This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
Scudder
High Yield
Tax Free Fund
Annual Report
December 31, 1995
o Offers convenient access to high tax-free yields by investing primarily in
investment-grade municipal securities.
o A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
<PAGE>
SCUDDER HIGH YIELD TAX FREE FUND
CONTENTS
2 In Brief
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
17 Financial Statements
20 Financial Highlights
21 Notes to Financial Statements
26 Report of Independent Accountants
27 Tax Information
29 Officers and Trustees
30 Investment Products and Services
31 How to Contact Scudder
IN BRIEF
- - Scudder High Yield Tax Free Fund posted a strong total return of 19.28% for
the 12-month period ended December 31, 1995. The municipal bond market made
a dramatic recovery last year after disappointing investors in 1994.
- - The Fund's 30-day net annualized SEC yield was 5.47% on December 31, 1995.
For investors in the top federal tax brackets of 36% and 39.6%, the Fund's
yield was equivalent to an 8.55% and 9.06% taxable yield, respectively.
(BAR CHART TITLE) The Fund's 30-Day Net Annualized SEC Yield
and Taxable Equivalent Yields
as of December 31, 1995
(BAR CHART DATA)
The Fund's 30-Day Net Taxable-Equivalent Taxable-Equivalent
Annualized Yield at 36% Tax Yield at 39.6% Tax
SEC Yield Bracket Bracket
--------- ------- -------
5.47% 8.55% 9.06%
- - The Fund continues to outpace the average performance of similar funds over
one-, three-, four-, and five-year periods, according to Lipper Analytical
Services. Please see page 6 for additional Lipper performance information.
2
<PAGE>
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Scudder High Yield Tax Free Fund's objective is to provide a high level
of tax-free income from an actively managed portfolio consisting mainly of
investment-grade municipal bonds. The Fund's managers work to sort through the
municipal marketplace to find attractively valued individual bonds or classes of
bonds. The Fund is designed for investors seeking yields higher than those
obtainable from investments in only the highest quality bonds.
Your Fund performed well in 1995, as you'll see in the Portfolio
Management Discussion beginning on page 6. How did the municipal market overall
perform last year? Not badly, considering the continued low level of demand from
individual investors for tax-free bonds. Portfolio managers and institutions
compensated to a certain degree. As a group, portfolio managers sold short-term
municipal securities and purchased long-term tax-free bonds because the yield
level of intermediate- and especially longer-maturity tax-free bonds relative to
U.S. Treasuries approximated an all-time high. This is because many investors
are currently discounting the value of tax exemption. Consider the relative
yields of AAA municipal bonds versus Treasuries of the same maturity as of the
close of 1995: 10-year municipals yielded 4.65%, while 10-year Treasuries
yielded 3.88% if taxed at the 31% rate and only 3.39% at the 39.6% level. We
believe that demand for municipals will rise as investors continue to recognize
this disparity. We also believe that when budget and taxation matters are
resolved in Washington, municipal bonds will continue to be attractive to
investors in higher tax brackets.
If you have any questions concerning your Scudder High Yield Tax Free
Fund investment, please call a Scudder Investor Relations representative at
1-800-225-2470. Thank you for investing with Scudder.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder High Yield Tax Free Fund
3
<PAGE>
SCUDDER HIGH YIELD TAX FREE FUND
PERFORMANCE UPDATE as of December 31, 1995
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER HIGH YIELD TAX FREE FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,928 19.28% 19.28%
5 Year $15,652 56.52% 9.37%
Life of
Fund* $19,568 95.68% 7.82%
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,746 17.46% 17.46%
5 Year $15,262 52.62% 8.82%
Life of
Fund* $19,692 96.92% 7.90%
*The Fund commenced operations on
January 22, 1987. Index comparisons
begin January 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Scudder High Yield Tax Free Fund
Year Amount
- ----------------------
1/31/87 $10,000
87 $ 9,419
88 $10,689
89 $11,792
90 $12,502
91 $14,185
92 $15,728
93 $17,906
94 $16,405
95 $19,568
Lehman Brothers Municipal Bond Index
Year Amount
- ----------------------
1/31/87 $10,000
87 $ 9,854
88 $10,855
89 $12,026
90 $12,903
91 $14,469
92 $15,745
93 $17,679
94 $16,765
95 $19,692
The unmanaged Lehman Brothers Municipal Bond Index is a market
value-weighted measure of municipal bonds issued across the
United States. Index issues have a credit rating of at least
Baa and a maturity of at least two years. Index returns assume
reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
YEARLY PERIODS ENDED DECEMBER 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987* 1988 1989 1990 1991 1992 1993 1994 1995
-----------------------------------------------------------------------
NET ASSET VALUE... $10.52 $11.06 $11.35 $11.19 $11.67 $11.90 $12.55 $10.86 $12.19
INCOME DIVIDENDS.. $ .78 $ .83 $ .76 $ .77 $ .76 $ .72 $ .67 $ .66 $ .72
CAPITAL GAINS
DISTRIBUTIONS..... $ -- $ -- $ .06 $ .05 $ .21 $ .27 $ .28 $ -- $ --
FUND TOTAL
RETURN (%)........ -5.81 13.48 10.32 6.02 13.36 10.88 13.85 -8.38 19.28
INDEX TOTAL
RETURN (%)........ -1.46 10.16 10.79 7.29 12.14 8.82 12.28 -5.17 17.46
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased.
If the Adviser had not maintained the Fund's expenses, the average annual
total return for the one year, five year and life of Fund periods would have
been lower.
4
<PAGE>
PORTFOLIO SUMMARY as of December 31, 1995
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Hospital/Health 24%
Electric Utility Revenue 16%
Port/Airport Revenue 12% The Fund held securities
Toll Revenue 10% issued in 26 states plus the
Core Cities/Lease 7% District of Columbia and the
Sales & Special Tax 6% Virgin Islands at the
Pollution Control/ close of 1995.
Industrial Development 6%
Housing Finance Authority 5%
School District/Lease 2%
Miscellaneous Municipal 12%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 15%
AA 14% As of December 31, bonds
A 5% rated A or better made up
BBB 45% 34% of the Fund's portfolio.
BB 1%
B 2%
Not Rated 18%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
EFFECTIVE MATURITY
- --------------------------------------------------------------------------
1 - 5 years 5% Following substantial yield
5 - 10 years 47% declines and bond price
10 - 20 years 45% increases in 1995, we are
Greater than 20 years 3% taking a cautious stance and
---- have recently shortened the
100% Fund's average effective
==== maturity to 11 years.
Weighted average effective maturity: 11 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- -------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 10.
5
<PAGE>
SCUDDER HIGH YIELD TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Municipal bonds -- especially bonds with intermediate- to long-term
maturities -- performed extremely well in 1995 as inflation fears eased and
interest rates declined. Scudder High Yield Tax Free Fund fully participated in
the market's price recovery, posting a total return of 19.28% for the 12-month
period ended December 31 and exceeding the 15.98% average return of similar
funds as tracked by Lipper Analytical Services, Inc. The Fund's net asset value
rose 12.25% from $10.86 per share on December 31, 1994, to $12.19 at the end of
1995. The Fund's total return also included reinvestment of income distributions
to shareholders totaling $0.72 per share. Scudder High Yield Tax Free Fund
provided a 30-day net annualized SEC yield of 5.47% as of December 31, 1995,
equivalent to an 8.55% taxable yield for investors in the 36% federal income tax
bracket.
The Fund's solid 1995 performance versus the competition is in keeping
with its longer-term record: Scudder High Yield Tax Free Fund has outperformed
the Lipper average of similar municipal bond funds over one-, three-, four-, and
five-year periods, as shown in the chart below. Please turn to the Performance
Update on page 4 for more information on the Fund's long-term progress,
including comparisons with the unmanaged Lehman Brothers Municipal Bond Index.
Scudder High Yield Tax Free Fund's Total Return Versus
the Average of Similar Funds
(Average annual total returns for periods
ended December 31, 1995)
Scudder High
Yield Tax Free Lipper Number of
Period Fund Average Funds Tracked
------ ---- ------- -------------
1 year 19.28% 15.98% 38
2 years 4.54 5.16 32
3 years 7.55 7.16 24
4 years 8.38 7.56 21
5 years 9.37 8.40 20
Performance statistics compiled by Lipper Analytical Services, Inc.
6
<PAGE>
A Solid Comeback in 1995
Following one of the worst years in history for fixed-income
securities, municipal money managers and other institutional investors put cash
to work beginning in the first quarter of 1995 as interest rates began to turn
down, buying bonds they felt were significantly oversold. The rally in municipal
bonds continued during most of the rest of the year, posting gains in every
month except July. Discount bonds (those trading below par) performed best,
favored by investors because of their greater upside potential versus other
bonds of equivalent maturity.
As encouraging as the performance of tax-free bonds was, returns did
not match those of U.S. Treasuries. For example, while yields of long-term
Treasury bonds declined almost two percentage points and their prices rose
25.10% during 1995, yields of municipal bonds of similar maturity declined 1.25
percentage points, with prices rising only 10.45%. As always, supply and demand
played a significant role in municipal market returns. Demand for municipals was
held back by several factors, including the outstanding performance of the stock
market, continued reluctance to invest in bonds due to the negative impact of
1994's interest rate increases, and concerns over the Orange County, California,
bankruptcy. An additional restraint on municipals' performance has been
congressional discussion of a radically low-rate flat tax.
While weak demand for municipals has been a hindrance, the decrease in
supply was a bright spot. New issue volume for 1995 was $156 billion, down 4.3%
from the $163 billion of new issues sold in 1994. With refinancing activity
diminished, we expect the supply of tax-exempt bonds to remain relatively low in
the near term. In fact, we expect that in 1996, for the second year running, the
net supply of municipal bonds outstanding will actually decline.
Municipal Issuance: 1994-1996
(in billions)
1994 1995 1996
---- ---- ----
163% 156% 150%*
* Estimated
7
<PAGE>
Portfolio Review
Following the substantial declines in municipal yields in 1995, we are
taking a cautious stance and have recently shortened the Fund's average
effective maturity from 12 to 11 years. The Fund's average effective maturity is
now on par with that of the average municipal bond fund. At the same time we
have continued to seek additional yield by increasing the percentage of
below-investment-grade bonds in the Fund's portfolio from 17% to 21%.
Our long-term investment strategy, however, remains the same as in the
past: We emphasize investment-grade, long-term municipal bonds providing high
relative yields. As of December 31, 1995, BBB-rated bonds made up 45% of the
Fund's portfolio, while bonds rated A or higher represented 34%.
Diversification remains an important investment strategy for Scudder
High Yield Tax Free Fund, allowing us to spread the portfolio's risk over a
large number of geographic areas, bond sectors, and maturities. The Fund held
securities issued in 26 states plus the District of Columbia and the Virgin
Islands as of the close of 1995. In addition, Fund assets were distributed among
hospital/healthcare bonds, toll revenue bonds, general obligation bonds and
several other categories. The past year provided an important example of the
value of diversification: Retama Development Corporation, organized to build a
racetrack in Retama, Texas, proved to be a disappointing credit, as racetrack
revenues have so far not met expectations. However, several other issues in the
portfolio, including San Joaquin, California, toll road bonds, experienced
outstanding performance in 1995, more than making up for Retama.
Lastly, purchasing bonds with call protection remains a fundamental
part of our investment strategy. When long-term interest rates on municipal
bonds are declining, as happened in 1995, we believe it is important to protect
a significant portion of the Fund's bonds from being called in by their issuers
before maturity. (Generally, a bond is called in by its issuer so that it can be
refinanced at a lower prevailing rate.) Our call-protection strategy provides a
more reliable income stream than would exist if the portfolio held significant
amounts of bonds that could be called in before their stated maturities.
8
<PAGE>
Our Outlook
Our view of the municipal bond market hasn't changed significantly from
six months ago. We expect the present economic environment of slow growth and
low inflation -- which has been with us for some time -- to continue in the near
term, with the possibility of a brief economic slowdown occurring in the second
half of 1996. We believe the municipal bond market and bonds in general would
benefit from either environment, but we expect more modest declines in interest
rates this year than last year. Though municipals staged a rally in the latter
half of 1995, municipal bond yields remain at historical highs relative to
Treasury bonds. Because of this relationship, large institutions that pay no
taxes continue to purchase tax-free securities for their price appreciation
potential. Our ongoing strategy will reflect our commitment to providing high
tax-free income and competitive total returns for our shareholders.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Donald C. Carleton
Philip G. Condon Donald C. Carleton
Scudder High Yield
Tax Free Fund:
A Team Approach to Investing
Scudder High Yield Tax Free Fund is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund's portfolio. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Lead Portfolio Manager Philip G. Condon has had responsibility for Scudder
High Yield Tax Free Fund's day-to-day operations since its inception in 1987,
after joining Scudder in 1983. Phil, who has worked in the investment industry
since 1977, also serves as Lead Portfolio Manager for Scudder Massachusetts Tax
Free Fund and is a Portfolio Manager of other tax free funds. Donald C.
Carleton, Portfolio Manager, became a member of the team in 1995 and has been a
portfolio manager at Scudder since he joined the firm in 1983. Don, who assists
in implementing investment strategy, also serves as Portfolio Manager for
Scudder Tax Free Money Fund and other Scudder funds.
9
<PAGE>
<TABLE>
SCUDDER HIGH YIELD TAX FREE FUND
INVESTMENT PORTFOLIO as of December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (d) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
0.1% SHORT-TERM MUNICIPAL INVESTMENTS
-------------------------------------------------------------------------------------------------
NEW YORK New York City, NY, General Obligation, Series A-4,
Daily Demand Note, 5.95%, 8/1/22*
(Cost $150,000) ................................... 150,000 P1 150,000
----------
-------------------------------------------------------------------------------------------------
99.9% LONG-TERM MUNICIPAL INVESTMENTS
-------------------------------------------------------------------------------------------------
ALASKA North Slope Borough, AK, General Obligation, Capital
Appreciation, Series B, Zero Coupon, 6/30/05 (c) .. 7,600,000 AAA 4,754,256
ARIZONA Maricopa County, AZ, Industrial Development
Revenue, Resource Recovery, Private Placement,
9.25%, 5/1/15 ..................................... 4,000,000 NR 3,999,680
McDowell Mountain Ranch, AZ, Communities
Facilities District, 8.25%, 7/15/19 ............... 3,000,000 NR 3,198,060
Salt River Project, AZ, Agricultural Improvement &
Power District, Electric Systems, 6%, 1/1/09 ...... 5,000,000 AA 5,443,900
CALIFORNIA Foothill Eastern Transportation Corridor Agency, CA,
Toll Road Revenue, Senior Lien, Series A:
Zero Coupon, 1/1/10 .............................. 7,000,000 BBB 4,172,280
Zero Coupon, 1/1/11 .............................. 4,415,000 BBB 2,652,444
Zero Coupon, 1/1/12 .............................. 6,000,000 BBB 3,598,860
Zero Coupon, 1/1/14 .............................. 2,875,000 BBB 1,729,083
Long Beach, CA, Aquarium of the Pacific Project,
6.1%, 7/1/10 ...................................... 4,500,000 BBB 4,540,725
Los Angeles County, CA, Certificate of Participation,
Marina Del Ray, Series A, 6.25%, 7/1/03 ........... 5,500,000 NR 5,549,060
Sacramento, CA, Cogeneration Project Revenue,
Proctor & Gamble Project, 6.5%, 7/1/14 ............ 2,500,000 BBB 2,617,625
San Joaquin Hills, CA, Transportation Corridor
Agency, Orange County, Senior Lien Toll Road
Revenue:
Zero Coupon to 1/1/02, 7.6% to 1/1/11 (b) ........ 5,000,000 BBB 3,764,350
Zero Coupon to 1/1/02, 7.65% to 1/1/12 ........... 15,000,000 BBB 11,199,150
Zero Coupon to 1/1/02, 7.65% to 1/1/13 ........... 4,000,000 BBB 2,986,440
San Jose, CA, Redevelopment Agency, Merged Area
Redevelopment Project, Tax Allocation Bonds,
6%, 8/1/08 (c) .................................... 3,000,000 AAA 3,283,500
COLORADO Colorado Health Facilities Authority Revenue, Rocky
Mountain Adventist Healthcare Project, Series 1993,
6.625%, 2/1/13 .................................... 3,500,000 BBB 3,584,840
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (d) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Denver, CO, Airport System Revenue:
Series A, Zero Coupon, 11/15/00 ................... 1,140,000 BBB 875,748
Series A, Zero Coupon, 11/15/01 ................... 5,120,000 BBB 3,704,934
Series A, Zero Coupon, 11/15/03 ................... 3,050,000 BBB 1,946,937
Series A, Zero Coupon, 11/15/04 ................... 3,130,000 BBB 1,871,145
Series A, Zero Coupon, 11/15/05 ................... 1,855,000 BBB 1,036,500
Series 1991 D, 7.75%, 11/15/13 (b) ................ 9,775,000 BBB 11,730,782
DISTRICT OF COLUMBIA District of Columbia, Certificate of Participation,
Series 1993, 7.3%, 1/1/13 ......................... 4,650,000 B 4,858,692
District of Columbia, General Obligation:
Series A, 5.875%, 6/1/05 (c) ...................... 4,300,000 AAA 4,569,825
Series A-3, 5.6%, 6/1/07 .......................... 3,300,000 AAA 3,403,851
District of Columbia, Hospital Refunding Revenue:
Medlantic Healthcare Group, Inc., 1993 Series A,
5.5%, 8/15/06 (c) ................................ 1,305,000 AAA 1,363,686
Metlantic Washington Hospital Center, 1992
Series A, 7.125%, 8/15/19 ........................ 3,000,000 BBB 3,070,380
FLORIDA Broward County, FL, Housing Finance Authority,
Single Family Mortgage Revenue, Zero Coupon,
4/1/14 ............................................ 5,270,000 AA 863,173
Indian Trace, FL, Special Tax Revenue, Water
Management, 8.25%, 5/1/05 ......................... 2,785,000 NR 2,953,910
Indian Trace, FL, Community Development Authority,
Special Assessment District Bonds, 6.875%, 4/1/10 . 2,340,000 NR 2,324,977
GEORGIA Municipal Electric Authority of Georgia, Power
Revenue, Series Z, 5.5%, 1/1/12 ................... 1,375,000 A 1,389,603
ILLINOIS Chicago, IL, General Obligation Lease, Board of
Education, Series A, 6%, 1/1/16 (c) ............... 5,000,000 AAA 5,474,050
Illinois Development Finance Authority:
Refunding Revenue, Commonwealth Edison,
5.7%, 1/15/09 .................................... 3,000,000 BBB 3,019,110
Solid Waste Revenue, Ford Heights Waste Tire
Project, 7.875%, 4/1/11 .......................... 3,000,000 NR 2,977,140
Health Facilities Revenue, Community Living
Options, 7%, 3/1/07 .............................. 2,000,000 BBB 2,117,600
Winnebago County, IL, School District #122,
6.45%, 6/1/08 (c) ................................. 1,500,000 AAA 1,702,365
INDIANA Fishers, IN, Economic Development Revenue, First
Mortgage/United Student Aid Inc. Project,
Series 1989, 8.25%, 9/1/09 ........................ 2,000,000 NR 2,138,360
Indiana Health Facilities Finance Authority, Hospital
Refunding Revenue, Floyd Memorial Hospital,
6.625%, 2/15/13 ................................... 3,000,000 A 3,166,290
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
SCUDDER HIGH YIELD TAX FREE FUND
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (d) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Indiana Municipal Power Agency, Power Supply
System Refunding Revenue, Series 1983 B,
5.875%, 1/1/09 (c) ................................ 2,300,000 AAA 2,483,862
Indianapolis, IN, Economic Development, Refunding
and Improvement Revenue, Robin Run Village
Project, Series 1992, 7.625%, 10/1/22 ............. 1,500,000 BBB 1,619,745
MARYLAND Maryland Energy Finance Administration, Limited
Obligation, Cogeneration-Warrior Run Project,
7.4%, 9/1/19 ...................................... 2,500,000 NR 2,639,825
Prince George's County, MD, Greater Southeast
Healthcare, 6.2%, 1/1/08 .......................... 1,000,000 BBB 980,140
MASSACHUSETTS Boston, MA, Industrial Development Authority,
Springhouse Project, 9.25%, 7/1/25 ................ 1,000,000 NR 1,043,910
Lowell, MA, General Obligation, 8.3%, 2/15/05 ...... 365,000 BBB 445,771
Massachusetts Health & Educational Facilities
Authority, Cooley Dickson Hospital Inc., 7.125%,
11/15/18, Prerefunded 5/15/03 (e) ................. 1,925,000 AAA 2,284,263
Massachusetts Housing Finance Agency, Multi-Family
Housing Project, Series 1988 A, 8.8%, 8/1/21 ...... 665,000 A 716,690
Massachusetts Industrial Finance Agency, Solid Waste
Disposal, Peabody Monofil Project, 9%, 9/1/05 ..... 3,000,000 NR 3,149,370
Massachusetts Industrial Finance Agency, Edgewood
Retirement Community, Series A, 9%, 11/15/25 ...... 1,000,000 NR 1,000,820
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue,
Series A, 5.1%, 7/1/07 (c) ........................ 3,840,000 AAA 3,883,315
MICHIGAN Detroit, MI, Unlimited Tax, General Obligation,
Distributable State Aid, Refunding, 5.25%,
5/1/09 (c) ....................................... 2,450,000 AAA 2,490,548
Michigan State Hospital Finance Authority Revenue:
Gratiot Community Hospital, Series 1988 A, 8.75%,
10/1/07, Prerefunded 10/1/98 (e) ................. 1,000,000 BB 1,114,920
Sinai Hospital, Series 1995, 6.625%, 1/1/16 ....... 2,990,000 BBB 2,993,648
Genesys Health System, Series A, 7.5%,
10/1/27 .......................................... 2,000,000 BBB 2,132,120
MINNESOTA St. Paul, MN, Housing & Redevelopment Authority,
Healtheast Hospital Project, Series 1993 A, 6.625%,
11/1/17 ........................................... 3,500,000 BBB 3,564,120
NEVADA Las Vegas, NV, Downtown Redevelopment Agency,
Tax Increment Revenue, Subordinate Lien, 6.1%,
6/15/14 ........................................... 1,500,000 BBB 1,514,970
Nevada State Housing Division, Single Family
Mortgage Revenue, Series R, 5.95%, 10/1/11 ........ 2,205,000 AA 2,317,631
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (d) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW HAMPSHIRE New Hampshire Health & Educational Authority, New
Hampshire Catholic Charity, 8.4%, 8/1/11 .......... 600,000 BBB 654,294
New Hampshire Higher Education and Health
Facilities Revenue:
Frisbie Memorial Hospital, Series 1993, 6.125%,
10/1/13 ......................................... 2,750,000 BBB 2,704,433
St. Joseph's Hospital:
7.5%, 1/1/07 .................................... 1,490,000 BBB 1,592,885
7.5%, 1/1/16 .................................... 2,600,000 BBB 2,762,214
Monadnok Community Hospital, Series 1990,
9.125%, 10/1/20 ................................. 1,455,000 NR 1,616,825
NEW JERSEY New Jersey Economic Development Authority,
Methodist Homes, 7.5%, 7/1/25 ..................... 1,000,000 NR 1,025,550
NEW YORK Metropolitan Transportation Authority of New York,
Transit Facilities Revenue, 7%, 7/1/09 ............ 1,000,000 BBB 1,097,270
New York City, NY, General Obligation:
Series B, 6.1%, 8/15/05 ........................... 3,500,000 A 3,607,590
Series B, 7.3%, 8/15/10 ........................... 2,000,000 A 2,255,540
New York City, NY, Industrial Development Agency,
Visy Paper Inc. Project, Series 1995, 7.95%,
1/1/28 ............................................ 1,000,000 NR 1,020,770
OHIO Gateway Economic Development Corporation of
Cleveland, OH, Stadium Revenue, 6.5%, 9/15/14 ..... 5,000,000 NR 5,036,200
Hamilton County, OH, Health System Revenue,
Franciscan Sisters of the Poor Health System,
Providence Hospital, Series 1992, 6.8%, 7/1/08 .... 5,485,000 BBB 5,718,387
OKLAHOMA Tulsa Municipal Airport Trust, Revenue Bonds, AMR
Corporation, American Airlines, Series 1995, 6.25%,
6/1/20 ............................................ 4,500,000 BBB 4,601,115
PENNSYLVANIA Clearfield, PA, Hospital Authority Revenue,
Clearfield Hospital, 6.875%, 6/1/16 ............. 4,375,000 BBB 4,409,300
Montgomery County, PA, Redevelopment Authority,
Multi-Family Housing Revenue Refunding, KBF
Associates, LP Project, 6.375%, 7/1/12 ............ 5,500,000 BBB 5,556,540
Pennsylvania Higher Education Authority, Medical
College of Pennsylvania, Series B, 7.25%, 3/1/05 .. 1,000,000 BBB 1,111,020
Philadelphia, PA, Hospital and Higher Education
Facilities Authority, Hospital Revenue:
Albert Einstein Medical Center, 7.625%, 4/1/11 ... 2,500,000 A 2,718,300
Graduate Health System Obligated Group,
6.25%, 7/1/13 ................................... 5,000,000 BBB 4,973,700
Pottsville, PA, Hospital Authority, Warne Clinic,
7.25%, 7/1/24 .................................... 3,000,000 BBB 3,092,670
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
SCUDDER HIGH YIELD TAX FREE FUND
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (d) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOUTH CAROLINA South Carolina Jobs Economic Development Authority,
Hospital Facilities Revenue, South Carolina Baptist
Hospital, 5.3%, 8/1/09 (c) ........................ 8,000,000 AAA 8,038,160
SOUTH DAKOTA South Dakota Health & Educational Facilities
Authority Revenue, Prairie Lakes Health Care System:
7.125%, 4/1/10 ................................... 1,000,000 BBB 1,063,550
7.25%, 4/1/22 .................................... 1,000,000 BBB 1,051,410
South Dakota Housing Development Authority, Home
Ownership Mortgage, Series A, 6.4%, 5/1/12 ........ 3,500,000 AA 3,634,610
TEXAS Bexar County, TX, Housing Finance Corporation,
Series A, Subject to AMT, GNMA Collateralized
Mortgage, 8.2%, 4/1/22 ............................ 1,150,000 AAA 1,219,907
Dallas-Fort Worth, TX, International Airport,
American Airlines Inc.:
7.5%, 11/1/25 .................................... 3,910,000 BBB 4,191,012
7.25%, 11/1/30 ................................... 5,000,000 BBB 5,406,700
Midland County, TX, Hospital District, Midland
Memorial Hospital, 7.5%, 6/1/16 ................... 1,500,000 BBB 1,622,790
Retama Development Corporation, TX, Special
Facilities Revenue, Retama Park Racetrack Project,
Series 1993, 8.75%, 12/15/18 ...................... 5,000,000 NR 1,800,000
UTAH Salt Lake City, UT, Hospital Revenue, Intermountain
Healthcare Systems, 6.65%, 2/15/12 ................ 2,000,000 AA 2,137,020
VERMONT Swanton, VT, Electric System Revenue, Series 1993,
6.7%, 12/1/23 ..................................... 1,155,000 BBB 1,213,847
Vermont Housing Finance Agency, Multi-Family
Housing Revenue, Northgate Housing Project,
8.25%, 6/15/20 .................................... 1,065,000 NR 1,118,506
VIRGIN ISLANDS Virgin Islands Public Finance Authority, General
Obligation, Matching Fund Loan Notes, Series A,
7.25%, 10/1/18 .................................... 6,500,000 NR 7,054,905
VIRGINIA Pittsylvania County, VA, Industrial Development
Authority, Multitrade of Pittsylvania County, L.P.
Project:
7.45%, 1/1/09 .................................... 1,500,000 NR 1,641,945
7.5%, 1/1/14 ..................................... 3,500,000 NR 3,830,400
WASHINGTON King County, WA, Public Hospital District, Hospital
Revenue, Valley Medical Center, 6.25%, 9/1/09 (c) . 530,000 AAA 593,324
Washington Public Power Supply System, Refunding
Revenue:
Nuclear Project #2:
Series B, 5.65%, 7/1/08 ......................... 3,030,000 AA 3,109,325
Series B, 6.3%, 7/1/12 .......................... 10,000,000 AA 10,849,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------
Principal Credit Market
Amount ($) Rating (d) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inverse Floater, 6.42%, 7/1/12** ................ 3,000,000 AA 2,838,750
Nuclear Project #3:
Series B, 5.65%, 7/1/08 ......................... 3,640,000 AA 3,735,295
Series B, 7.125%, 7/1/16 ........................ 2,500,000 AA 2,951,200
Series C, 5.1%, 7/1/07 .......................... 5,500,000 AA 5,424,760
-----------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $283,262,106) ............................... 300,090,098
-----------
-------------------------------------------------------------------------------------------------
0.0% PURCHASED OPTIONS
-------------------------------------------------------------------------------------------------
Number of
Contracts
---------
Put on U.S. Treasury Bond Futures, strike price 118.00,
expires 2/17/96 (Cost $311,094) .................... 250 132,813
-----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $283,723,200) (a) ........................... 300,372,911
===========
<FN>
(a) The cost for federal income tax purposes was $283,723,200. At December 31, 1995, net unrealized appreciation
for all securities was $16,649,711. This consisted of aggregate gross unrealized appreciation for all
securities in which there was an excess of market value over tax cost of $20,175,363 and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax cost over market value of
$3,525,652.
(b) At December 31, 1995 these securities, in whole or in part, have been pledged to cover initial margin
requirements for open futures contracts.
AT DECEMBER 31, 1995, OPEN FUTURES CONTRACTS SOLD SHORT WERE AS FOLLOWS (NOTE A):
Aggregate
Futures Expiration Contracts Face Value ($) Market Value ($)
------- ---------- --------- -------------- ----------------
Muni Bond Index Mar. 1996 25 2,999,750 3,025,782
20 Year U.S. Treasury Bond Mar. 1996 75 8,808,625 9,110,156
--- ---------- ----------
100 11,808,375 12,135,938
=== ========== ==========
Total net unrealized depreciation on open futures contracts sold short ................ (327,563)
==========
(c) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC, FSA or MBIA.
(d) All of the securities held have been determined to be of the appropriate credit quality as required by the
Fund's investment objectives. Credit ratings are either Standard & Poor's Ratings Group, Moody's Investors
Service, Inc. or Fitch Investors Service, Inc. Unrated securities (NR) and securities rated by Scudder (SS&C)
have been determined to be of comparable quality to rated eligible securities.
(e) Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury securities which are held in
escrow and are used to pay principal and interest on tax-exempt issue and to retire the bonds in full at the
earliest refunding date.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
SCUDDER HIGH YIELD TAX FREE FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Floating rate and monthly, weekly, or daily demand notes are
securities whose yields vary with a designated market index or market
rate, such as the coupon-equivalent of the Treasury bill rate.
Variable rate demand notes are securities whose yields are
periodically reset at levels that are generally comparable to
tax-exempt commercial paper. These securities are payable on demand
within seven calendar days and normally incorporate an irrevocable
letter of credit or line of credit from a major bank. These notes
are carried, for purposes of calculating average weighted maturity,
at the longer of the period remaining until the next rate change or
to the extent of the demand period.
** Inverse floating rate notes are instruments whose yields have an
inverse relationship to benchmark interest rates. These securities
are shown at their rate as of December 31, 1995.
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------
DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $283,723,200)
(Note A) ............................................. $300,372,911
Cash .................................................. 25,271
Receivables:
Interest ............................................. 5,179,807
Fund shares sold ..................................... 158,320
------------
Total assets ........................................ 305,736,309
LIABILITIES
Payables:
Investments purchased ................................ $1,005,963
Dividends ............................................ 466,223
Fund shares redeemed ................................. 86,568
Daily variation margin on open futures contracts
(Note A) ............................................ 33,594
Accrued management fee (Note C) ...................... 152,776
Other accrued expenses (Note C) ...................... 112,017
----------
Total liabilities ................................... 1,857,141
------------
Net assets, at market value ........................... $303,879,168
============
NET ASSETS
Net assets consist of:
Net unrealized appreciation (depreciation) on:
Investments ......................................... $ 16,649,711
Futures ............................................. (327,563)
Accumulated net realized loss ........................ (3,048,689)
Shares of beneficial interest ........................ 249,296
Additional paid-in capital ........................... 290,356,413
------------
Net assets, at market value ........................... $303,879,168
============
NET ASSET VALUE, offering and redemption price per share
($303,879,168 -:- 24,929,576 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized) ................................ $12.19
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
SCUDDER HIGH YIELD TAX FREE FUND
- --------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest .............................................. $18,802,766
Expenses:
Management fee (Note C) ............................... $1,968,029
Services to shareholders (Note C) ..................... 414,177
Custodian and accounting fees (Note C) ................ 114,156
Trustees' fees (Note C) ............................... 43,060
Reports to shareholders ............................... 62,913
Auditing .............................................. 45,037
Legal ................................................. 20,488
State registration .................................... 16,774
Other ................................................. 19,281
----------
Total expenses before reductions ...................... 2,703,915
Expense reductions (Note C) ........................... (415,870)
----------
Expenses, net ......................................... 2,288,045
-----------
Net investment income ................................. 16,514,721
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investments .......................................... 2,633,735
Futures .............................................. (2,711,469) (77,734)
----------
Net unrealized appreciation during the period on:
Investments .......................................... 31,868,538
Futures .............................................. 1,281,187 33,149,725
---------- -----------
Net gain on investments ............................... 33,071,991
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $49,586,712
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------
INCREASE (DECREASE) IN NET ASSETS 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ...................................... $ 16,514,721 $ 17,780,175
Net realized loss from investment transactions ............. (77,734) (1,023,858)
Net unrealized appreciation (depreciation)
on investments during the period .......................... 33,149,725 (43,029,825)
------------ ------------
Net increase (decrease) in net assets
resulting from operations ................................. 49,586,712 (26,273,508)
------------ ------------
Distributions to shareholders from net
investment income ($.72 and $.66 per share,
respectively) ............................................. (17,484,017) (16,810,879)
------------ ------------
Fund share transactions:
Proceeds from shares sold .................................. 80,985,278 126,895,781
Net asset value of shares issued to
shareholders in reinvestment of
distributions ............................................. 11,658,355 10,306,439
Cost of shares redeemed .................................... (80,644,390) (151,370,479)
------------ ------------
Net increase (decrease) in net assets from
Fund share transactions ................................... 11,999,243 (14,168,259)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS .......................... 44,101,938 (57,252,646)
Net assets at beginning of period .......................... 259,777,230 317,029,876
------------ ------------
NET ASSETS AT END OF PERIOD (including
undistributed net investment income
of $969,296 at December 31, 1994) ......................... $303,879,168 $259,777,230
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period .................. 23,910,066 25,261,001
------------ ------------
Shares sold ................................................ 6,935,326 10,881,281
Shares issued to shareholders in
reinvestment of distributions ............................. 992,340 974,025
Shares redeemed ............................................ (6,908,156) (13,206,241)
------------ ------------
Net increase (decrease) in Fund shares ..................... 1,019,510 (1,350,935)
------------ ------------
Shares outstanding at end of period ........................ 24,929,576 23,910,066
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
<TABLE>
SCUDDER HIGH YIELD TAX FREE FUND
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
FOR THE PERIOD
JANUARY 22, 1987
(COMMENCEMENT
YEARS ENDED DECEMBER 31, OF OPERATIONS) TO
--------------------------------------------------------------------- DECEMBER 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ........................... $10.86 $12.55 $11.90 $11.67 $11.19 $11.35 $11.06 $10.52 $12.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a) ........... .68 .70 .67 .72 .76 .77 .76 .83 .78
Net realized and unrealized
gain (loss) on investments ......... 1.37 (1.73) .93 .50 .69 (.11) .35 .54 (1.48)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .......................... 2.05 (1.03) 1.60 1.22 1.45 .66 1.11 1.37 (.70)
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income .......... (.72) (.66) (.67) (.72) (.76) (.77) (.76) (.83) (.78)
From net realized gains on
investment transactions ............ -- -- (.21) (.27) (.21) (.05) (.06) -- --
In excess of net realized gains
on investment transactions ......... -- -- (.07) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .................. (.72) (.66) (.95) (.99) (.97) (.82) (.82) (.83) (.78)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period ....... $12.19 $10.86 $12.55 $11.90 $11.67 $11.19 $11.35 $11.06 $10.52
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) ..................... 19.28 (8.38) 13.85 10.88 13.36 6.02 10.32 13.48 (5.81)**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ................. 304 260 317 204 160 129 114 74 36
Ratio of operating expenses net,
to average daily net assets
(%) (a) ............................. .80 .80 .92 .98 1.00 1.00 1.00 .67 .40*
Ratio of net investment income
to average daily net assets (%) ..... 5.77 6.01 5.38 6.10 6.65 6.88 6.72 7.65 8.45*
Portfolio turnover rate (%) .......... 27.3 34.3 56.4 56.6 45.5 33.4 75.8 36.7 131.8*
<FN>
(a) Reflects a per share amount
of expenses, exclusive of
management fees,
reimbursed by the
Adviser of ...................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ .010 $ .066
Reflects a per share amount
of management fee not
imposed by the Adviser of ....... $ .02 $ .02 $ .01 $ -- $ -- $ .01 $ .01 $ .05 $ .06
Operating expense ratio
before expense
reductions (%) .................. .94 .97 .98 .99 1.04 1.09 1.15 1.25 1.80*
* Annualized
** Not annualized
</FN>
</TABLE>
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Scudder High Yield Tax Free Fund (the "Fund") is organized as a diversified
series of Scudder Municipal Trust, a Massachusetts business trust, which is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The policies described below are followed
consistently by the Fund in the preparation of its financial statements in
conformity with generally accepted accounting principles.
SECURITY VALUATION. Portfolio debt securities with remaining maturities
greater than sixty days are valued by pricing agents approved by the Officers of
the Fund, which prices reflect broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Trustees.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
OPTIONS. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or
sell to (put option), the writer a designated instrument at a specified price
within a specified period of time. Certain options, including options on
indices, will require cash settlement by the Fund if the option is exercised.
During the period, the Fund purchased put options on financial instruments as
a hedge against potential adverse price movements in the value of portfolio
assets.
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects to close out the option it
would recognize a gain or loss equal to the difference between the cost of
acquiring the option and the amount realized upon the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call
or purchased put option is adjusted for the amount of option premium. If a
written put or purchased call option is exercised the
21
<PAGE>
SCUDDER HIGH YIELD TAX FREE FUND
- --------------------------------------------------------------------------------
Fund's cost basis of the acquired security or currency would be the exercise
price adjusted for the amount of the option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last
sale price or, in the absence of a sale, the mean between the closing bid and
asked price or at the most recent asked price (bid for purchased options) if no
bid and asked price are available. Over-the-counter written or purchased
options are valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange
for the premium, the opportunity to profit during the option period from an
increase in the market value of the underlying security or currency above the
exercise price. When the Fund writes a put option it accepts the risk of a
decline in the market value of the underlying security or currency below the
exercise price. Over-the-counter options have the risk of the potential
inability of counterparties to meet the terms of their contracts. The Fund's
maximum exposure to purchased options is limited to the premium initially paid.
In addition, certain risks may arise upon entering into option contracts
including the risk that an illiquid secondary market will limit the Fund's
ability to close out an option contract prior to the expiration date and, that
a change in the value of the option contract may not correlate exactly with
changes in the value of the securities or currencies hedged.
FUTURES CONTRACTS. A futures contract is an agreement between a buyer or
seller and an established futures exchange or its clearinghouse in which the
buyer or seller agrees to take or make a delivery of a specific amount of an
item at a specified price on a specific date (settlement date). During the
period the Fund sold interest rate futures to hedge against declines in the
value of portfolio securities.
Upon entering into a futures contract, the Fund is required to deposit with
a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract.
Subsequent payments ("variation margin") are made or received by the Fund each
day, dependent on the daily fluctuations in the value of the underlying
security, and are recorded for financial reporting purposes as unrealized
gains or losses by the Fund. When entering into a closing transaction, the
Fund will realize a gain or loss equal to the difference
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
between the value of the futures contract to sell and the futures contract
to buy. Futures contracts are valued at the most recent settlement price.
Certain risks may arise upon entering into futures contracts including the
risk that an illiquid secondary market will limit the Fund's ability to close
out a futures contract prior to the settlement date and that a change in the
value of a futures contract may not correlate exactly with changes in the value
of the securities or currencies hedged. When utilizing futures contracts to
hedge the Fund gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code which are applicable to regulated investment
companies and to distribute all of its taxable and tax exempt income to its
shareholders. The Fund accordingly paid no federal income taxes and no
provision for federal income taxes was required.
At December 31, 1995, the Fund had a net tax basis capital loss carryforward
of approximately $1,086,000 which may be applied against any realized net
taxable capital gains of each succeeding year until fully utilized or until
December 31, 2002, the expiration date.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital
loss carryforwards, would be taxable to the Fund if not distributed and,
therefore, will be distributed to shareholders. An additional distribution may
be made to the extent necessary to avoid the payment of a four percent federal
excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
23
<PAGE>
SCUDDER HIGH YIELD TAX FREE FUND
- --------------------------------------------------------------------------------
regulations which may differ from generally accepted accounting principles.
These differences primarily relate to investments in futures contracts. As
a result, net investment income (loss) and net realized gain (loss) on
investment transactions for a reporting period may differ significantly from
distributions during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
OTHER. Investment transactions are accounted for on a trade-date basis.
Interest income is accrued pro rata to the earlier of call or maturity.
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
Purchases and sales of long-term municipal investments for the year ended
December 31, 1995, were $89,238,858 and $74,358,292, respectively.
The aggregate face value of futures contracts opened and closed during the
year ended December 31, 1995 was $24,140,781 and $40,440,844, respectively.
C. RELATED PARTIES
- --------------------------------------------------------------------------------
Under the Investment Management Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Adviser directs the investments of
the Fund in accordance with its investment objectives, policies, and
restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides
certain administrative services in accordance with the Agreement. The
management fee payable under the Agreement is equal to an annual rate of 0.70%
on the first $200,000,000 of average daily net assets, and 0.65% of such net
assets in excess of $200,000,000, computed and accrued daily and payable
monthly. The Agreement also provides that if the Fund's expenses exclusive of
taxes, interest, and extraordinary expenses, exceed specified limits, such
excess, up to the amount of the management fee, will be paid by the Adviser.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For the year ended December 31, 1995, the fee pursuant to the Agreement
amounted to $1,552,159 which was equivalent to an annual effective rate of .54%
of the Fund's average daily net assets. The Adviser has agreed not to impose
all or a portion of its management fee until April 30, 1996, and during such
period to maintain the annualized expenses of the Fund at not more than .80% of
average daily net assets. For the year ended December 31, 1995, the Adviser did
not impose a portion of its management fee amounting to $415,870.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended December 31, 1995, the amount charged to the Fund by SSC aggregated
$314,439 of which $24,939 is unpaid at December 31, 1995.
Effective January 23, 1995, Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of the Adviser, assumed responsibility for determining the daily
net asset value per share and maintaining the portfolio and general accounting
records of the Fund. For the year ended December 31, 1995, the amount charged
to the Fund by SFAC aggregated $56,810, of which $5,061 is unpaid at December
31, 1995.
The Fund pays each Trustee not affiliated with the Adviser $4,000 annually
plus specified amounts for attended board and committee meetings. For the year
ended December 31, 1995, Trustees' fees and expenses aggregated $43,060.
25
<PAGE>
SCUDDER HIGH YIELD TAX FREE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER MUNICIPAL TRUST AND THE SHAREHOLDERS OF SCUDDER
HIGH YIELD TAX FREE FUND:
We have audited the accompanying statement of assets and liabilities of
Scudder High Yield Tax Free Fund, including the investment portfolio, as of
December 31, 1995, and the related statement of operations for the year then
ended, the statements of changes in net assets and the financial highlights for
each of the eight years in the period then ended and for the period January 22,
1987 (commencement of operations) to December 31, 1987. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Scudder High Yield Tax Free Fund as of December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for
each of the eight years in the period then ended and for the period January
22, 1987 (commencement of operations) to December 31, 1987, in conformity with
generally accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 14, 1996
26
<PAGE>
TAX INFORMATION
- --------------------------------------------------------------------------------
By now shareholders for whom year-end tax reporting is required by the IRS
should have received their Form 1099-DIV and tax information letter from the
Fund. For corporate shareholders no amount of the income dividends paid by
the Fund qualified for the dividends received deduction.
Of the dividends paid from net investment income for the fiscal year ended
December 31, 1995, 18.07% should be treated as an item of tax preference for
purposes of the federal alternative minimum tax, if applicable. Pursuant to
section 852 of the Internal Revenue Code, the Fund designates $16,522,000 as
exempt-interest dividends for the fiscal year ended December 31, 1995.
Please consult a tax adviser if you have questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
27
<PAGE>
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28
<PAGE>
OFFICERS AND TRUSTEES
David S. Lee*
President and Trustee
Daniel Pierce*
Vice President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director, Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
College of Business Administration
Juris Padegs*
Trustee
Donald C. Carleton*
Vice President
Philip G. Condon*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
* Scudder, Stevens & Clark, Inc.
29
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
The Scudder Family of Funds
-----------------------------------------------------------------------------------------------------------------
<C> <C>
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Global Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Small Company Fund
Scudder Massachusetts Tax Free Fund* Scudder Gold Fund
Scudder Medium Term Tax Free Fund Scudder Greater Europe Growth Fund
Scudder New York Tax Free Fund* Scudder International Fund
Scudder Ohio Tax Free Fund* Scudder Latin America Fund
Scudder Pennsylvania Tax Free Fund* Scudder Pacific Opportunities Fund
Growth and Income Scudder Quality Growth Fund
Scudder Balanced Fund Scudder Small Company Value Fund
Scudder Growth and Income Fund Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
-----------------------------------------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
-----------------------------------------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income
Opportunities Fund, Inc.
Institutional Cash Management
- -----------------------------------------------------------------------------------------------------------------
Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder Fund, Inc.
-----------------------------------------------------------------------------------------------------------------
<FN>
For complete information on any of the above Scudder funds, including
management fees and expenses, call or write for a free prospectus. Read it
carefully before you invest or send money. +A portion of the income from the
tax-free funds may be subject to federal, state, and local taxes. *Not
available in all states. +++A no-load variable annuity contract provided by
Charter National Life Insurance Company and its affiliate, offered by
Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder, Stevens & Clark, Inc. are traded on various stock exchanges. ++For
information on Scudder Treasurers Trust,(TM) an institutional cash
management service that utilizes certain portfolios of Scudder Fund, Inc.
($100,000 minimum), call 1-800-541-7703.
</FN>
</TABLE>
30
<PAGE>
HOW TO CONTACT SCUDDER
<TABLE>
<CAPTION>
<S> <C>
Account Service and Information
-------------------------------------------------------------------------------------------------------------
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For personalized information about your Scudder accounts;
exchanges and redemptions; or information on any Scudder fund
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
-------------------------------------------------------------------------------------------------------------
To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
-------------------------------------------------------------------------------------------------------------
THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
-------------------------------------------------------------------------------------------------------------
Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you--they can
be found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
-------------------------------------------------------------------------------------------------------------
For information on Scudder For information on Scudder
Treasurers Trust,(TM)an institutional Institutional Funds,* funds
cash management service for designed to meet the broad
corporations, non-profit investment management and
organizations and trusts that uses service needs of banks and
certain portfolios of Scudder Fund, other institutions, call
Inc.* ($100,000 minimum), call 1-800-854-8525.
1-800-541-7703.
-------------------------------------------------------------------------------------------------------------
Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
<FN>
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
</FN>
</TABLE>
31
<PAGE>
Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven Clark,
Scudder, Stevens & Clark was the first independent investment counsel firm in
the United States. Since its birth, Scudder's pioneering spirit and commitment
to professional long-term investment management have helped shape the investment
industry. In 1928, we introduced the nation's first no-load mutual fund. Today
we offer 37 pure no load(TM) funds, including the first international mutual
fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
