fund shall be
responsible for some or all of such distribution expenses.
Each Agreement requires the Adviser to return to a Fund all or a
portion of advances of its management fee to the extent annual expenses of a
Fund (including the management fee stated above) exceed the limitations
prescribed by any state in which a Fund's shares are offered for sale. Certain
expenses such as brokerage commissions, taxes, extraordinary expenses and
interest are excluded from such limitations. Any such fee advance required to be
returned to a Fund will be returned as promptly as practicable after the end of
each Fund's fiscal year. However, no fee payment will be made to the Adviser
during any fiscal year which will cause year-to-date expenses to exceed the
cumulative pro rata expense limitation at the time of such payment. The
amortization of organizational costs is described herein under "ADDITIONAL
INFORMATION -- Other Information."
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of each Agreement and in discussions with the
Adviser concerning the Agreement, Trustees who are not "interested persons" of
the Adviser are represented by independent counsel at that Fund's expense.
Each Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Trust
relationships.
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 Advisor
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, 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 particluar circumstances after review by appropriate personnel.
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<PAGE>
Code of Ethics
The Funds the Adviser and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Funds and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Funds, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Funds. Among other things, the Adviser's Code of Ethics
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
quarterly 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
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
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.
Unless otherwise indicated, trustees and officers serve for both
Scudder State Tax Free Trust and Scudder California Tax Free Trust.
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>
Linda C. Coughlin*+@ (48) President and Managing Director of Scudder Vice President,
Trustee Kemper Investments, Inc. Director and Assistant
Treasurer
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, Suite 543 Associates (real estate
Boston, MA 02109-4002 corporation)
64
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address With Trust Occupation** Services, Inc.
--------------------- ---------- ------------ --------------
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 and Kemper Investments, Inc. Director and Clerk
Assistant Secretary
Jean C. Tempel (56) Trustee Venture Partner, Internet --
Internet Capital Group Capital Group
10 Post Office Square
Suite 1325
Boston, MA 02109-4603
Eleanor R. Brennan+@@ (35) Vice President Vice President of Scudder Kemper --
Investments, Inc.
Philip G. Condon+## (48) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Ashton P. Goodfield+### (36) Vice President Senior Vice President of Scudder __
Kemper Investments, Inc.
Ann M. McCreary# (42) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Frank J. Rachwalski, Jr.***###(54) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Rebecca Wilson+ (37) Vice President Vice President of Scudder Kemper --
Investments, Inc.
John R. Hebble+ (41) Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
John Millette+ (36) Vice President and Assistant Vice President of --
Secretary Scudder Kemper Investments, Inc.
since September 1994; previously
employed by the law firm Kaye,
Scholer, Fierman, Hays & Handler
Caroline Pearson+ (37) Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm), 1989-1997
</TABLE>
* Ms. Coughlin 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 1940 Act.
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<PAGE>
** 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.
@@ Ms. Brennan serves as Vice President for Scudder State Tax Free Trust
only.
## Mr. Condon serves as Vice President for Scudder State Tax Free Trust
only.
*** Address: 111 E. Wacker Drive -- Suite 2200, Chicago, Illinois 60601
### Ms. Goodfield and Mr. Rachwalski serve as Vice President for Scudder
State Tax Free Trust only.
@ Messrs. Becton and Marple, Ms. Quirk and Ms. Coughlin, are members of
the Executive Committee of the Trust, which has the power to declare
dividends from ordinary income and distributions of realized capital
gains to the same extent as the Board is so empowered.
The Trustees and officers of the Trust may also serve in similar
capacities with other Scudder Funds.
As of June 30, 1999, all Trustees and officers of each 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 of each
Fund on such date.
Certain accounts for which the Adviser acts as investment adviser owned
2,883,143 shares in the aggregate, or 9.76% of the outstanding shares of Scudder
Massachusetts Tax Free Fund on June 30, 1999. The Adviser may be deemed to be
the beneficial owner of such shares, but disclaims any beneficial ownership in
such shares.
As of June 30, 1999, 1,766,600 shares in the aggregate or 5.98% of the
outstanding shares of Scudder Massachusetts Tax Free Fund were held in the name
of National Financial Service Company (for exclusive benefit of customers,) P.O.
Box 3908, Church St. Station, New York, NY 10008, who may be deemed to be
beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
As of June 30, 1999, 1,849,999 shares in the aggregate or 6.26% of the
outstanding shares of Scudder Massachusetts Tax Free Fund were held in the
nominees of Fiduciary Trust Company. Fiduciary Trust Company may be deemed to be
the beneficial owner of certain of these shares, but disclaims any beneficial
ownership therein.
Certain accounts for which the Investment Manager acts as investment
adviser owned 1,049,803 shares in the aggregate, or 5.81% of Scudder New York
Tax Free Fund on June 30, 1999. The Investment Manager may be deemed to be a
beneficial owner of such shares but disclaims any beneficial ownership in such
shares.
As of June 30, 1999, 963,621 shares in the aggregate, or 5.34% of the
outstanding shares of Scudder New York Tax Free Fund were held in the name of
Charles Schwab & Co., 101 Montgomery Street, San Francisco, CA 94101, who may be
deemed to be beneficial owner of certain of these shares but disclaims any
beneficial ownership therein.
Certain accounts for which the Investment Manager acts as investment
adviser owned 1,994,722 shares in the aggregate, or 6.52% of the outstanding
shares of Scudder California Tax Free Fund on June 30, 1999. The Investment
Manager may be deemed to be a beneficial owner of such shares but disclaims any
beneficial ownership in such shares.
As of June 30, 1999, 3,107,539 shares in the aggregate, or 10.16% of
the outstanding shares, of Scudder California Tax Free Fund were held in the
name of Charles Schwab and Co., Inc., 101 Montgomery Street, San Francisco, CA
94101-4122, who may be deemed to be the beneficial owner of certain of these
shares but disclaims any beneficial ownership therein.
To the knowledge of the Trusts, as of June 30, 1999, no person owned
beneficially more than 5% of each Fund's outstanding shares except as stated
above.
The Trustees and officers of each Trust also serve in similar
capacities with other Scudder Funds.
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<PAGE>
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
Each Trust's 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.
Each 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 $3,600 for each of SMTFF, SNYTFF and SCTFF; 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;
$75 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 liaison 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 of the Funds also serve as Independent
Trustees of certain other Scudder Funds, which enables them to address
investment and operational issues that are common to many of the Funds in a
cost-efficient and effective manner. During 1999, the Independent Trustees
participated in 25 meetings of the Funds' board or board committees, which were
held on 21 different days during the year.
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 1999 from the Trust and from all of Scudder funds as a group.
<TABLE>
<CAPTION>
Scudder State Scudder California
Name Tax Free Trust(1) Tax Free Trust(2) All Scudder Funds(3)
---- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Henry P. Becton, $18,936 $7,060 $140,000 (28 funds)
Trustee
Dawn-Marie Driscoll, $21,154 $7,564 $150,000 (28 funds)
Trustee
67
<PAGE>
Scudder State Scudder California
Name Tax Free Trust(1) Tax Free Trust(2) All Scudder Funds(3)
---- -------------- -------------- -----------------
Peter B. Freeman, $18,746 $6,984 $179,783 (53 funds)
Trustee
George M. Lovejoy, Jr., $18,821 $6,984 $153,200 (29 funds)
Trustee
Wesley W. Marple, Jr., $18,821 $6,984 $140,000 (28 funds)
Trustee
Jean C. Tempel, $18,821 $6,984 $140,000 (28 funds)
Trustee
</TABLE>
(1) In 1999 Scudder State Tax Free Trust consisted of six funds:
Scudder Massachusetts Limited Term Tax Free Fund, Scudder
Massachusetts Tax Free Fund, Scudder New York Tax Free Money
Fund, Scudder New York Tax Free Fund, Scudder Ohio Tax Free
and Scudder Pennsylvania Tax Free Fund.
(2) In 1999 Scudder California Tax Free Trust consisted of two
funds: Scudder California Tax Free Money Fund and Scudder
California Tax Free Fund.
(3) 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
Each Trust has an underwriting agreement with Scudder Investor
Services, Inc. (the "Distributor"), Two International Place, Boston, MA
02110-4103, a Massachusetts corporation, which is a subsidiary of the Adviser, a
Delaware corporation. Each 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 agreements were last approved by the Trustees on August
10, 1998.
Under the underwriting agreements, each Trust is responsible for the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of a 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 a Trust as a broker or
dealer; the fees and expenses of preparing, printing and mailing prospectuses
annually to existing shareholders (see below for expenses relating to
prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications to shareholders of a 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 Trusts 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
68
<PAGE>
such Fund pursuant to a 12b-1 Plan, if any, were such a plan
adopted by a Fund, notwithstanding any other provision to the
contrary in the underwriting agreement.
As agent the Distributor currently offers shares of each Fund on a
continuous basis to investors in all states in which shares of a Fund may from
time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of a Fund.
TAXES
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 a Fund.
Federal Taxation
Each Fund within a 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.
If for any taxable year a Fund does not qualify for the special federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of current
accumulated earnings and profits, and would be eligible for the dividends
received deductions for corporations in the case of corporate shareholders.
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
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Massachusetts Tax Free Fund intends 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, 1999,
SNYTFF had a net capital loss carryforward of approximately $3,508,000, which
may be applied against realized capital gains of each succeeding year until
fully utilized or until March 31, 2003, $1,128,000 and March 31, 2004,
$2,308,000, the respective expiration dates, whichever occurs first. As of March
31, 1999, SCTFF had a net tax basis capital loss carryforward of approximately
$2,400,000, which may be applied against any realized net taxable capital gains
of each succeeding year until fully utilized or until March 31, 2003
($2,000,000) and March 31, 2004 ($400,000), the respective expiration dates,
whichever occurs first.
Distributions of taxable net investment income and the excess of net
short-term capital gain over net long-term capital loss are taxable to
shareholders as ordinary income.
Subchapter M of the Code permits the character of tax-exempt interest
distributed by a regulated investment company to flow through as tax-exempt
interest to its shareholders, provided that at least 50% of the value of its
assets at the end of each quarter of its taxable year is invested in state,
municipal and other obligations the interest on which is excluded from gross
income under Section 103(a) of the Code. Each Fund intends to satisfy this 50%
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
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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.
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,
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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
Each Trust is organized as a Massachusetts business trust, and neither
the Trusts nor a Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund qualifies as a regulated
investment company.
Scudder Massachusetts Tax Free Fund
Individual shareholders of SMTFF resident in Massachusetts will not be
subject to Massachusetts personal income tax on distributions received from a
Fund to the extent such distributions constitute either (1) exempt-interest
dividends under Section 852(b)(5) of the Code which a Fund properly identifies
as consisting of interest on tax-exempt obligations of the Commonwealth of
Massachusetts for its political subdivisions or any agency or instrumentality of
the foregoing, or (2) dividends which a Fund properly identifies as attributable
to interest on tax-exempt obligations of the United States and instrumentalities
or obligations issued by the Governments of Puerto Rico, The Virgin Islands and
Guam.
Other distributions from either Fund, including those derived from
taxable interest income and long-term and short-term capital gains, generally
will not be exempt from Massachusetts personal income taxation except for
distributions which qualify as capital gain dividends under Section 852(b)(3) of
the Code, and are properly identified by a Fund as attributable to the sale of
certain Massachusetts obligations issued pursuant to legislation which
specifically exempts capital gain on the sale of such obligations from
Massachusetts income taxation.
Fund distributions will not be excluded from net income, and shares of
either Fund will not be excluded from the net worth of intangible property
corporations, for purposes of computing the Massachusetts corporate excise tax.
Shares of either Fund will not be subject to Massachusetts local
property taxes.
Scudder New York Tax Free Fund
New York State corporate tax law has special provisions governing
regulated investment companies that are qualified and taxed under Subchapter M
of the Code. To the extent a Fund has no federal income tax liability because it
distributes all of its investment income and the excess of net short-term
capital gain over net long-term capital loss and all of the excess of net
long-term capital gain over net short-term capital loss, it will incur no New
York State income tax, other than a possible nominal minimum tax. New York City
tax consequences are identical except that the amount of the possible minimum
tax differs. Individual shareholders who are residents of New York State will be
able to exclude for state income tax purposes that portion of the distributions
which is derived from interest on obligations of New York State and its
political subdivisions and of Puerto Rico, The Virgin Islands and Guam, because
at least 50% of the value of the assets of a Fund will be invested in state or
municipal obligations the interest on which is exempt for federal income tax
purposes.
Individual shareholders who are residents of New York City will also be
able to exclude such income for New York City income tax purposes. Capital gains
that are retained by each Fund will be taxed to that Fund, and New York State
and New York City residents will receive no New York income tax credit for such
tax. Capital gains that are distributed by a Fund will be treated as capital
gains for New York State and City income tax purposes in the hands of New York
State and New York City residents.
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Scudder California Tax Free Fund
In any year in which the Funds qualify as regulated investment
companies under Subchapter M of the Code and are exempt from federal income tax,
the Funds will also be relieved of liability for California state franchise and
corporate income tax to the extent their earnings are distributed to their
shareholders. Each Fund may be taxed on its undistributed taxable income
(including interest income on California municipal securities for franchise tax
purposes). If for any year either of the Funds does not qualify for the special
tax treatment afforded regulated investment companies, then all of such Fund's
taxable income may be subject to California state franchise or income tax at
regular corporate rates.
If at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company (or series
thereof) consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California, then the regulated investment
company (or series thereof) will be qualified to pay dividends exempt from
California personal income tax (hereinafter referred to as "California
exempt-interest dividends"). Each of the Funds intends to qualify under the
above requirements so it can pay California exempt-interest dividends. However,
if a Fund fails to so qualify, then no part of its dividends to shareholders
will be exempt from California personal income tax.
Within 60 days after the close of its taxable year, each Fund will
notify each shareholder of the portion of the dividends paid by the Fund with
respect to such taxable year which is exempt from California state personal
income tax. Interest on obligations of Puerto Rico and other U.S. Possessions,
as well as interest on obligations of the State of California or its political
subdivisions, may be distributed as California tax-exempt interest dividends.
Distributions from the Funds which are attributable to sources other than those
described in the preceding sentence generally are taxable to such shareholders
as ordinary income. However, distributions derived from interest on U.S.
Government obligations, if any, may also be designated by a Fund and treated by
shareholders as exempt under the California personal income tax provided the 50%
requirement of the preceding paragraph is satisfied.
In cases where shareholders of a Fund are "substantial users" or
"related persons" with respect to California municipal securities held by the
Fund, such shareholders should consult their own tax advisers to determine
whether California exempt-interest dividends paid by the Fund with respect to
such securities retain California state personal income tax exclusion for such
shareholders. In this connection, rules similar to those regarding the possible
unavailability of exempt interest treatment of Fund dividends to "substantial
users" (or persons related thereto) for federal income tax purposes are
applicable for California state tax purposes. See "Federal Taxation" above.
To the extent, if any, dividends paid to shareholders of a Fund are
derived from the excess of net long-term capital gains over net short-term
capital losses, such dividends will not constitute California exempt-interest
dividends. Such dividends will generally be taxed as long-term capital gains
under rules similar to those regarding the treatment of capital gain dividends
for federal income tax purposes; provided that California has not adopted the
federal rule that allows a regulated investment company to elect to treat such
capital gains as having been distributed even though no capital gain dividend
has actually been paid. See "Federal Taxation" above. In the case where the
Funds make this election for federal income tax purposes, any such capital gains
may be subject to tax at the Fund level for California franchise or corporate
income tax purposes.
Shares of the Funds are not subject to the California property tax.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of a Fund are not deductible for California personal
income tax purposes. In addition, any loss realized by a shareholder of a Fund
upon the sale of shares held for six months or less may be disallowed to the
extent of any exempt-interest dividends received with respect to such shares.
Moreover, any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains distribution on such shares is treated as long-term capital loss to the
extent of such long-term capital gains distribution. Finally, any loss realized
upon the redemption shares within 30 days before or after the acquisition of
other shares of the same Fund may be disallowed under the "wash sale" rules.
The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the Funds and their
shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the Funds or their
shareholders, and this discussion is not intended as a
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substitute for careful planning. Further, it should be noted that the portion of
any Fund dividends constituting California exempt-interest dividends is
excludable for California state personal income tax only. Any dividends paid to
shareholders subject to California state franchise or California state corporate
income tax may therefore be taxed as ordinary dividends to such shareholders
notwithstanding that all or a portion of dividends is exempt from California
state personal income tax. Accordingly, potential investors in a Fund,
excluding, in particular, corporate investors which may be subject to either
California franchise tax or California corporate income tax, should consult
their tax advisers with respect to the application of such taxes to the receipt
of Fund dividends and as to their own California state tax situation, in
general.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund is to obtain the most favorable net results,
taking into account such factors as price, commission 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 the Fund to reported commissions paid by
others. The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income 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 the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
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
broker/dealers who supply brokerage and research services to the Adviser or the
Funds. The term "research services" 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, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Funds in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the 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 elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
a Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Funds, and not all such information is used by the
Adviser in connection with the Funds. Conversely, such information provided to
the Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Funds.
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The Trustees 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
The portfolio turnover rate is defined by the SEC as the ratio of the
lesser of sales or purchases to the monthly average value of such securities
owned during the year, excluding all securities with maturities at time of
acquisition of one year or less. Purchases and sales are made for a Fund
whenever necessary, in management's opinion, to meet a Fund's objective.
Portfolio Turnover Rates for periods ended March 31,
1999 1998 1997
---- ---- ----
Scudder Massachusetts Tax Free Fund 10.7 8.4 11.5
Scudder New York Tax Free Fund 44.5 28.8 71.0
Scudder California Tax Free Fund 40.6 21.5 70.8
NET ASSET VALUE
The net asset value per share of a 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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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, 160 Federal
Street, Boston, Massachusetts 02110, 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
Each 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 Declarations of Trust contains an express
disclaimer of shareholder liability in connection with a Fund's property or the
acts, obligations or affairs of the Trusts. The Declarations 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
76
<PAGE>
greater vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. Such securities are commonly referred to as "junk" bonds and as such
they carry a high margin of risk.
S&P's top ratings categories for municipal notes are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The six highest quality ratings categories of Fitch for municipal bonds
are AAA, AA, A, BBB, BB and B. Bonds rated AAA are considered to be investment
grade and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. Bonds rated AA are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated
`AAA'. Because bonds rated in the `AAA' and `AA' categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated `F-1+'. Bonds rated A are considered to be
investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher rates. Bonds rated BBB are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse effects
on these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings. Securities rated BB or below by Fitch are considered below
investment grade, with factors giving security to principal and interest
inadequate and potentially unreliable over any period of time. Such securities
are commonly referred to as "junk" bonds and as such they carry a high margin of
risk.
Commercial Paper Ratings
Commercial paper rated A-1 or better by S&P has the following
characteristics: liquidity ratios are adequate to meet cash requirements;
long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed; the issuer has access to at least two additional
channels of borrowing; and basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances. Typically, the issuer's industry
is well established and the issuer has a strong position within the industry.
The reliability and quality of management are unquestioned.
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.
77
<PAGE>
2. Debt Obligation -- A general term which includes fixed income
and variable rate securities, obligations issued at a discount
and other types of securities which evidence a debt.
3. Discount and Premium -- A discount (premium) bond is a bond
selling in the market at a price lower (higher) than its face
value. The amount of the market discount (premium) is the
difference between market price and face value.
4. Maturity -- The date on which the principal amount of a debt
obligation comes due by the terms of the instrument.
5. Municipal Obligation -- Obligations issued by or on behalf of
states, territories and possessions of the United States,
their political subdivisions, agencies and instrumentalities
and the District of Columbia and other issuers, the interest
from which is, at the time of issuance in the opinion of bond
counsel for the issuers, exempt from federal income tax.
6. Net Asset Value Per Share -- The value of each share of the
Fund for purposes of sales and redemptions.
7. Net Investment Income -- The net investment income of a Fund
is comprised of its interest income, including amortizations
of original issue discounts, less amortizations of premiums
and expenses paid or accrued computed under GAAP.
Other Information
The CUSIP number of SMTFF is 811184-30-8.
The CUSIP number of SNYTFF is 811184-10-0.
The CUSIP number of SCTFF is 811115-10-4.
Each 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 each
Trust.
The names "Scudder State Tax Free Trust" and "Scudder California Tax
Free Trust" are the designation of the Trustees for the time being under an
Amended and Restated Declarations 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
Trusts liable for the obligations of any other Fund. Upon the initial purchase
of shares, the shareholder agrees to be bound by each Trust's Declaration of
Trust, as amended from time to time. The Declarations of Trust of each 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. For the fiscal years
ended March 31, 1997 and 1998, the amounts charged to SMTFF by SFAC amounted to
$58,015 and $59,760, respectively. For the fiscal year ended March 31, 1999, the
amount charged was $66,955, of which $11,433 was unpaid at March 31, 1999. The
fee incurred by SNYTFF for the fiscal years ended March 31, 1997, 1998 and 1999,
respectively, amounted to $53,983, $52,711 and $53,895, respectively, of which
$8,895 was unpaid at March 31, 1999.
78
<PAGE>
For the fiscal years ended March 31, 1997, 1998 and 1999, respectively, the
amounts charged to SCTFF by SFAC amounted to $66,630, $66,491 and $68,917, of
which $5,665 was unpaid at March 31, 1999.
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston,
Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer and
dividend-paying agent. SSC 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 fees incurred by SMTFF to SSC for the fiscal years ended
March 31, 1997, 1998 and 1999, respectively, were $188,646, $194,865 and
$193,395, of which $15,963 was unpaid at March 31, 1999. The fees incurred by
SNYTFF to SSC for the fiscal years ended March 31, 1997, 1998 and 1999,
respectively, were $119,944, $118,928 and $114,000, of which $9,422 was unpaid
at March 31, 1999. The fees incurred by SCTFF to SSC for the fiscal years ended
March 31, 1997, 1998 and 1999, respectively, were $159,122, $164,689 and
$149,887, of which $12,170 was unpaid at March 31, 1999.
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
The financial statements, including the investment portfolio, of each
Fund together with the Report of Independent Accountants, Financial Highlights
and notes to financial statements in the Annual Reports to the Shareholders of
the Funds dated March 31, 1999, are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
79
<PAGE>
SCUDDER STATE TAX FREE TRUST
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
-------- --------
<S> <C> <C>
(a) (1) Amended and Restated Declaration of Trust dated as of December 8, 1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(2) Amended Establishment and Designation of Series of Beneficial Interest, $.01
Par Value.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(3) Establishment and Designation of Classes of Shares of Beneficial Interest,
$.01 Par Value.
Filed herein.
(b) (1) By-laws of the Registrant dated May 25, 1983.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(2) Amendment to By-laws dated December 10, 1991.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(c) Inapplicable.
(d) (1) Investment Management Agreement between the Registrant, on behalf of Scudder
New York Tax Free Fund, and Scudder Kemper Investments, Inc. dated September
7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(2) Investment Management Agreement between the Registrant, on behalf of Scudder
New York Tax Free Money Fund, and Scudder Kemper Investments, Inc. dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(3) Investment Management Agreement between the Registrant, on behalf of Scudder
Ohio Tax Free Fund, and Scudder Kemper Investments, Inc. dated September 7,
1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(4) Investment Management Agreement between the Registrant, on behalf of Scudder
Pennsylvania Tax Free Fund, and Scudder Kemper Investments, Inc. dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
1
<PAGE>
(5) Investment Management Agreement between the Registrant, on behalf of Scudder
Massachusetts Tax Free Fund, and Scudder Kemper Investments, Inc. dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(6) Investment Management Agreement between the Registrant, on behalf of Scudder
Massachusetts Limited Term Tax Free Fund, and Scudder Kemper Investments,
Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(e) Underwriting Agreement between the Registrant and Scudder Investor Services,
Inc. dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(f) Inapplicable.
(g) (1) Custodian Agreement between the Registrant and State Street Bank and Trust
Company dated June 14, 1983.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(2) Fee Schedule for Exhibit (g)(1).
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(3) Amendment dated April 16, 1986 to the Custodian Agreement between the
Registrant and State Street Bank and Trust Company.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(4) Amendment dated August 9, 1988 to the Custodian Agreement between the
Registrant and State Street Bank and Trust Company.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(5) Amendment dated December 11, 1990 to the Custodian Contract between the
Registrant and State Street Bank and Trust Company.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(6) Amendment dated February 8, 1999 to the Custodian Contract between the
Registrant and State Street Bank and Trust Company.
Filed herein.
(7) Subcustodian Agreement between State Street Bank and Trust Company and
Morgan Guaranty Trust Company of New York dated November 25, 1985.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(8) Subcustodian Agreement between Irving Trust Company and State Street Bank
and Trust Company dated November 30, 1987.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
2
<PAGE>
(9) Subcustodian Agreement between Chemical Bank and State Street Bank and Trust
Company dated October 6, 1988.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(10) Subcustodian Agreement between Security Pacific National Trust Company (New
York) and State Street Bank and Trust Company dated February 18, 1988.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(h) (1) Transfer Agency and Service Agreement between the Registrant and Scudder
Service Corporation dated October 2, 1989.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(2) Fee schedule for Exhibit (h)(1).
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(3) Fund Accounting Services Agreement between the Registrant (on behalf of
Scudder Massachusetts Limited Term Tax Free Fund) and Scudder Fund
Accounting Corporation dated February 15, 1994.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(4) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Massachusetts Tax Free Fund, and Scudder Fund Accounting Corporation
dated November 14, 1994.
(Incorporated by reference to Post-Effective Amendment No. 17 to the
Registration Statement.)
(5) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder New York Tax Free Fund, and Scudder Fund Accounting Corporation
dated December 7, 1994.
(Incorporated by reference to Post-Effective Amendment No. 17 to the
Registration Statement.)
(6) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder New York Tax Free Money Fund, and Scudder Fund Accounting
Corporation dated September 22, 1994.
(Incorporated by reference to Post-Effective Amendment No. 17 to the
Registration Statement.)
(7) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Massachusetts Tax Free Fund, and Scudder Fund Accounting Corporation
dated November 14, 1994.
(Incorporated by reference to Post-Effective Amendment No. 17 to the
Registration Statement.)
(8) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Ohio Tax Free Fund, and Scudder Fund Accounting Corporation dated
November 21, 1994.
3
<PAGE>
(Incorporated by reference to Post-Effective Amendment No. 17 to the
Registration Statement.)
(9) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Pennsylvania Tax Free Fund, and Scudder Fund Accounting Corporation
dated November 16, 1994.
(Incorporated by reference to Post-Effective Amendment No. 17 to the
Registration Statement.)
(10) Administrative Services Agreement between the Registrant, on behalf of
Scudder New York Tax Free Fund and Scudder Massachusetts Tax Free Fund and
Scudder Kemper Investments Inc.
To be filed by amendment.
(i) Consent of Legal Counsel.
To be filed by amendment.
(j) Consent of Independent Accountants.
To be filed by amendment.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Mutual Funds Multi-Distibution Plan pursuant to Rule 18f-3.
To be filed by amendment.
(o) Inapplicable.
(p) Code of Ethics.
Filed herein.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
-------- --------------------------------------------------------
None
Item 25. Indemnification.
-------- ----------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV, Sections 4.1-4.3 of the Registrant's Declaration
of Trust provide as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
Etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all
4
<PAGE>
such Persons shall look solely to the Trust Property for
satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding was brought
that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) resulting in a payment by a
Trustee or officer, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office:
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type inquiry) by
(x) vote of a majority of the Disinterested Trustees
acting on the matter (provided
5
<PAGE>
that a majority of the Disinterested Trustees then in
office act on the matter) or (y) written opinion of
independent legal counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust,
shall be severable, shall not affect any other rights
to which any Trustee or officer may now or hereafter
be entitled, shall continue as to a person who has
ceased to be such Trustee or officer and shall insure
to the benefit of the heirs, executors,
administrators and assigns of such a person. Nothing
contained herein shall affect any rights to
indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense
to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section
4.3 may be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by
or on behalf of the recipient to repay such amount if
it is ultimately determined that he is not entitled
to indemnification under this Section 4.3, provided
that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one
who is not (i) an "Interested Person" of the Trust (including anyone
who has been exempted from being an "Interested Person" by any rule,
regulation or order of the Commission), or (ii) involved in the claim,
action, suit or proceeding.
Item 26. Business or Other Connections of Investment Adviser
-------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
6
<PAGE>
<S> <C>
Stephen R. Beckwith Treasurer, Scudder Kemper Investments, Inc.**
Director, Kemper Service Company
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and Treasurer, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Director and Chairman, Scudder Threadneedle International Ltd.
Director, Scudder Kemper Holdings (UK) Ltd. oo
Director and President, Scudder Realty Holdings Corporation *
Director, Scudder, Stevens & Clark Overseas Corporation o
Director and Treasurer, Zurich Investment Management, Inc. xx
Director and Treasurer, Zurich Kemper Investments, Inc.
Lynn S. Birdsong Director, Vice President and Chief Investment Officer, Scudder Kemper Investments,
Inc.**
Director and Chairman, Scudder Investments (Luxembourg) S.A.#
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. @@
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company xxx
Nicholas Bratt Director, Scudder Kemper Investments, Inc.**
Vice President, Scudder, Stevens & Clark Corporation **
Vice President, Scudder, Stevens & Clark Overseas Corporation o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of America xxx
Director, ZKI Holding Corporation xx
7
<PAGE>
Harold D. Kahn Chief Financial Officer, Scudder Kemper Investments, Inc.**
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Vice President, Chief Legal Officer and Secretary, Kemper Distributors, Inc.
Director and Secretary, Kemper Service Company
Director, Senior Vice President, Chief Legal Officer & Assistant Clerk, Scudder
Investor Services, Inc.
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director and Secretary, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc. ###
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. @
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd. @@
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Threadneedle International Ltd.
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings Ltd.
</TABLE>
* Two International Place, Boston, MA
@ 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
8
<PAGE>
@@@ Grand Cayman, Cayman Islands, British West Indies
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
xxx Zurich Towers, 1400 American Ln., Schaumburg, IL
@@ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
oo One South Place, 5th Floor, London EC2M 2ZS England
ooo One Exchange Square, 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
x Level 3, Five Blue Street, North Sydney, NSW 2060
Item 27. Principal Underwriters.
-------- -----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mark S. Casady President and Assistant Treasurer None
Two International Place
Boston, MA 02110
Linda Coughlin Director and Senior Vice President Trustee and President
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
9
<PAGE>
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
James J. McGovern Chief Financial Officer and Treasurer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Trustee, Vice President
345 Park Avenue Legal Officer and Assistant Clerk and Assistant Secretary
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
Item 27. Principal Underwriters.
-------- -----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
10
<PAGE>
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mark S. Casady President and Assistant Treasurer None
Two International Place
Boston, MA 02110
Linda Coughlin Director and Senior Vice President Trustee and President
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
James J. McGovern Chief Financial Officer and Treasurer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
11
<PAGE>
Scudder Investor Services, Inc. Position and Offices with Positions and
Name and Principal Scudder Investor Services, Inc. Offices with Registrant
Business Address ------------------------------- -----------------------
----------------
Kathryn L. Quirk Director, Senior Vice President, Chief Trustee, Vice President
345 Park Avenue Legal Officer and Assistant Clerk and Assistant Secretary
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
Item 28. Location of Accounts and Records
-------- --------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments Inc.., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
custodian are maintained by State Street Bank and Trust
Company, Heritage Drive, North Quincy, Massachusetts. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services
-------- -------------------
Inapplicable.
Item 30. Undertakings.
-------- -------------
Inapplicable.
12
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Boston and the Commonwealth of
Massachusetts, on the 8th of May, 2000.
SCUDDER STATE TAX FREE TRUST
By /s/John Millette
----------------------------
John Millette
Vice President and Secretary
<TABLE>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Linda C. Coughlin
---------------------------------------
Linda C. Coughlin* President (Principal Executive May 8, 2000
Officer) and Trustee
/s/Henry P. Becton, Jr.
---------------------------------------
Henry P. Becton, Jr.* Trustee May 8, 2000
/s/Dawn-Marie Driscoll
---------------------------------------
Dawn-Marie Driscoll* Trustee May 8, 2000
/s/Peter B. Freeman
---------------------------------------
Peter B. Freeman* Trustee May 8, 2000
/s/George M. Lovejoy, Jr.
---------------------------------------
George M. Lovejoy, Jr.* Trustee May 8, 2000
/s/Wesley W. Marple, Jr.
---------------------------------------
Wesley W. Marple, Jr. * Trustee May 8, 2000
/s/Kathryn L. Quirk
---------------------------------------
Kathryn L. Quirk* Trustee, Vice President, and May 8, 2000
Assistant Secretary
/s/Jean C. Tempel
---------------------------------------
Jean C. Tempel* Trustee May 8, 2000
/s/John R. Hebble
---------------------------------------
John R. Hebble Treasurer (Principal Financial and May 8, 2000
Accounting Officer)
</TABLE>
*By: /s/Caroline Pearson
---------------------------------------------------
Caroline Pearson
Attorney-in-fact pursuant to the powers of attorney
contained in the signature pages of Post-Effective
Amendment No. 30 to the Registration Statement filed on
July 30, 1999.
Attorney-in-fact for Ms. Coughlin pursuant to power of
attorney contained herein.
<PAGE>
POWER OF ATTORNEY
-----------------
SCUDDER CALIFORNIA TAX FREE TRUST
SCUDDER STATE TAX FREE TRUST
SCUDDER TAX FREE TRUST
SCUDDER MUNICIPAL TRUST
SCUDDER SECURITIES TRUST
Pursuant to the requirements of the Securities Act of 1933, this Power
of Attorney has been signed below by the following persons in the capacities and
on the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint Caroline Pearson, Kathryn L. Quirk, John Millette and Burton M. Leibert
and each of them, severally, or if more than one acts, a majority of them, his
true and lawful attorney and agent to execute in his name, place and stead (in
such capacity) any and all amendments to the Registration Statement and any
post-effective amendments thereto and all instruments necessary or desirable in
connection therewith, to attest the seal of the Registrant thereon and to file
the same with the Securities and Exchange Commission. Each of said attorneys and
agents shall have power to act with or without the other and have full power and
authority to do and perform in the name and on behalf of the undersigned, in any
and all capacities, every act whatsoever necessary or advisable to be done in
the premises as fully and to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and approving the act of said attorneys
and agents and each of them.
SIGNATURE TITLE DATE
--------- ----- ----
/s/Linda C. Coughlin
---------------------
Linda C. Coughlin Trustee and President May 4, 2000
9
<PAGE>
File No. 2-84021
File No. 811-3749
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 31
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 32
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER STATE TAX FREE TRUST
<PAGE>
SCUDDER STATE TAX FREE TRUST
EXHIBIT INDEX
Exhibit (a)(3)
Exhibit (g)(6)
Exhibit (p)
