SCUDDER
INVESTMENTS(SM)
[LOGO]
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BOND/TAX FREE
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Scudder High Yield
Tax Free Fund
Class S Shares
Fund #008
Annual Report
May 31, 2000
The fund seeks to provide a high level of income exempt from regular federal
income tax.
A no-load fund with no commissions to buy, sell, or exchange shares.
<PAGE>
Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
9 Portfolio Management Discussion
15 Glossary of Investment Terms
16 Investment Portfolio
26 Financial Statements
29 Financial Highlights
30 Notes to Financial Statements
38 Report of Independent Accountants
39 Tax Information
40 Officers and Trustees
41 Investment Products and Services
43 Scudder Solutions
2
<PAGE>
Scudder High Yield Tax Free Fund
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ticker symbol SHYTX fund number 008
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Date of o In an environment of rising interest rates, Scudder
Inception: High Yield Tax Free Fund -- Class S Shares posted a
1/22/87 total return of -1.28% for its most recent fiscal year
ended May 31, 2000. The fund continued to display
Total Net strong competitive performance, outpacing the -4.98%
Assets of average performance of the fund's peers over the same
Class S period, according to Lipper.
Shares:
$436 million o For the one-, three-, five-, and ten-year periods, the
fund's total returns placed it in the top 6% of similar
municipal bond funds as tracked by Lipper Analytical
Services. The fund also ranked number one for three-
and ten-year total return performance versus its peers.
Please see page 9 for additional Lipper performance
information.
o As of May 31, 2000, Scudder High Yield Tax Free Fund --
Class S Shares' 30-day net annualized SEC yield was
5.72%, equivalent to an 8.94% taxable yield for
investors subject to the 36% maximum federal income tax
rate.
o Scudder High Yield Tax Free Fund received an overall
Morningstar Rating(TM) of five stars out of 1690 tax
free funds as of May 31, 2000.^1
^1 Morningstar proprietary rankings reflect historical risk-adjusted
performance as of May 31, 2000. Ratings are subject to change monthly, and
past performance does not guarantee future results. Morningstar ratings are
calculated from the fund's three- and five-year average annual returns in
excess of 90-day Treasury bills with appropriate fee adjustments, and a
risk factor that reflects fund performance below 90-day T-bill returns. The
fund received five stars for the three-year period, five stars for the
five-year period, and five stars for the ten-year period. The top 10% of
funds in a broad asset class receive 5 stars and the next 22.5% receive 4
stars. The fund was rated among 1690, 1441, and 408 funds in its broad
asset class for the three-, five-, and ten-year periods, respectively.
3
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Letter from the Fund's President
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Dear Shareholders,
Municipal bonds endured a challenging investment environment during the most
recent fiscal year ended May 31, 2000 for Scudder High Yield Tax Free Fund --
Class S Shares. The fund's Class S Shares posted a -1.28% total return during
the period, but outperformed the -4.98% average return of its peers for the same
period as compiled by Lipper. To match the fund's Class S Shares tax-free 5.72%
30-day SEC yield on May 31, a taxable investment for investors in the 36% tax
bracket would have had to yield 8.94%. Over the period, municipal bonds were
negatively affected by significant interest rate increases across all fixed
income markets as the Federal Reserve attempted to restrain surging U.S.
economic growth and head off a major increase in inflation by incrementally
raising the Federal Funds Rate to 6.50%.
Following this period of relative underperformance, we nevertheless believe the
municipal market offers attractive return potential: Adjusted for inflation,
municipal yields are high by historical standards and are attractive when
compared to yields of comparable Treasury bonds. As of May 31, yields of 10-year
AAA-rated municipal bonds were 84.40% of comparable Treasuries. Second, recent
declines in the issuance of municipal bonds should provide strong support for
bond prices.
4
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On a related note, we'd like to point out some of the advantages of owning a
municipal bond fund compared with holding individual municipal bonds. First and
foremost, municipal bond funds offer professional management: While many
investors believe that purchasing an individual bond is a relatively simple
process, knowing what price to pay for a municipal bond and what structure and
characteristics to seek can be confusing, and can make a dramatic difference in
how a bond will perform on a total return basis. Though investors understandably
value income and coupon level, they are not the only factors that determine
whether a bond will prove to be a worthwhile investment. Other important
advantages offered by municipal bond funds include portfolio diversification,
dividend reinvestment, and quarterly statements that display performance
information clearly and concisely.
Thank you for investing with Scudder. If you have any questions regarding
Scudder High Yield Tax Free Fund, please call 1-800-SCUDDER, or visit Scudder's
Web site at www.scudder.com.
Sincerely,
/s/Lin Coughlin
Linda C. Coughlin
President,
Scudder High Yield Tax Free Fund
5
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Performance Update
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May 31, 2000
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Growth of a $10,000 Investment
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THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
Scudder High Yield Tax Lehman Brothers Municipal
Free Fund-- Class S Shares Bond Index*
'90 10000 10000
'91 11008 11008
'92 12292 12090
'93 13988 13537
'94 14203 13871
'95 15425 15135
'96 16052 15826
'97 17588 17139
'98 19622 18748
'99 20440 19629
'00 20178 19452
Yearly periods ended May 31
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Fund Index Comparison
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Total Return
Growth of Average
Period ended 5/31/2000 $10,000 Cumulative Annual
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Scudder High Yield Tax Free Fund -- Class S Shares
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1 year $ 9,872 -1.28% -1.28%
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5 year $ 13,082 30.82% 5.52%
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10 year $ 20,178 101.78% 7.27%
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Lehman Brothers Municipal Bond Index*
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1 year $ 9,912 -.88% -.88%
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5 year $ 12,853 28.53% 5.14%
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10 year $ 19,452 94.52% 6.87%
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* The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of municipal bonds issued across the United States. Index issues have
a credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
6
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Returns and Per Share Information
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
Yearly periods ended May 31
Scudder High Yield Tax Lehman Brothers Municipal
Free Fund -- Class S Shares Bond Index*
1991 10.08 10.08
1992 11.66 9.83
1993 13.79 11.97
1994 1.54 2.47
1995 8.61 9.11
1996 4.06 4.57
1997 9.57 8.29
1998 11.57 9.39
1999 4.17 4.67
2000 -1.28 -0.88
<TABLE>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class Total
Return (%) 10.08 11.66 13.79 1.54 8.61 4.06 9.57 11.57 4.17 -1.28
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Index Total
Return (%) 10.08 9.83 11.97 2.47 9.11 4.57 8.29 9.39 4.67 -.88
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Net Asset
Value ($) 11.38 11.72 12.33 11.61 11.86 11.66 12.09 12.80 12.69 11.87
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Income
Dividends ($) .77 .74 .70 .67 .70 .68 .66 .66 .64 .66
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Capital Gains
Distributions($) .06 .19 .25 .27 -- -- -- -- -- --
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</TABLE>
* 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.
On May 1, 2000, existing shares of the Fund were redesignated as Class S
shares and generally are not available to new investors. The total return
information provided is for the Fund's Class S shares.
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 expenses, total returns for the Class would have been lower.
7
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Portfolio Summary
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May 31, 2000
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Diversification
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Hospital/Health/Senior Care 26%
Project Revenue/Special
Assessment 8%
Port/Airport Revenue 7%
State General Obligation/
Lease 6%
Electric Utility Revenue 5%
Sales/Special Tax 4%
Housing Finance Authority 3%
Toll Revenue/Transportation 1%
Miscellaneous Municipal 40%
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100%
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Diversification remains an important strategy for the fund, allowing us to
spread risk over a large number of sectors, maturities, and geographic areas.
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Quality
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
AAA 31%
AA 5%
A 12%
BBB 21%
Not Rated 31%
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100%
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Weighted Average Quality: AA+
We gradually added lower-quality bonds to the portfolio during the period as
yields of these bonds rose to the point where we believed the benefits of
additional income potential outweighed the additional risk these bonds carry.
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Effective Maturity
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Less than 1 4%
1 < 5 13%
5 < 8 17%
8 < 15 31%
Greater than 15 35%
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100%
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Weighted Average Effective
Maturity: 13.42 years
The fund continues its cautious stance on the market with respect to interest
rate risk, maintaining a neutral average maturity and duration with respect to
its peer group.
For more complete details about the Fund's investment portfolio, see page 16. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8
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Portfolio Management Discussion
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May 31, 2000
Dear Shareholders,
Scudder High Yield Tax Free Fund -- Class S Shares achieved its objectives and
distinguished itself as one of the top-ranking municipal bond funds for total
return performance during the 12 months ended May 31, 2000. The fund's most
recent fiscal year comprised one of the most difficult periods for fixed-income
investments since 1994, however, as the Federal Reserve Board Open Market
Committee (FOMC) raised short-term interest rates 175 basis points (1.75%) to
6.50%. Reflecting this adverse environment, the fund's Class S Shares posted a
-1.28% total return for the 12 months ended May 31, 2000. This return was better
than nearly all of the fund's 56 peers as defined by Lipper Analytical Services,
Inc. The fund's Class S Shares strong competitive results also placed it in the
top 6% of similar funds for the one-, three-, five-, and ten-year periods as
shown in the table on page 9.
During the 12-month period, the Federal Reserve's resolve to head off inflation,
coupled with weak investor demand for municipal bond funds, led to negative
returns. Strong U.S. economic growth, the lowest unemployment rate in 30 years,
and brisk consumer spending prompted the Fed to tighten monetary policy.
For the fund, the overriding challenge was to preserve capital. We are pleased
to report that the fund's return outpaced the -4.98% return of the average high
yield municipal bond fund for the 12 months ended May 31, 2000. In addition,
Scudder High Yield Tax Free Fund received a five-star (highest) rating from
Morningstar as of May 31 (see page 2 for additional information). Please turn to
the Performance Update on page 5 for more information on the fund's long-term
progress, including comparisons with the unmanaged Lehman Brothers Municipal
Bond Index.
9
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Strong Competitive Results Over All Four Periods
(Average annual returns for periods ended May 31, 2000)
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Scudder
High Yield Tax Lipper
Free Fund -- Class Average Number of
S Shares Annual Funds Percentile
Period Return Return Rank Tracked Ranking
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1 Year -1.28% -4.98% 2 of 56 Top 4%
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3 Years 4.69% 2.77% 1 of 41 Top 3%
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5 Years 5.52% 4.19% 2 of 33 Top 6%
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10 Years 7.27% 6.01% 1 of 16 Top 6%
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Past performance does not guarantee future results.
The Treasury Initiates A Buyback
Contrasting with the pressures on fixed income markets generated by FOMC
interest rate increases, in February the U.S. Treasury announced plans to buy
back some long-term debt and hold fewer debt auctions. This development
generated a welcome rally following five months of negative fixed-income
performance. The Treasury said that it plans to buy back 30-year government
bonds and reduce auctions all along the maturity spectrum.
Intermediate- and long-term bonds typically provide higher yields than
securities maturing in a year or less since they involve more interest-rate
risk. This pattern held true for both Treasuries and municipal bonds in the
autumn and winter of 1999. However, as 2000 began, the Treasury yield curve
inverted, so that by May 31, 2000, one-year Treasury bills offered higher yields
than 30-year bonds. While the municipal yield curve flattened during the period,
it did not invert. Long-term municipal bond yields reached a historically
attractive ratio -- providing nearly all of the yield of comparable-maturity
Treasuries. Long-maturity municipal bonds typically yield about 85% to 90% of a
similar-maturity Treasury.
10
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Premium Bonds Contributed to Performance
Scudder High Yield Tax Free Fund's goal is to provide a high level of tax-free
income from an actively managed portfolio consisting primarily of
investment-grade municipal bonds. Over the course of the period, higher interest
rates created challenges, but also provided opportunities to reposition the
fund's portfolio to what we believe is a favorable stance over the near term.
Accordingly, our recent portfolio strategy has been to:
o Focus on premium "cushion" bonds (high coupon bonds trading at a premium to
face value that can be redeemed prior to maturity). Cushion bonds provide
greater price protection than par bonds from market discount tax in a
rising interest rate environment.
o Boost the fund's yield by purchasing lower-rated, higher-yielding bonds.
During the first half of the fiscal year, the fund was underweighted in
lower-rated, higher-yielding bonds. This underweighting helped the fund's
performance as interest rates rose. Beginning in 2000, however,
lower-quality bond yields had risen to the point where we believed the
benefits of additional income potential for many high-yield bonds
outweighed the additional risk they carry. We gradually added more
lower-quality bonds so that by May 31, 2000, 21% of the fund's holdings had
ratings of BBB or lower. Municipal bonds rated BBB currently yield at least
one percentage point more than comparable-sector AAA municipal bonds.
o Emphasize call protection. Our call-protection strategy provides a more
reliable income stream for the fund than would exist if the portfolio held
a significant proportion of bonds that could be called in before their
stated maturities. (Generally a bond is called in by its issuer so that it
can be refinanced at a lower prevailing rate.)
In addition, the fund has maintained a neutral duration with respect to its peer
group. As of May 31, the fund's
11
<PAGE>
average duration was 6.24 years. (Duration gives relative weight to both
principal and interest payments through the life of a bond and has replaced
average maturity as the standard measure of interest rate sensitivity among
professional investors. Generally, the shorter the duration, the less sensitive
a portfolio will be to changes in interest rates.)
Diversification remains an important strategy for the fund, allowing us to
spread risk over a large number of sectors, maturities, and geographic areas. As
of May 31, the fund held securities issued in 35 states plus the District of
Columbia and the Virgin Islands. The Portfolio Summary on page 7 provides more
information about the fund's holdings, including quality, maturity, and sector
representation.
Our Outlook
Given recent government statistics that suggest U.S. economic growth has begun
to moderate and the fact that the Federal Reserve raised its short-term
interest-rate target in May by 50 basis points, municipal bonds may benefit from
a more stable interest rate environment over the coming months. We believe the
municipal bond market provides attractive value, with yields of longer-maturity
municipals still close to those of Treasuries, and tax-equivalent yields near
double-digit levels for investors in the highest tax brackets. In January 2000,
the average municipal bond yield, as measured by The Bond Buyer's Revenue Bond
Index, reached 6.35%, the highest level since August 1995.
We believe Scudder High Yield Tax Free Fund is well-positioned to benefit from
historically attractive yields on lower quality municipal bonds. A moderately
growing U.S. economy enhances municipal finances, which should continue to help
bolster municipal credit ratings. And continuing volatility in the equity and
taxable bond markets could prompt more investors to diversify their portfolios
with tax-exempt bonds.
12
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In terms of fund strategy, we will continue to purchase select lower-rated bonds
as we seek to increase the fund's yield. The fund will also seek competitive
returns by purchasing bonds with the best combination of coupon, maturity, and
call features. As always, rather than attempting to make investment decisions
based on short-term market movements, we will search for the most attractively
valued bonds as we seek a high level of tax-free income for our shareholders.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Rebecca L. Wilson
Philip G. Condon Rebecca L. Wilson
13
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Scudder High Yield Tax Free Fund:
A Team Approach to Investing
Scudder High Yield Tax Free Fund is managed by a team of Scudder Kemper
Investments, Inc. (the "Adviser") professionals, each of whom plays an important
role in the fund's management process. Team members work together to develop
investment strategies and select securities for the fund's portfolio. They are
supported by the Adviser's large staff of economists, research analysts,
traders, and other investment specialists who work in offices across the United
States and abroad. The Adviser believes that a team approach benefits fund
investors by bringing together many disciplines and leveraging the firm's
extensive resources.
Lead portfolio manager Philip G. Condon joined the Adviser in 1983 and has had
responsibility for the fund's day-to-day operations since its inception in 1987.
Mr. Condon has 22 years of experience in the investment industry.
Portfolio manager Rebecca L. Wilson joined the Adviser in 1986 and the fund as a
portfolio manager in 1998. Ms. Wilson has 14 years of experience in municipal
bond investing.
14
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Glossary of Investment Terms
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Bond An interest-bearing security issued by the federal, state,
or local government or a corporation that obligates the
issuer to pay the bondholder a specified amount of interest
for a stated period -- usually a number of years -- and to
repay the face amount of the bond at its maturity date.
General A municipal bond backed by the "full faith and credit"
Obligation (including the taxing and further borrowing power) of the
Bond city, state, or agency that issues the bond. A general
obligation bond is repaid with the issuer's general revenue
and borrowings.
Inflation An overall increase in the prices of goods and services, as
happens when business and consumer spending increases
relative to the supply of goods available in the marketplace
-- in other words, when too much money is chasing too few
goods. High inflation has a negative impact on the prices of
fixed-income securities.
Municipal Bond An interest-bearing debt security issued by a state or local
government entity.
Net Asset The price per share of a mutual fund is based on the sum of
Value (NAV) the market value of all the securities owned by the fund,
plus assets less liabilities, divided by the number of
outstanding shares.
Taxable The level of yield a fully taxable instrument would have to
Equivalent provide to equal that of a tax-free municipal bond on an
Yield after-tax basis. The standard yield reference for bond
30-Day Sec funds, based on a formula prescribed by the SEC. This
Yield annualized yield calculation reflects the 30-day average of
the income earnings of every holding in a given fund's
portfolio, net of expenses, assuming each is held to
maturity.
Total Return The most common yardstick to measure the performance
of a fund. Total return -- annualized or compound -- is
based on a combination of share price changes plus income
and capital gain distributions, if any, expressed as a
percentage gain or loss in value.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
15
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<TABLE>
<CAPTION>
Investment Portfolio as of May 31, 2000
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Principal
Amount ($) Value ($)
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Short-Term Municipal Investments 1.9%
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<S> <C> <C>
Arizona
Maricopa County, AZ, Pollution Control Revenue, Arizona
Public Service Corporation, Series 1994 F, Daily
Demand Note, 4.3%, 5/1/2029* .................................. 1,700,000 1,700,000
District Of Columbia
District of Columbia, Series B1, Daily Demand Note,
4.5%, 6/1/2003* ............................................... 1,400,000 1,400,000
New York
Long Island, NY, Power Authority, New York Electricity,
Series 6, Daily Demand Note, 4.3%, 5/1/2033* .................. 1,000,000 1,000,000
Texas
Harris County, TX, Health Facilities Authority Revenue,
St. Lukes Episcopal Hospital, Series A, Daily Demand
Note, 4.4%, 2/15/2027* ........................................ 4,000,000 4,000,000
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Total Short-Term Municipal Investments (Cost $8,100,000) 8,100,000
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Long-Term Municipal Investments 98.1%
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Alaska
North Slope Borough, AK, General Obligation, Capital
Appreciation, Series 1994 B, Zero Coupon,
6/30/2005 (b) ................................................. 7,600,000 5,753,808
Arizona
Maricopa County, AZ, Industrial Development Revenue,
Resource Recovery, Series 1995, 9.25%, 5/1/2015 ............... 3,610,000 3,618,808
McDowell Mountain Ranch, AZ, General Obligation,
Series 1994, 8.25%, 7/15/2019 ................................. 3,000,000 3,371,940
California
California Community Development Authority,
Apartment Development Revenue Bond, Series
1998 A-4, 5.25%, 5/15/2025 .................................... 3,750,000 3,473,588
California Pollution Control Financing Authority, Solid
Waste Disposal Revenue, Canadian Fibre of Riverside
PJ, AMT, Series 1997 A, 9%, 7/1/2019 ......................... 6,000,000 6,202,140
Foothill Eastern Transportation Corridor Agency, CA,
Toll Road Revenue:
Series 1995 A, Step-up Coupon, 0% to 1/1/2005,
7.05% to 1/1/2010 ......................................... 7,000,000 5,848,780
Series 1995 A, Step-up Coupon, 0% to 1/1/2005,
7.1% to 1/1/2011 .......................................... 4,415,000 3,738,136
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
Principal
Amount ($) Value ($)
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Series 1995 A, Step-up Coupon, 0% to 1/1/2005,
7.1% to 1/1/2012 .............................. 6,000,000 5,095,020
Series 1995 A, Step-up Coupon, 0% to 1/1/2005,
7.15% to 1/1/2014 ............................. 2,875,000 2,446,223
Long Beach, CA, Aquarium of the Pacific Project, 6.1%,
7/1/2010 .......................................... 4,500,000 4,514,580
Los Angeles County, CA, Certificate of Participation,
Marina Del Ray, AMT, Series 1993 A, 6.25%, 7/1/2003 4,525,000 4,580,974
Millbrae California Residential Facilities, AMT,
Series 1997 A, 7.375%, 9/1/2027 ................... 1,000,000 957,530
Sacramento, CA, City Financing Authority, Convention
Center Hotel, Series 1999 A, 6.25%, 1/1/2030 ...... 4,000,000 3,617,920
San Francisco, CA, City and County Redevelopment
Agency, Residential Facility, AMT, Series 1996 A,
8.5%, 12/1/2026 ................................... 2,000,000 2,002,580
San Joaquin Hills, CA, Transportation Corridor Agency:
Series 1993, Prerefunded 1/1/2008, Step-up Coupon,
0% to 1/1/2002, 7.6% to 1/1/2011 (c) ............ 5,000,000 5,206,000
Series 1993, Prerefunded 1/1/2008, Step-up Coupon,
0% to 1/1/2002, 7.65% to 1/1/2012 (c) ........... 15,000,000 15,653,100
Series 1993, Prerefunded 1/1/2008, Step-up Coupon,
0% to 1/1/2002, 7.65% to 1/1/2013 (c) ........... 4,000,000 4,174,160
Colorado
Denver, CO, Airport System Revenue:
Series 1990 A, Zero Coupon, 11/15/2001 ............ 5,120,000 4,717,312
Series 1990 A, Zero Coupon, 11/15/2003 ............ 3,050,000 2,493,985
Series 1990 A, Zero Coupon, 11/15/2004 ............ 3,130,000 2,409,349
Series 1991 A, Zero Coupon, 11/15/2005 ............ 1,855,000 1,342,909
Series 1991 D, 7.75%, 11/15/2013 .................. 9,775,000 11,249,070
Denver, CO, Urban Renewal Authority, Tax Increment
Revenue, AMT, Series 1989, 7.75%, 9/1/2016 ........ 2,500,000 2,626,275
Connecticut
Connecticut Development Authority, Aquarium Project
Revenue, Mystic Marinelife Aquarium, Series 1997,
6.875%, 12/1/2017 ................................. 1,000,000 971,720
Connecticut State Health Finance Authority, Edgehill
Project, Series 1997 A, 6.875%, 7/1/2017 .......... 3,000,000 2,910,510
Mashantucket, CT, Western Pequot Tribe:
Series 1996 B, 6.4%, Prerefunded, 9/1/2007,
9/1/2011 (c) .................................... 1,510,000 1,535,912
Series 1996 B, 6.4%, 9/1/2011 ..................... 1,490,000 1,605,103
Series 1997 B, 5.7%, 9/1/2012 ..................... 1,000,000 938,320
Series 1999 B, Zero Coupon, 9/1/2010 .............. 2,000,000 1,043,380
Series 1999 B, Zero Coupon, 9/1/2011 .............. 2,000,000 972,820
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
<S> <C> <C>
Series 1999 B, Zero Coupon, 9/1/2012 ................. 2,000,000 904,900
Series 1999 B, Zero Coupon, 9/1/2013 ................. 2,000,000 841,680
Series 1999 B, Zero Coupon, 9/1/2014 ................. 2,000,000 781,960
District of Columbia
District of Columbia, American College of
Obstetricians, Series 1999, 4.75%, 8/15/2018 (b) ..... 500,000 418,135
District of Columbia, Certificate of Participation,
Series 1993, 7.3%, 1/1/2013 .......................... 4,650,000 4,828,932
District of Columbia, Hospital Refunding Revenue,
Metlantic Washington Hospital Center,
Series 1992 A, Prerefunded 8/15/2002, 7.125%
8/15/2019 (c) ........................................ 3,000,000 3,174,060
District of Columbia, Water and Sewer Authority,
Public Utilities Revenue:
Series 1998, 5.7%, 10/1/2014 (b) ................... 4,220,000 4,490,080
Series 2000, 5.8%, 10/1/2016 ....................... 1,155,000 1,215,441
Florida
Bayside, FL, Community Development District, Capital
Improvement Revenue, 6.3%, 5/1/2018 .................. 980,000 895,593
Broward County, FL, Housing Finance Authority, Single
Family Mortgage Revenue, Series 1983, Zero Coupon,
4/1/2014 ............................................. 890,000 223,871
Escambia County, FL, Health Facilities Authority, Baptist
Hospital Revenue, Series 1993 B, 6%, 10/1/2014 ....... 1,050,000 933,219
Hillsborough County, FL, Industrial Development Authority
Revenue, University Community Hospital Project:
Series 1999, 5.625%, 8/15/2019 ..................... 3,425,000 2,855,525
Series 1999, 5.625%, 8/15/2023 ..................... 1,550,000 1,255,640
Indian Trace, FL, Special Tax Revenue, Water Management,
Series 1995, 8.25%, 5/1/2005 ......................... 1,380,000 1,435,517
Palm Beach County, FL, Health Facilities Authority,
Retirement Community Revenue, Series 1998,
5.125%, 11/15/2029 ................................... 2,000,000 1,536,840
Georgia
Athens-Clarke County, GA, Wesley Woods,
Series 1997, 6.35%, 10/1/2017 ........................ 1,575,000 1,386,158
Coweta County, GA, Residential Care Facilities for the
Elderly, Wesley Woods, Series 1996 A, 8.25%,
10/1/2026 ............................................ 1,000,000 1,059,650
Municipal Electric Authority of Georgia, Series 1993 Z,
5.5%, 1/1/2012 ....................................... 1,375,000 1,349,563
Rockdale County, GA, Development Authority,
Solid Waste Disposal Revenue, Visy Paper Inc. Project,
AMT, Series 1993, 7.4%, 1/1/2016 ..................... 4,540,000 4,586,944
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
Principal
Amount ($) Value ($)
----------------------------------------------------------------------------------------
Illinois
Chicago, IL, O'Hare International Airport, Special Facilities
Revenue, United Airlines Project, Series 1999 A, 5.35%,
9/1/2016 ................................................. 5,000,000 4,167,850
Hoffman Estates, IL, Tax Increment Revenue, Capital
Appreciation, Junior Lien, Series 1991,
Zero Coupon, 5/15/2006 ................................... 4,000,000 2,858,840
Illinois Development Finance Authority Hospital Revenue,
Series 1999 A, 5.5%, 11/15/2029 .......................... 5,000,000 3,823,650
Winnebago County, IL, School District #122, Series 1992,
6.45%, 6/1/2008 (b) ...................................... 1,500,000 1,600,425
Indiana
Indiana Health Facilities Financing Authority, Franciscan
Eldercare Community Services, Series 1998,
5.875%, 5/15/2029 ........................................ 2,300,000 1,823,624
Indianapolis, IN, Economic Development, Robin Run
Village Project, Series 1992, 7.625%, 10/1/2022 .......... 1,500,000 1,541,895
Iowa
Iowa Financial Authority Retirement Authority, Wesley
Retirement Services, Series 1999, 6.1%, 6/1/2024 ......... 2,250,000 1,865,093
Kansas
Manhattan, KS, Health Care Facilities Revenue Bond,
Meadowlark Hills Retirement, Series 1999 A, 6.5%,
5/15/2028 ................................................ 1,000,000 874,240
Kentucky
Kenten County, KY, Airport Board, Delta Airlines
Inc. Revenue, Series 1992 A, 6.125%, 2/1/2022 ............ 4,150,000 3,821,113
Maine
Maine Finance Authority, Huntington Common, Series
1997 A, 7.5%, 9/1/2027 ................................... 1,000,000 904,050
Maryland
Maryland Economic Development Corporation:
Chesapeake Bay Conference, Series 1999 B, 7.625%,
12/1/2022 .............................................. 12,000,000 11,640,720
University of Maryland, Series 1999 A, 5.75%, 6/1/2031 ... 1,000,000 861,480
Maryland State Health and Higher Educational Facilities
Authority, University of Maryland Medical System
Revenue, Series 2000, 6.75%, 7/1/2030 .................... 2,500,000 2,464,975
Massachusetts
Boston, MA, Industrial Development Financing Authority,
Springhouse Project, Series 1995, 9.25%, Prerefunded
7/1/2005, 7/1/2025 (c) ................................... 1,350,000 1,605,299
Lowell, MA, General Obligation, Series 1991, 8.3%,
2/15/2005 ................................................ 365,000 383,819
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
Massachusetts Health and Educational Facilities Authority,
Cooley Dickson Hospital Inc., Series 1993 A, 7.125%,
Prerefunded 5/15/2003, 11/15/2018 (c) ................... 1,765,000 1,877,183
Massachusetts Industrial Finance Agency:
Edgewood Retirement Community, Series 1995 A, 9%,
11/15/2025 ............................................ 1,000,000 1,093,430
Solid Waste Disposal, Peabody Monofil Project,
Series 1994, 9%, 9/1/2005 ............................. 2,155,000 2,218,314
Massachusetts State Development Financial Agency,
Revenue, Health Care Facilities, Series 1999 A, 7.1%,
7/1/2032 ................................................ 4,000,000 3,632,560
Massachusetts State Health and Educational Facilities
Authority:
Caritas Christi Obligation, Series 1999, 5.625%,
7/1/2020 .............................................. 3,000,000 2,360,940
Partners Healthcare Systems, Series 1999 B, 5.125%,
7/1/2019 .............................................. 1,185,000 981,121
South Shore Hospital, Series 1999 F, 5.625%,
7/1/2019 .............................................. 1,000,000 879,250
South Shore Hospital, Series 1999 F, 5.75%, 7/1/2029 .... 4,000,000 3,443,520
Massachusetts State Rites, Series 2000, 5.961%,
11/1/2010 ............................................... 8,000,000 8,795,360
Michigan
Detroit, MI, Downtown Development Authority:
Series 1996, Zero Coupon, 7/1/2011 ...................... 3,150,000 1,623,605
Series 1996, Zero Coupon, 7/1/2012 ...................... 3,150,000 1,516,851
Kalamazoo, MI, Economic Development Revenue Bond,
Series 1999 A, 7.5%, 5/15/2029 .......................... 2,000,000 1,804,380
Michigan State Hospital Finance Authority Revenue,
Sinai Hospital, Series 1995, 7.5%, 10/1/2027 (b) ........ 2,000,000 2,212,640
Michigan State Strategic Fund Limited, Series 1998 A,
5.75%, 11/15/2018 ....................................... 1,500,000 1,191,240
Mississippi
Mississippi Development Bank, Special Obligation,
Diamond Lakes Utilities, Series 1997 A, 6.25%,
12/1/2017 ............................................... 1,900,000 1,765,613
Nevada
Clark County, NV, Pollution Control Revenue, Series 1995 D,
5.45%, 10/1/2023 ........................................ 3,470,000 2,828,293
New Hampshire
New Hampshire Health and Education Facility Authority
Revenue, New Hampshire College Issue, Series 2000,
7.4%, 1/1/2023 .......................................... 2,000,000 1,970,080
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------
New Hampshire Higher Education and Health Facilities
Authority:
Monadnock Community Hospital, Series 1990,
9.125%, Prerefunded, 10/1/2000, 10/1/2020 (c) ..... 1,370,000 1,415,676
New Hampshire Catholic Charity:
Series 1991, 8.4%, Prerefunded, 8/1/2001,
8/1/2011 (c) .................................... 600,000 640,422
Series 1997, 5.8%, 8/1/2022 ....................... 2,760,000 2,252,574
Rivermead at Peterborough:
Series 1998, 5.5%, 7/1/2013 ....................... 2,635,000 2,257,062
Series 1998, 5.625%, 7/1/2018 ..................... 500,000 400,625
New Hampshire Higher Educational and Health Facilities
Authority Revenue, Riverwoods at Exeter:
Series 1997 A, 6.375%, 3/1/2013 ................... 725,000 667,602
Series 1997 A, 6.5%, 3/1/2023 ..................... 1,000,000 872,900
New Jersey
New Jersey Economic Development Authority,
United Methodist Homes, Series 1995, 7.5%,
Prerefunded 7/1/2005, 7/1/2025 (c) .................. 1,000,000 1,111,240
New Jersey State Transportation Certificate of
Participation, Series 16, Inverse Floater, 6.9%,
9/15/2010 (b)** ..................................... 8,250,000 8,666,048
New Jersey State Turnpike Authority Revenue,
Series 2000 R, 6.17%, 1/1/2010 (b) .................. 5,000,000 5,281,300
New Mexico
Farmington, NM, Pollution Control Revenue:
Series 1997 A, 5.8%, 4/1/2022 ....................... 5,000,000 4,328,150
Series 1997 C, 5.8%, 4/1/2022 ....................... 2,000,000 1,731,260
New Mexico State Hospital Equipment Loan Council,
Memorial Medical Center, Series 1998, 5.5%,
6/1/2028 ............................................ 1,450,000 1,113,905
New York
Glen Cove Housing Authority, Senior Living Facility,
AMT, Series 1996, 8.25%, 10/1/2026 .................. 1,500,000 1,561,545
Islip, NY, New York Community Development Agency,
New York Institute of Technology, Series 1996, 7.5%,
3/1/2026 ............................................ 2,500,000 2,565,450
New York City, NY, General Obligation, Series 1996 A,
7%, 8/1/2007 ........................................ 5,000,000 5,426,450
New York City Municipal Water Finance Authority
Revenue, Series 1997C, 5%, 6/21/2021 ............... 5,220,000 4,522,190
New York Metropolitan Transportation Authority:
Series 1991, 7%, Prerefunded 7/1/2001, 7/1/2009 (c) 1,000,000 1,043,740
Series 1993 O, 5.75%, 7/1/2013 .................... 2,750,000 2,749,835
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
<S> <C> <C>
New York, NY, Series 1999 J, 5.125%, 5/15/2029 (b) ....... 10,000,000 8,609,500
New York, State Dormitory Authority Revenue, Series 310,
Inverse Floater, 7.59%, 2/15/2010 (b)** ............... 4,250,000 4,607,680
Onondaga County, NY, Industrial Development Agency,
Solid Waste Disposal Facility, Solvay Paperboard LLC,
AMT Series 1998, 7%, 11/1/2030 ........................ 3,500,000 3,376,240
North Carolina
North Carolina Municipal Power Agency, Electric Revenue,
Series 1999 B, 6.375%, 1/1/2013 ....................... 2,075,000 2,064,231
North Dakota
Grand Forks, ND, Health Care Systems Revenue,
Series 2000, 7.125%, 8/15/2024 ........................ 2,000,000 1,949,140
Ohio
Hamilton County, OH, Health System Revenue, Franciscan
Sisters of the Poor Health System, Providence Hospital,
Series 1992, 6.8%, 7/1/2008 ........................... 5,485,000 5,756,398
Pennsylvania
Chester County, PA, Health and Education Facilities
Authority Revenue, Series 1997 A, 5.375%, 5/15/2027 ... 3,270,000 2,696,573
Delaware County, PA, White Horse Village Inc.:
Series 1996, 7.5%, 7/1/2018 ........................... 2,000,000 1,999,800
Series 1996 A, 6.7%, 7/1/2007 ......................... 1,000,000 970,830
Latrobe, PA, Industrial Development Authority, St. Vincent
College Project, Series 1998, 5.375%, 5/1/2013 ........ 1,885,000 1,718,347
Montgomery County, PA, Health and Educational Facilities
Authority, Philadelphia Geriatric Center Revenue,
Series 1999 A, 7.25%, 12/1/2027 ....................... 3,125,000 2,877,219
Montgomery County, PA, Industrial Development
Authority, Retirement Community Revenue,
Series 1998, 5.25%, 11/15/2028 ........................ 4,000,000 3,101,120
Montgomery County, PA, Multi-Family Housing Revenue,
Series 1993 A, 6.375%, 7/1/2012 ....................... 5,500,000 5,375,315
Pennsylvania Higher Education Authority, Medical College
of Pennsylvania, Series 1991 B, 7.25%, 3/1/2005 (b) ... 1,000,000 1,038,110
Philadelphia, PA, Industrial Development Authority,
Commercial Development Revenues, Series 1997,
6.5%, 10/1/2027 ....................................... 4,500,000 4,228,650
South Carolina
South Carolina Jobs Economic Development
Authority, Hospital Facilities Revenue, Series 2000 A,
7.375%, 12/15/2021 .................................... 2,500,000 2,394,875
South Dakota
South Dakota Health and Educational Facilities Authority
Revenue, Prairie Lakes:
Series 1992, 7.125%, Prerefunded, 4/1/2003,
4/1/2010 (c) ...................................... 680,000 724,098
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
Series 1992, 7.25%, Prerefunded, 4/1/2003,
4/1/2022 (c) ...................................... 680,000 726,301
Series 1992, 7.125%, 4/1/2010 ....................... 320,000 326,154
Series 1992, 7.25%, 4/1/2022 ........................ 320,000 321,786
Tennessee
Elizabethton, TN, Health and Educational Facilities Board
Revenue, Series 2000 B, 8%, 7/1/2033 .................. 3,000,000 2,993,100
Johnson City, TN, Health and Educational Facilities Board
Hospital Revenue, 7.5%, 7/1/2033 ...................... 5,000,000 4,714,150
Texas
Arlington, TX, Independent School District, General
Obligation, Series 1999, 5%, 2/15/2024 ................ 7,000,000 5,994,030
Austin, TX, Bergstrom Landhost Enterprises, Airport
Hotel, Series 1999 A, 6.75%, 4/1/2027 ................. 5,000,000 4,466,750
Bexar County, TX, Housing Finance Corporation,
AMT, Series 1999 A, 8.2%, 4/1/2022 .................... 618,000 631,015
Dallas-Fort Worth, TX, Airport Revenue, American Airlines,
AMT, Series 1990, 7.5%, 11/1/2025 ..................... 1,910,000 1,933,264
Dallas-Fort Worth, TX, International Airport, American
Airlines, AMT, Series 1990A, 7.25%, 11/1/2030 ......... 5,000,000 5,048,250
Hidalgo County, TX, Health Services, Mission Hospital,
Series 1996, 6.75%, 8/15/2016 ......................... 2,500,000 2,322,125
Lubbock, TX, Health Facilities Development Corporation,
Carillon Inc., Series 1999 A, 6.5%, 7/1/2019 .......... 3,000,000 2,602,500
Magnolia, TX, Independent School District, Series 1999,
5%, 8/15/2017 ......................................... 2,400,000 2,137,344
Midland County, TX, Hospital District, Midland Memorial
Hospital, Series 1992, 7.5%, Prerefunded 6/1/2002,
6/1/2016 (c) .......................................... 1,500,000 1,580,115
Richardson, TX, Hospital Authority, Hospital Revenue,
Series 1998, 5.625%, 12/1/2028 ........................ 1,250,000 956,313
Travis County, TX, Health Facilities Development Corp.,
Ascension Health, Inverse Floating Rate Note, Series
1999 A, 6.25%, 11/15/2015** ........................... 10,000,000 10,269,900
Utah
Salt Lake City, UT, Hospital Revenue, Series 1992, 6.15%,
2/15/2012 ............................................. 2,000,000 2,083,900
Vermont
Vermont Housing Finance Agency, Northgate Housing
Project, Series 1989, 8.25%, 6/15/2020 ................ 1,000,000 1,044,700
Virgin Islands
Virgin Islands Public Financial Authority Revenue, Series
1992 A, Prerefunded 10/1/2002, 7.25%,
10/1/2018 (c) (d) ..................................... 6,500,000 6,979,830
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
Principal
Amount ($) Value ($)
----------------------------------------------------------------------------------------
Virginia
Fairfax County, VA, Economic Development Authority
Revenue, Series 1999 A, 7.25%, 10/1/2019 ................ 3,000,000 2,885,280
Pittsylvania County, VA, Industrial Development Authority,
Multitrade of Pittsylvania County, L.P. Project:
Series 1994 A, 7.45%, 1/1/2009 ........................ 1,500,000 1,523,475
Series 1994 A, 7.5%, 1/1/2014 ......................... 3,500,000 3,555,790
Washington
Washington Public Power Supply System:
Nuclear Project #2:
Series 1992 A, 6.3%, 7/1/2012 ......................... 10,000,000 10,511,100
Series 1994, Inverse Floater, 6.52%, 7/1/2012** ....... 3,000,000 2,636,250
Nuclear Project #3, Series 1989 B, 7.125%, 7/1/2016 ..... 2,500,000 2,817,375
Wisconsin
Wisconsin State Health and Educational Facilities Authority:
Aurora Health Care Inc., Series 1999 A,
5.6%, 2/15/2029 ....................................... 7,500,000 5,848,792
National Regency of New Berlin Project, Series 1995,
8%, 8/15/2025 ......................................... 1,480,000 1,525,510
----------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $413,116,355) 420,208,312
----------------------------------------------------------------------------------------
Total Investment Portfolio-- 100.0% (Cost $421,216,355) (a) 428,308,312
----------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $421,216,355. At May 31, 2000,
net unrealized appreciation for all securities based on tax cost was
$7,091,957. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$16,001,482 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $8,909,525.
(b) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC,
FSA or MBIA/BIG.
(c) Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest on tax-exempt issues and to retire the bonds in full at the
earliest refunding date.
(d) At May 31, 2000, this security has been pledged to cover, in whole or in
part, initial margin requirements for open futures contracts.
* Floating rate and monthly, weekly or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand notes
are securities whose yields are periodically reset at levels that are
generally comparable to tax-exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit from a major bank. These notes are carried,
for purposes of calculating average weighted maturity, at the longer of the
period remaining until the next rate change or to the extent of the demand
period.
** Inverse floating rate notes are instruments whose yields may change based
on the change in the relationship between long-term and short-term interest
rates and which exhibit added interest rate sensitivity compared to other
bonds with a similar maturity. These securities are shown at their rate as
of May 31, 2000.
AMT: Alternative minimum tax
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
--------------------------------------------------------------------------------
At May 31, 2000, open futures contracts sold short were as follows:
Aggregate
Face
Futures Expiration Contracts Value ($) Value ($)
------------------------------- ------------ --------- ------------ -----------
Municipal Bond Index ........ June 2000 275 25,868,350 25,755,469
Total unrealized appreciation on open futures contracts -----------
sold short ................................................. 112,881
-----------
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Statement of Assets and Liabilities as of May 31, 2000
-----------------------------------------------------------------------------------------------
Assets
-----------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (cost $421,216,355) ...................... $ 428,308,312
Cash ......................................................................... 3,138,914
Receivable for investments sold .............................................. 20,273
Interest receivable .......................................................... 7,022,510
Receivable for Fund shares sold .............................................. 453,212
Due from Adviser ............................................................. 29,803
Other assets ................................................................. 1,080
-------------
Total assets ................................................................. 438,974,104
Liabilities
-----------------------------------------------------------------------------------------------
Dividends payable ............................................................ 804,346
Payable for Fund shares redeemed ............................................. 599,562
Payable for daily variation margin on open futures contracts ................. 223,438
Accrued management fee ....................................................... 217,812
Accrued reorganization costs ................................................. 44,005
Accrued Trustees' fees and expenses .......................................... 62,512
Other accrued expenses and payables .......................................... 87,410
-------------
Total liabilities ............................................................ 2,039,085
-----------------------------------------------------------------------------------------------
Net assets, at value $ 436,935,019
-----------------------------------------------------------------------------------------------
Net Assets
-----------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation (depreciation) on:
Investments .................................................................. 7,091,957
Futures ...................................................................... 112,881
Accumulated net realized gain (loss) ......................................... (11,431,848)
Paid-in capital .............................................................. 441,162,029
-----------------------------------------------------------------------------------------------
Net assets, at value $ 436,935,019
-----------------------------------------------------------------------------------------------
Net Asset Value
-----------------------------------------------------------------------------------------------
Class S Shares
Net Asset Value, offering and redemption price per share ($436,443,861 /
36,773,001 outstanding shares of beneficial interest, $.01 par value, -------------
unlimited number of shares authorized) .................................... $ 11.87
-------------
Class A Shares
Net Asset Value and redemption price per share ($246,117 / 20,756 outstanding
shares of beneficial interest, $.01 par value, unlimited number of shares -------------
authorized) ............................................................... $ 11.86
-------------
-------------
Maximum offering price per share (100 / 95.50 of $11.86) ..................... $ 12.42
-------------
Class B Shares
Net Asset Value, offering and redemption price (subject to contingent deferred
sales charge) per share ($209,355 / 17,647 outstanding shares of beneficial -------------
interest, $.01 par value, unlimited number of shares authorized) .......... $ 11.86
-------------
Class C Shares
Net Asset Value, offering and redemption price (subject to contingent deferred
sales charge) per share ($35,686 / 3,008 outstanding shares of beneficial -------------
interest, $.01 par value, unlimited number of shares authorized) .......... $ 11.86
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations for the year ended May 31, 2000
--------------------------------------------------------------------------------
Investment Income
--------------------------------------------------------------------------------
Income:
Interest ....................................................... $ 26,586,349
------------
Expenses:
Management fee ................................................. 2,690,614
Services to shareholders ....................................... 612,246
Custodian and accounting fees .................................. 99,139
Distribution services fees ..................................... 90
Administrative services fees ................................... 55
Auditing ....................................................... 51,867
Legal .......................................................... 11,979
Trustees' fees and expenses .................................... 103,983
Reports to shareholders ........................................ 25,429
Registration fees .............................................. 58,877
Reorganization ................................................. 49,110
Other .......................................................... 53,415
------------
Total expenses, before expense reductions ...................... 3,756,804
Expense reductions ............................................. (71,315)
------------
Total expenses, after expense reductions ....................... 3,685,489
--------------------------------------------------------------------------------
Net investment income 22,900,860
--------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
--------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments .................................................... (7,062,599)
Futures ........................................................ 1,461,286
------------
(5,601,313)
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................... (22,507,180)
Futures ........................................................ (25,063)
------------
(22,532,243)
--------------------------------------------------------------------------------
Net gain (loss) on investment transactions (28,133,556)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (5,232,696)
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Statements of Changes in Net Assets
------------------------------------------------------------------------------------
Five Months Year Ended
Increase (Decrease) in Net Year Ended May Ended May 31, December 31,
Assets 31, 2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ........... $ 22,900,860 $ 9,072,350 $ 19,190,928
Net realized gain (loss) on
investment transactions ...... (5,601,313) 330,513 768,029
Net unrealized appreciation
(depreciation) on investment
transactions during the period (22,532,243) (8,837,591) 3,727,480
------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations ................... (5,232,696) 565,272 23,686,437
------------- ------------- -------------
Distributions to shareholders
from:
Net investment income-- Class S
shares ....................... (22,899,579) (9,072,350) (19,191,807)
Net investment income-- Class A
shares ....................... (634) -- --
Net investment income-- Class B
shares ....................... (498) -- --
Net investment income-- Class C
shares ....................... (149) -- --
------------- ------------- -------------
Fund share transactions:
Proceeds from shares sold ....... 206,693,996 89,063,593 173,275,197
Reinvestment of distributions ... 15,204,758 6,549,592 12,853,477
Cost of shares redeemed ......... (206,909,446) (69,149,802) (95,191,076)
------------- ------------- -------------
Net increase (decrease) in net
assets from Fund share
transactions ................. 14,989,308 26,463,383 90,937,598
------------- ------------- -------------
Increase (decrease) in net assets (13,144,248) 17,956,305 95,432,228
Net assets at beginning of period 450,079,267 432,122,962 336,690,734
------------- ------------- -------------
Net assets at end of period ..... $ 436,935,019 $ 450,079,267 $ 432,122,962
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Class S Shares (a)
------------------------------------------------------------------------------------
2000(b) 1999(c) 1998(d) 1997(d) 1996(d) 1995(d)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $12.69 $12.93 $12.78 $12.04 $12.19 $10.86
-----------------------------------------------------
------------------------------------------------------------------------------------
Income (loss) from investment operations:
------------------------------------------------------------------------------------
Net investment income .66 .26 .65 .67 .66 .68
------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions (.82) (.24) .15 .74 (.15) 1.37
-----------------------------------------------------
------------------------------------------------------------------------------------
Total from investment
operations (.16) .02 .80 1.41 .51 2.05
------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------
Net investment income (.66) (.26) (.65) (.67) (.66) (.72)
------------------------------------------------------------------------------------
Net asset value, end of period $11.87 $12.69 $12.93 $12.78 $12.04 $12.19
-----------------------------------------------------
------------------------------------------------------------------------------------
Total Return (%) (1.28) .18** 6.38 12.04 4.43(e) 19.28(e)
------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 436 450 432 337 293 304
------------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) .89(f) .83* .84 .90 .95 .94
------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .87(f) .83* .84 .90 .91 .80
------------------------------------------------------------------------------------
Ratio of net investment
income (%) 5.42 4.91* 5.03 5.43 5.59 5.77
------------------------------------------------------------------------------------
Portfolio turnover rate (%) 62 7* 14 33 22 27
------------------------------------------------------------------------------------
</TABLE>
(a) On May 1, 2000 existing shares of the Fund were designated as Class S
shares and are generally not available to new investors.
(b) For the year ended May 31, 2000.
(c) For the five months ended May 31, 1999. On August 10, 1998, the Board of
Trustees of the Trust changed the fiscal year end of the Fund from December
31 to May 31.
(d) For the year ended December 31.
(e) Total returns would have been lower had certain expenses not been reduced.
(f) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .86% and
.85%, respectively.
* Annualized
** Not annualized
29
<PAGE>
Notes to Financial Statements
--------------------------------------------------------------------------------
A. Significant Accounting Policies
Scudder High Yield Tax Free Fund (the "Fund") is a diversified series of Scudder
Municipal Trust (the "Trust") which is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company organized as a Massachusetts business trust. On August 10, 1998, the
Board of Trustees of the Trust changed the fiscal year end of the Fund from
December 31 to May 31.
Beginning May 1, 2000, the Fund offers multiple classes of shares. Class A
shares are offered to investors subject to an initial sales charge. Class B
shares are offered without an initial sales charge but are subject to higher
ongoing expenses than Class A shares and a contingent deferred sales charge
payable upon certain redemptions. Class B shares automatically convert to Class
A shares six years after issuance. Class C shares are offered without an initial
sales charge but are subject to higher ongoing expenses than Class A shares and
a contingent deferred sales charge payable upon certain redemptions within one
year of purchase. Class C shares do not convert into another class. Class S
shares, generally not available to new investors, are not subject to initial or
contingent deferred sales charges. Certain detailed financial information for
the Class A, B and C shares is provided separately and is available upon
request.
Investment income, realized and unrealized gains and losses, and certain
fund-level expenses and expense reductions, if any, are borne pro rata on the
basis of relative net assets by the holders of all classes of shares except that
each class bears certain expenses unique to that class such as distribution
services, shareholder services, administrative services and certain other class
specific expenses. Differences in class expenses may result in payment of
different per share dividends by class. All shares of the Fund have equal rights
with respect to voting subject to class specific arrangements.
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the use of
management estimates. The policies described below are followed consistently by
the Fund in the preparation of its financial statements.
Security Valuation. Portfolio debt securities purchased with an original
maturity greater than sixty days are valued by pricing agents approved by the
officers of the Trust, whose quotations reflect broker/dealer-supplied
valuations and electronic data processing techniques. If the pricing agents are
unable to provide such quotations, the most recent bid quotation supplied by
30
<PAGE>
a bona fide market maker shall be used. Money market instruments purchased with
an original maturity of sixty days or less are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees.
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 a financial
instrument at a specified price on a specific date (settlement date). During the
period, the Fund purchased index futures to manage the duration of the
portfolio. In addition, the Fund also sold index 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 depending upon
the daily fluctuations in the value of the underlying security and are recorded
for financial reporting purposes as unrealized gains or losses by the Fund. When
entering into a closing transaction, the Fund will realize a gain or loss equal
to the difference between the value of the futures contract to sell and the
futures contract to buy. Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures contracts, including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with the 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.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable and tax-exempt income
to its shareholders. Accordingly, the Fund paid no federal income taxes and no
federal income tax provision was required.
At May 31, 2000, the Fund had a net tax basis capital loss carryforward of
approximately $6,600,000 which may be applied against any realized net taxable
capital gains of each succeeding year, until fully utilized or until
31
<PAGE>
May 31, 2005 ($3,900,000) and May 31, 20008 ($2,700,000), the respective
expiration dates or whichever occurs first.
In addition, from November 1, 1999 through May 31, 2000 the Fund incurred
approximately $3,600,000 of net realized capital losses. As permitted by tax
regulations, the Fund intends to elect to defer these losses and treat them as
arising in the fiscal year ending May 31, 2001.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a daily dividend and is distributed to shareholders monthly. 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 at least annually.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from accounting principles generally accepted in the United
States. 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.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Realized gains and losses from investment transactions are recorded on an
identified cost basis.
All premium and original issue discounts are amortized/accreted for both tax and
financial reporting purposes.
B. Purchases and Sales of Securities
During the year ended May 31, 2000, purchases and sales of municipal securities
(excluding short-term investments) aggregated $259,408,311 and $255,052,118,
respectively.
C. Transactions with Affiliates
Management Agreement. Under the Investment Management Agreement (the
"Agreement") with Scudder Kemper Investments, Inc. ("Scudder Kemper" or the
"Adviser"), the Adviser directs the investments of the Fund in accordance
32
<PAGE>
with its investment objective, 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 0.65% on the first $300,000,000 of the Fund's average daily
net assets and 0.60% of such net assets in excess of $300,000,000, computed and
accrued daily and payable monthly. Effective May 1, 2000, the Adviser agreed to
maintain the annualized expenses of the classes of the Fund until October 1,
2000 as follows: Class S shares 0.80%, Class A shares 0.80%, Class B shares
1.60% and Class C shares 1.58%. Included in expense reductions is $26,253 due
from the Adviser. For the year ended May 31, 2000, the fee pursuant to this
agreement aggregated $2,690,614, which was equivalent to an annual effective
rate of 0.64% of the Fund's average daily net assets.
Distribution Service Agreement. In accordance with Rule 12b-1 under the 1940
Act, Kemper Distributors, Inc. ("KDI"), a subsidiary of the Adviser, receives a
fee of 0.75% of average daily net assets of Classes B and C. Pursuant to the
agreement, KDI enters into related selling group agreements with various firms
at various rates for sales of Class B and C shares. For the year ended May 31,
2000, the Distribution Fee was as follows:
Total Unpaid at
Distribution Fee Aggregated May 31, 2000
------------------------------------------ --------------- ---------------
Class B .................................. $ 69 $ 69
Class C .................................. 21 21
$ 90 $ 90
Underwriting Agreement and Contingent Deferred Sales Charge. KDI is the
principal underwriter for Classes A, B and C. Underwriting commissions paid in
connection with the distribution of Class A shares for the year ended May 31,
2000 aggregated $225, of which none was paid to other firms.
In addition, KDI receives any contingent deferred sales charge (CDSC) from Class
B share redemptions occurring within six years of purchase and Class C share
redemptions occurring within one year of purchase. There is no such charge upon
redemption of any share appreciation or reinvested dividends. Contingent
deferred sales charges are based on declining rates ranging from 4% to 1% for
Class B and 1% for Class C, of the value of the shares redeemed. For the year
ended May 31, 2000, there was no CDSC for Classes B and C.
33
<PAGE>
Administrative Services Fees. KDI provides information and administrative
services to Classes A, B and C shareholders at an annual rate of up to 0.25% of
average daily net assets for each such class. KDI in turn has various agreements
with financial services firms that provide these services and pays these firms
based upon the assets of shareholder accounts the firms service. For the year
ended May 31, 2000, the Administrative Services Fee was as follows:
Total Fees Waived Unpaid at
Administrative Services Fee Aggregated by KDI May 31, 2000
-------------------------------- ---------------- --------------- -------------
Class A ....................... $ 25 $ -- $ 25
Class B ....................... 23 -- 23
Class C ....................... 7 -- 7
$ 55 $ -- $ 55
Shareholder Services Fees. Kemper Service Company ("KSC"), an affiliate of the
Adviser, is the transfer, dividend-paying and shareholder service agent for the
Fund's Classes A, B and C shares. For the year ended May 31, 2000, the amount
charged to Classes A, B and C by KSC aggregated $4, $7 and $4, respectively, all
of which is unpaid at May 31, 2000. Scudder Service Corporation ("SSC"), a
subsidiary of the Adviser, is the transfer, dividend-paying and shareholder
service agent for the Class S shares. For the year ended May 31, 2000, the
amount charged to the Class S shares by SSC for shareholder services aggregated
$304,605, of which $25,663 is unpaid at May 31, 2000.
Fund Accounting Fees. Scudder Fund Accounting Corporation ("SFAC"), a subsidiary
of the Adviser, is responsible for determining the daily net asset value per
share and maintaining the portfolio and general accounting records of the Fund.
For the year ended May 31, 2000, the amount charged to the Fund by SFAC
aggregated $76,576, of which $10,469 is unpaid at May 31, 2000.
Trustees' Fees. The Trust pays each Trustee not affiliated with the Adviser an
annual retainer, divided equally among the series of the Trust, plus specified
amounts for attended board and committee meetings. For the year ended May 31,
2000, Trustees' fees and expenses aggregated $44,376. In addition, a one-time
fee of $59,607 for Class S shares was accrued for payment to those Trustees not
affiliated with the Adviser who are not standing for re-election, under the
reorganization discussed in Note F. Inasmuch as the Adviser will
34
<PAGE>
also benefit from administrative efficiencies of a consolidated Board, the
Adviser has agreed to bear $29,803 of such costs.
D. Expense Off-Set Arrangements
The Fund has entered into arrangements with its custodian and transfer agent
whereby credits realized as a result of uninvested cash balances were used to
reduce a portion of the Fund's expenses. During the year ended May 31, 2000, the
Fund's custodian and transfer agent fees (Class S shares only) were reduced by
$2,414 and $12,845, respectively, under these arrangements.
E. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $1 billion
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated, pro rata based upon net assets, among each of the
Participants. Interest is calculated based on the market rates at the time of
the borrowing. The Fund may borrow up to a maximum of 33 percent of its net
assets under the agreement.
F. Reorganization
In early 2000, Scudder Kemper initiated a restructuring program for most of its
Scudder no-load open-end funds in response to changing industry conditions and
investor needs. The program proposes to streamline the management and operations
of most of the no-load open-end funds Scudder Kemper advises principally through
the liquidation of several small funds, mergers of certain funds with similar
investment objectives, the creation of one Board of Directors/Trustees and the
adoption of an administrative fee covering the provision of most of the services
currently paid for by the affected funds. Costs incurred in connection with this
restructuring initiative for Class S shares are being borne jointly by Scudder
Kemper and certain of the affected funds. These costs, including printing,
shareholder meeting expenses and professional fees, are presented as
reorganization expenses in the Statement of Operations of the Fund.
35
<PAGE>
<TABLE>
<CAPTION>
G. Share Transactions
The following tables summarize share and dollar activity in the Fund:
Year Ended
May 31, 2000
------------------------
Shares Dollars
Shares sold
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A shares .................................................................. 27,398 $ 324,369
-------------------------------------------------------------------------------------------------------------------
Class B shares .................................................................. 17,635 208,844
-------------------------------------------------------------------------------------------------------------------
Class C shares .................................................................. 2,995 36,000
-------------------------------------------------------------------------------------------------------------------
Class S shares .................................................................. 17,085,134 206,124,783
-------------------------------------------------------------------------------------------------------------------
17,133,162 $ 206,693,996
Shares issued to shareholders in reinvestment of distributions
-------------------------------------------------------------------------------------------------------------------
Class A shares .................................................................. 50 $ 590
-------------------------------------------------------------------------------------------------------------------
Class B shares .................................................................. 12 142
-------------------------------------------------------------------------------------------------------------------
Class C shares .................................................................. 13 149
-------------------------------------------------------------------------------------------------------------------
Class S shares .................................................................. 1,253,142 15,203,877
-------------------------------------------------------------------------------------------------------------------
1,253,217 $ 15,204,758
Shares redeemed
-------------------------------------------------------------------------------------------------------------------
Class A shares .................................................................. (6,692) $ (79,462)
-------------------------------------------------------------------------------------------------------------------
Class B shares .................................................................. -- --
-------------------------------------------------------------------------------------------------------------------
Class C shares .................................................................. -- --
-------------------------------------------------------------------------------------------------------------------
Class S shares .................................................................. (17,028,771) (206,829,984)
-------------------------------------------------------------------------------------------------------------------
(17,035,463) $(206,909,446)
Net increase (decrease)
-------------------------------------------------------------------------------------------------------------------
Class A shares .................................................................. 20,756 $ 245,497
-------------------------------------------------------------------------------------------------------------------
Class B shares .................................................................. 17,647 208,986
-------------------------------------------------------------------------------------------------------------------
Class C shares .................................................................. 3,008 36,149
-------------------------------------------------------------------------------------------------------------------
Class S shares .................................................................. 1,309,505 14,498,676
-------------------------------------------------------------------------------------------------------------------
1,350,916 $ 14,989,308
</TABLE>
36
<PAGE>
<TABLE>
Five Months Ended Year Ended
May 31, 1999 December 31, 1998
-----------------------------------------------------------------
Shares Dollars Shares Dollars
Shares sold
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class S shares .. 6,916,529 $ 89,063,593 13,488,602 $ 173,275,197
Shares issued to shareholders in reinvestment of distributions
------------------------------------------------------------------------------------
Class S shares .. 509,777 $ 6,549,592 1,000,254 $ 12,853,477
Shares redeemed
------------------------------------------------------------------------------------
Class S shares .. (5,377,235) $ (69,149,802) (7,412,740) $ (95,191,076)
Net increase (decrease)
------------------------------------------------------------------------------------
Class S shares .. 2,049,071 $ 26,463,383 7,076,116 $ 90,937,598
</TABLE>
37
<PAGE>
Report of Independent Accountants
--------------------------------------------------------------------------------
To the Trustees of Scudder Municipal Trust and the Shareholders of Scudder High
Yield Tax Free Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the Class S shares' financial highlights present
fairly, in all material respects, the financial position of Scudder High Yield
Tax Free Fund (the "Fund") at May 31, 2000, the results of its operations, the
changes in its net assets, and the Class S shares' financial highlights for each
of the periods indicated therein, in conformity with accounting principles
generally accepted in the United States. These financial statements and Class S
shares' financial highlights (hereafter referred to as "financial statements")
are the responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at May 31,
2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
July 20, 2000
38
<PAGE>
Tax Information
--------------------------------------------------------------------------------
Of the dividends paid from net investment income for the taxable year ended May
31, 2000, 100% are designated as exempt interest dividends for federal income
tax purposes.
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 account, please call 1-800-SCUDDER.
39
<PAGE>
Officers and Trustees
--------------------------------------------------------------------------------
Linda C. Coughlin* Philip G. Condon*
o President and Trustee o Vice President
Henry P. Becton, Jr. Ashton P. Goodfield*
o Trustee; President and General o Vice President
Manager, WGBH Educational
Foundation Ann M. McCreary*
o Vice President
Dawn-Marie Driscoll
o Trustee; Executive Fellow, Center John Millette*
for Business Ethics, Bentley o Vice President and Secretary
College; President, Driscoll
Associates John R. Hebble*
o Treasurer
Peter B. Freeman
o Trustee; Corporate Director Caroline Pearson*
and Trustee o Assistant Secretary
George M. Lovejoy, Jr. *Scudder Kemper Investments, Inc.
o Trustee; President and Director,
Fifty Associates; Chairman
Emeritus, Meredith and Grew, Inc.
Wesley W. Marple, Jr.
o Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration
Kathryn L. Quirk*
o Trustee, Vice President and
Assistant Secretary
Jean C. Tempel
o Trustee; Managing Director,
First Light Capital
40
<PAGE>
Investment Products and Services
--------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
The Scudder Family of Funds+++
--------------------------------------------------------------------------------
<S> <C>
Money Market U.S. Growth
Scudder U.S. Treasury Money Fund Value
Scudder Cash Investment Trust Scudder Large Company Value Fund
Scudder Money Market Series -- Scudder Value Fund***
Prime Reserve Shares* Scudder Small Company Value Fund
Premium Shares* Scudder Micro Cap Fund
Managed Shares*
Scudder Tax Free Money Fund+ Growth
Scudder Classic Growth Fund***
Tax Free+ Scudder Large Company Growth Fund***
Scudder Limited Term Tax Free Fund Scudder Select 1000 Growth Fund
Scudder Medium Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder 21st Century Growth Fund***
Scudder High Yield Tax Free Fund***
Scudder California Tax Free Fund** Global Equity
Scudder Massachusetts Limited Term Worldwide
Tax Free Fund** Scudder Global Fund
Scudder Massachusetts Tax Free Fund** Scudder International Growth and
Scudder New York Tax Free Fund** Income Fund
Scudder Ohio Tax Free Fund** Scudder International Fund++
Scudder Global Discovery Fund***
U.S. Income Scudder Emerging Markets Growth Fund
Scudder Short Term Bond Fund Scudder Gold Fund
Scudder GNMA Fund
Scudder Income Fund Regional
Scudder Corporate Bond Fund Scudder Greater Europe Growth Fund
Scudder High Yield Bond Fund Scudder Pacific Opportunities Fund
Scudder Latin America Fund
Global Income The Japan Fund, Inc.***
Scudder Global Bond Fund
Scudder International Bond Fund Industry Sector Funds
Scudder Emerging Markets Income Fund Choice Series
Scudder Health Care Fund
Asset Allocation Scudder Technology Fund
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio Preferred Series
Scudder Pathway Growth Portfolio Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
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
</TABLE>
41
<PAGE>
--------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
--------------------------------------------------------------------------------
Retirement Programs and Education Accounts
--------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA IRA for Minors
Inherited IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**+++ +++
Scudder Horizon Advantage**+++ +++ +++
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Closed-End Funds#
-----------------------------------------------------------------------------------------
<S> <C>
The Argentina Fund, Inc. Montgomery Street Income Securities, Inc.
The Brazil Fund, Inc. Scudder Global High Income Fund, Inc.
The Korea Fund, Inc. Scudder New Asia Fund, Inc.
</TABLE>
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
+++ Funds within categories are listed in order from expected least
risk to most risk. Certain Scudder funds or classes thereof may
not be available for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to
federal, state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Class S Shares of the fund are part of the Scudder Family
of Funds.
++ Only the International Shares of the fund are part of the Scudder
Family of Funds.
+++ +++ A no-load variable annuity contract provided by Charter National
Life Insurance Company and its affiliate, offered by Scudder
Kemper Investment's insurance agencies, 1-800-225-2470.
+++ +++ +++ A no-load variable annuity contract issued by Glenbrook Life and
Annuity Company and underwritten by Allstate Financial Services,
Inc., sold by Scudder Kemper Investment's insurance agencies,
1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are
traded on the New York Stock Exchange and, in some cases, on
various other stock exchanges.
42
<PAGE>
Scudder Solutions
--------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly to
regularly purchase fund shares and "dollar cost average" --
buy more shares when the fund's price is lower and fewer
when it's higher, which can reduce your average purchase
price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to purchase
shares -- use distributions from one Scudder fund to
purchase shares in another, automatically (accounts with
identical registrations or the same social security or tax
identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of your
transactions is electronically debited from a previously
designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government checks
-- invested in up to four Scudder funds at one time.
* Dollar cost averaging involves continuous investment in
securities regardless of price fluctuations and does not
assure a profit or protect against loss in declining
markets. Investors should consider their ability to
continue such a plan through periods of low price
levels.
Around-the- Scudder Automated Information Line: SAIL(TM) --
clock electronic 1-800-343-2890
account
service and Personalized account information, the ability to exchange
information, or redeem shares, and information on other Scudder funds
including some and services via touchtone telephone.
transactions
Scudder's Web Site -- www.scudder.com
Personal Investment Organizer: Offering account information
and transactions, interactive worksheets, prospectuses and
applications for all Scudder funds, plus your current asset
allocation, whenever your need them. Scudder's site also
provides news about Scudder funds, retirement planning
information, and more.
43
<PAGE>
--------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Retirees and Automatic Withdrawal Plan
those who depend
on investment You designate the bank account, determine the schedule (as
proceeds for frequently as once a month) and amount of the redemptions,
living expenses and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into the
automated bank account you designate within three business days after
withdrawal each distribution is paid.
programs
QuickSell
Provides speedy access to your money by electronically
crediting your redemption proceeds to the bank account you
previously designated.
For more Call a Scudder representative at
information about 1-800-SCUDDER
these services
Or visit our Web site at
www.scudder.com
Please address The Scudder Funds
all written PO Box 2291
correspondence Boston, Massachusetts
to 02107-2291
44
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $290 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded over 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich
Kemper Investments, Inc., with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in New York, Scudder Kemper
Investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies. With its global investment resources and
perspective, the firm seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Financial Services Group. The Zurich Financial Services Group is
an internationally recognized leader in financial services, including
property/casualty and life insurance, reinsurance, and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
INVESTMENTS(SM)
[LOGO]
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
A member of [LOGO] Zurich Financial Services Group
<PAGE>
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
ANNUAL REPORT TO
SHAREHOLDERS FOR THE YEAR
ENDED MAY 31, 2000
SCUDDER HIGH YIELD TAX FREE FUND
"... We believe attractive yields on
lower-quality municipal bonds can enhance
the fund's income potential. ..."
[SCUDDER LOGO]
<PAGE>
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
9
PORTFOLIO STATISTICS
11
PORTFOLIO OF INVESTMENTS
20
FINANCIAL STATEMENTS
23
FINANCIAL HIGHLIGHTS
24
NOTES TO
FINANCIAL STATEMENTS
30
REPORT OF
INDEPENDENT AUDITORS
AT A GLANCE
ABOUT YOUR REPORT
SCUDDER HIGH YIELD TAX FREE FUND COMMENCED OFFERING CLASS A, B AND C SHARES (THE
ADVISOR CLASSES) AS OF MAY 1, 2000. SHARES OF THE FUND OUTSTANDING AS OF MAY 1,
2000 WERE REDESIGNATED AS CLASS S SHARES. THE INCEPTION DATE OF CLASS S SHARES
IS JANUARY 22, 1987. ALL SHARE CLASSES INVEST IN THE SAME UNDERLYING PORTFOLIOS
OF SECURITIES AND HAVE THE SAME MANAGEMENT TEAM. BECAUSE OF DIFFERENT FEES AND
EXPENSES, PERFORMANCE OF SHARE CLASSES WILL DIFFER.
SCUDDER HIGH YIELD TAX FREE FUND
TOTAL RETURNS*
FOR THE YEAR ENDED MAY 31, 2000 (UNADJUSTED FOR SALES CHARGE)
[BAR GRAPH]
<TABLE>
<CAPTION>
LIPPER HIGH YIELD
MUNICIPAL DEBT FUND
SCUDDER HIGH YIELD TAX FREE FUND CLASS S CATEGORY AVERAGE*
---------------------------------------- ------------------
<S> <C> <C> <C>
-1.28 -4.98
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MIGHT BE
WORTH MORE OR LESS THAN ORIGINAL COST.
*RETURNS ARE HISTORICAL FOR SCUDDER HIGH YIELD TAX FREE CLASS S SHARES WHICH,
UNLIKE CLASS A, B AND C SHARES, DO NOT HAVE ANY SALES CHARGES, 12B-1 FEES, OR
OTHER CLASS SPECIFIC EXPENSES LIKE ADMINISTRATIVE SERVICE FEES. INVESTMENT
RETURNS AND PRINCIPAL VALUE FLUCTUATE. CLASS S SHARES ARE REDEEMABLE AT CURRENT
NET ASSET VALUE, WHICH MAY BE MORE OR LESS THAN ORIGINAL COST. SCUDDER HIGH
YIELD TAX FREE FUND CLASS A, B AND C SHARES WERE INITIALLY OFFERED MAY 1, 2000.
FROM INCEPTION TO MAY 31, 2000 THE TOTAL RETURN (UNADJUSTED FOR SALES CHARGE)
FOR CLASS A SHARES WAS -.77%, FOR CLASS B SHARES WAS -.92% AND FOR CLASS C
SHARES WAS -.92%. THE LIPPER HIGH YIELD MUNICIPAL DEBT FUND CATEGORY AVERAGE FOR
CLASS A, B AND C SHARES FROM MAY 1, 2000, THROUGH MAY 31, 2000 WAS -.84%.
RETURNS DURING PART OF THE PERIOD SHOWN INCLUDE THE EFFECT OF AN ABSORPTION OF
CERTAIN OPERATING EXPENSES BY THE INVESTMENT ADVISOR. WITHOUT SUCH AN
ABSORPTION, RETURNS WOULD HAVE BEEN LOWER AND RATINGS OR RANKINGS MAY HAVE BEEN
LESS FAVORABLE.
LIPPER, INC. RETURNS AND RANKINGS ARE BASED UPON CHANGES IN NET ASSET VALUE WITH
ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES CHARGES; IF
SALES CHARGE HAD BEEN INCLUDED, RESULTS MIGHT HAVE BEEN LESS FAVORABLE. RETURNS
AND RANKINGS ARE HISTORICAL AND DO NOT REFLECT FUTURE PERFORMANCE.
NET ASSET VALUE
<TABLE>
<CAPTION>
AS OF
5/31/00
.........................................................
<S> <C> <C> <C>
SCUDDER HIGH YIELD TAX FREE FUND CLASS A $11.86
.........................................................
SCUDDER HIGH YIELD TAX FREE FUND CLASS B $11.86
.........................................................
SCUDDER HIGH YIELD TAX FREE FUND CLASS C $11.86
.........................................................
</TABLE>
SCUDDER HIGH YIELD TAX FREE FUND
CLASS S RANKINGS AS OF 5/31/00*
COMPARED WITH ALL OTHER FUNDS IN THE LIPPER HIGH YIELD MUNICIPAL DEBT FUND
CATEGORY
<TABLE>
<CAPTION>
CLASS S
.....................................................
<S> <C> <C> <C>
1-YEAR #2 of 56 funds
.....................................................
3-YEARS #1 of 41 funds
.....................................................
5-YEARS #2 of 33 funds
.....................................................
10-YEARS #1 of 16 funds
.....................................................
</TABLE>
TERMS TO KNOW
BASIS POINT The movement of interest rates or yields expressed in hundredths of
a percent. For example, an increase in yield from 5 percent to 6 percent is 100
basis points.
DISCOUNTS AND PREMIUMS Par value is the principal value that an investor may
receive when a bond matures. If a bond's price is lower than par, it is selling
at a discount. If a bond's price is higher than par, it is said to be selling at
a premium.
DURATION A measure of the interest-rate sensitivity of a portfolio,
incorporating time to maturity and coupon size. The longer a portfolio's
duration, the greater its sensitivity to interest-rate changes.
INVERTED YIELD CURVE A market phenomenon in which intermediate-term bonds
(securities with one- to 10-year maturities) have higher income potential and
current yields than long-term bonds (securities with 10- to 30-year maturities).
Historically it has occurred during a period of rising short-term interest rates
and been viewed as an indicator of a future economic slowdown.
REVENUE BOND INDEX (RBI) The average yield on 25 revenue bonds with 30-year
maturities rated A1 and compiled by THE BOND BUYER, a newspaper that reports on
the municipal bond market.
<PAGE>
PERFORMANCE UPDATE
[CONDON PHOTO]
PHILIP G. CONDON HAS 22 YEARS OF PROFESSIONAL INVESTMENT EXPERIENCE AND IS LEAD
PORTFOLIO MANAGER OF SCUDDER HIGH YIELD TAX FREE FUND. HE JOINED SCUDDER KEMPER
INVESTMENTS, INC. IN 1983.
[WILSON PHOTO]
REBECCA L. WILSON HAS 14 YEARS OF PROFESSIONAL INVESTMENT EXPERIENCE AND HAS
BEEN CO-MANAGER OF THE FUND SINCE 1998. SHE JOINED SCUDDER KEMPER INVESTMENTS,
INC. IN 1986.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
MUNICIPAL BONDS HAVE FACED A TOUGH ENVIRONMENT THIS
PAST YEAR. THE FEDERAL RESERVE BOARD OPEN MARKET
COMMITTEE RAISED SHORT-TERM INTEREST RATES 175
BASIS POINTS, WHILE THE TREASURY DEPARTMENT
ANNOUNCED A DEBT BUYBACK PLAN, PROMPTING AN
INVERSION OF THE U.S. TREASURY YIELD CURVE. BELOW,
THE MANAGEMENT TEAM DISCUSSES THE MARKET'S
PERFORMANCE AND HOW THE FUND IS POSITIONED FOR THE
YEAR AHEAD.
Q HOW DID THE MUNICIPAL BOND MARKET PERFORM DURING FISCAL YEAR 2000?
A It was the most difficult period for bonds since 1994. As of May 31, 2000,
short-term interest rates -- as measured by the average rate that banks charge
each other for overnight loans -- were more than 35 percent higher than a year
earlier. Strong U.S. economic growth, the lowest unemployment rate in 30 years
and brisk consumer spending prompted the Federal Reserve Board Open Market
Committee to raise its short-term interest-rate target six times by 175 basis
points (175 percent) to 6.50 percent. The Federal Reserve's resolve to head off
inflationary pressures, coupled with weak investor demand for municipal bond
funds, led to negative returns.
The overriding challenge was to preserve capital. As the supply of new
municipal debt declined, securities with solid credit characteristics and
above-average income prospects grew scarce. We sought to avoid weaker issues to
reduce risk and maintain liquidity. As of the end of May, new issuance in
calendar year 2000 was down 26.8 percent from year-earlier levels, according to
THE BOND BUYER.
Q HOW DID SCUDDER HIGH YIELD TAX FREE FUND PERFORM BETWEEN MAY 1999 AND MAY
2000?
A We are pleased to report that the fund's return outpaced the -4.98 percent
return of the average high-yield municipal bond fund by 370 basis points for the
12 months ended May 31, 2000, as measured by Lipper Inc. A focus on premium
bonds -- those selling at prices higher than par -- helped us temper share price
volatility as interest rates rose. This, along with curve positioning and
security structure selection, helped Scudder High Yield Tax Free Fund preserve
capital to a greater extent than most of its peers during fiscal year 2000. We
tended to have more high-coupon, higher-grade high-yield bonds than our
competitors, and this helped the fund's results.
During the first half of the fiscal year, the fund was underweighted in
lower-rated, higher-yielding bonds. This boosted performance as interest rates
rose. Beginning in 2000, however, lower-quality bond yields had risen to the
point where we believed the benefits of additional income potential for many
high-yield bonds outweighed the added risks. We gradually added more
lower-quality bonds so that by May 31, 2000, some 21 percent of the fund's
holdings had ratings of BBB or lower. Municipal bonds rated BBB -- the lowest
level of investment-grade bonds -- generally yielded more than 100 basis points
more than comparable-sector AAAs.
Q HOW MUCH HAVE MUNICIPAL BOND YIELDS GONE UP?
A Let's take the example of the average 30-year hospital bond
5
<PAGE>
PERFORMANCE UPDATE
with a rating of BBB. A year ago, such a bond would have traded at a yield that
was about 62 basis points higher than a hospital bond with an AAA rating (the
highest quality available). At the end of May 2000, a BBB hospital bond would
have 163 more basis points of yield than an AAA-rated hospital bond (The
difference in yield among bonds of different quality is known as spread). In
addition to spread widening, you need to add the fact that yields across the
board have gone up substantially. Overall, that's an extra 150 basis points of
yield compared with May 1999 for a BBB-rated hospital. Of course, past
performance is not a guarantee of future results. As of May 31, 2000, the
average on hospital bonds in the Lehman Brothers Revenue Bond Index was 6.48
percent. That compares with 6.01 percent for a 30-year Treasury bond.*
*UNLIKE WITH TREASURIES, INTEREST AND RETURN OF PRINCIPAL ON HOSPITAL BONDS IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. MUNICIPAL BOND ISSUES
TIED TO A PARTICULAR INDUSTRY HAVE MORE CREDIT RISK THAN GENERAL OBLIGATION
BONDS. THE LEHMAN BROTHERS REVENUE BOND INDEX IS AN UNMANAGED GROUP OF
MUNICIPAL BONDS THAT VARY IN QUALITY AND MATURITY. REVENUE BONDS INCLUDE BONDS
BACKED BY ELECTRIC AND WATER UTILITY PAYMENTS, HIGHWAY TOLLS, AIRPORT FEES,
MORTGAGE PAYMENTS, LEASES AND/OR HOSPITAL REVENUE.
Q
DURING FEBRUARY 2000, THE TREASURY ANNOUNCED PLANS TO BUY BACK SOME
LONG-TERM DEBT AND HOLD FEWER AUCTIONS. WHAT WERE THE CONSEQUENCES OF THIS
ACTION ON MUNICIPAL BONDS?
A
February's Treasury news generated a welcome rally after five straight
months of depressed municipal bond prices. The Treasury said it plans to buy
back 30-year government bonds and reduce auctions all along the maturity
spectrum.
Usually, intermediate- and long-term bonds provide more income potential than
securities maturing in a year or less, since they involve more interest-rate
risk. This pattern held true for both Treasuries and municipal bonds in the
autumn and winter of 1999. However, as the new millennium began, the Treasury
yield curve inverted, so that by May 31, 2000, one-year Treasury bills had
higher yields than 30-year bonds. While the municipal yield curve flattened
during the period, it did not invert. Long-term municipal bond yields reached a
historically attractive ratio -- providing more than 96 percent of the yield of
comparable-maturity Treasuries. Long-maturity municipal bonds typically yield
about 85 to 90 percent of a similar-maturity Treasury.
Q
IS A STRONG U.S. ECONOMY BAD NEWS FOR MUNICIPAL BONDS?
A
Not necessarily. In fact, to the extent that the Fed can contain
inflation, and investors believe that consumer prices will not accelerate,
strong economic growth is positive because it enhances the
STATE GENERAL OBLIGATION BOND RATINGS
Percentage of states in each rating category.
<TABLE>
<CAPTION>
1991 2000
<S> <C> <C> <C> <C>
AAA 12.2% 20.9%
.......................................................................................
AA+ 17.1 25.6
.......................................................................................
AA 41.5 32.6
.......................................................................................
AA- 19.5 11.6
.......................................................................................
A+ & A 9.7 7.0
.......................................................................................
A- -- 2.3*
---------------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHARTS]
* ONE STATE, LOUISIANA
SOURCE: STANDARD & POOR'S CREDITWEEK 4/17/00
6
<PAGE>
PERFORMANCE UPDATE
ability of municipal debt issuers to meet their obligations. The first calendar
quarter of 2000 was the 18th consecutive quarter in which bond-rating upgrades
exceeded downgrades, according to Standard & Poor's. In April, S&P reported that
nearly half of the states had general obligation bond ratings of AAA or AA+, the
highest ratings available. Just 29 percent of states had such ratings back in
1991.
The fund's portfolios contained bonds from many states and U.S. territories,
providing an element of diversification. As of May 31, 2000, California was the
largest state allocation for the fund (15.76 percent of net assets). The fund
has invested in a number of high-yield revenue bonds in the state of California
to build toll roads and to facilitate economic development. For Scudder High
Yield Tax Free Fund, this has historically provided an opportunity to maximize
yield potential.
Q WHAT'S YOUR OUTLOOK FOR THE MUNICIPAL BOND MARKET?
A Given recent government statistics that suggest U.S. economic growth has
begun to moderate and the fact that the Federal Reserve raised its short-term
interest-rate target in May by 50 basis points, we think municipal bonds face a
more stable environment than we've seen in some time. We believe the municipal
bond market provides excellent value, with yields of longer-maturity municipals
still near those of Treasuries, and tax-equivalent yields near double-digit
levels for investors in the highest brackets. In January, in fact, municipal
bond yields, as measured by THE BOND BUYER'S Revenue Bond Index, reached 6.35
percent, the highest level since August 1995.
We believe historically attractive yields on lower quality municipal bonds can
enhance the fund's income potential in the coming months. In our view, a
moderately growing U.S. economy enhances municipal finances, and that should
continue to help bolster municipal credit ratings. Finally, if the equity and
taxable bond markets remain as volatile as they have been this past year, it
could provide a catalyst for renewed enthusiasm for tax-exempt debt as a way to
diversify a portfolio.
7
<PAGE>
PERFORMANCE UPDATE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED MAY 31, 2000 (ADJUSTED FOR THE MAXIMUM SALES CHARGE)
<TABLE>
<CAPTION>
LIFE OF CLASS** 1-YEAR 5-YEAR 10-YEAR LIFE OF FUND
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SCUDDER HIGH YIELD
TAX FREE FUND CLASS A -5.31 -5.72% 4.55% 6.78% 6.49% (since 1/22/87)
..............................................................................................
SCUDDER HIGH YIELD
TAX FREE FUND CLASS B -4.88 -5.04 4.43 6.37 5.91 (since 1/22/87)
..............................................................................................
SCUDDER HIGH YIELD
TAX FREE FUND CLASS C -1.90 -2.11 4.64 6.37 5.91 (since 1/22/87)
..............................................................................................
</TABLE>
SCUDDER HIGH YIELD TAX FREE CLASS A SHARES
Growth of an assumed $10,000 investment in Class A
shares from 1/31/87 to 5/31/00
[LINE GRAPH]
<TABLE>
<CAPTION>
SCUDDER HIGH YIELD TAX LEHMAN BROTHERS
FREE FUND CLASS A1 MUNICIPAL BOND INDEX+ CONSUMER PRICE INDEX++
---------------------- --------------------- ----------------------
<S> <C> <C> <C>
1/31/87 9550.00 10000.00 10000.00
8996.00 9854.00 10378.00
10209.00 10854.00 10836.00
11263.00 12025.00 11340.00
11941.00 12903.00 12032.00
12/31/91 13542.00 14469.00 12401.00
15002.00 15745.00 12761.00
17083.00 17679.00 13112.00
15651.00 16772.00 13462.00
12/31/95 18600.00 19692.00 13804.00
19425.00 20564.00 14263.00
21673.00 22454.00 14505.00
23055.00 23909.00 14739.00
22549.00 23416.00 15135.00
5/31/00 22816.00 23836.00 15399.00
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF
FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT
SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN ORIGINAL COST.
*AVERAGE ANNUAL TOTAL RETURN MEASURES
NET INVESTMENT INCOME AND CAPITAL GAIN
OR LOSS FROM PORTFOLIO INVESTMENTS,
ASSUMING REINVESTMENT OF ALL DIVIDENDS.
ON MAY 1, 2000, THE FUND OFFERED AN
ADDITIONAL THREE CLASSES OF SHARES,
NAMELY THE CLASS A, B AND C SHARES
DESCRIBED HEREIN. PRIOR TO THAT DATE,
THE FUND CONSISTED OF ONE CLASS OF
SHARES WHICH, ON THAT DATE, WERE
RE-DESIGNATED AS CLASS S SHARES OF THE
FUND. RETURNS SHOWN FOR CLASS A, B AND
C SHARES FOR THE PERIODS PRIOR TO THEIR
INCEPTION ARE DERIVED FROM THE
HISTORICAL PERFORMANCE OF CLASS S
SHARES OF SCUDDER HIGH YIELD TAX FREE
FUND DURING SUCH PERIODS AND HAVE BEEN
ADJUSTED TO REFLECT THE CURRENT MAXIMUM
4.5% INITIAL SALES CHARGE FOR CLASS A
SHARES OR THE MAXIMUM CONTINGENT
DEFERRED SALES CHARGE (CDSC), IF ANY,
CURRENTLY APPLICABLE TO CLASS B AND C
SHARES. CLASS S SHARES HAVE NO SALES
CHARGES, RULE 12B-1 FEES, OR
ADMINISTRATIVE SERVICE FEES (ASF).
CLASS B SHARE PERFORMANCE IS ADJUSTED
FOR THE APPLICABLE CDSC, WHICH IS 4%
WITHIN THE FIRST YEAR AFTER PURCHASE,
DECLINING TO 0% AFTER SIX YEARS. CLASS
C SHARE PERFORMANCE IS ADJUSTED FOR A
CDSC, WHICH IS 1% WITHIN THE FIRST YEAR
AFTER PURCHASE. THE PERFORMANCE FIGURES
HAVE NOT BEEN ADJUSTED TO REFLECT RULE
12B-1 FEES OF .75%, WHICH ARE
APPLICABLE TO EACH OF CLASS B AND C
SHARES, AND ASF OF UP TO .25%, WHICH
ARE APPLICABLE TO EACH OF CLASS A, B
AND C SHARES FROM THE DATE OF EACH SUCH
CLASS'S INCEPTION. THE RULE 12B-1 FEES
AND ASF APPLICABLE TO THE RESPECTIVE
CLASSES OF SHARES OF THE FUND WILL
AFFECT PERFORMANCE. CLASS S SHARES ARE
SUBJECT TO CERTAIN OTHER, OR DIFFERENT
LEVELS OF, EXPENSES THAN CLASSES A, B,
AND C. THE EXPENSES APPLICABLE TO CLASS
S HAVE BEEN REFLECTED IN THE
PERFORMANCE PRESENTED. THE DIFFERENCE
IN EXPENSES WILL AFFECT PERFORMANCE.
RETURNS DURING PART OF THE PERIODS
SHOWN INCLUDE THE EFFECT OF A TEMPORARY
WAIVER OF MANAGEMENT FEES AND/OR
ABSORPTION OF CERTAIN OPERATING
EXPENSES BY THE INVESTMENT ADVISOR.
WITHOUT SUCH WAIVER OR ABSORPTION,
RETURNS WOULD HAVE BEEN LOWER AND
RATINGS OR RANKINGS MAY HAVE BEEN LESS
FAVORABLE. DURING THE PERIODS NOTED,
SECURITIES PRICES FLUCTUATED. FOR
ADDITIONAL INFORMATION, SEE THE
PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION AND THE FINANCIAL
HIGHLIGHTS.
**CLASS A, B AND C SHARES WERE INITIALLY
OFFERED ON MAY 1, 2000. RETURNS FOR
THIS PERIOD ARE TOTAL RETURNS NOT
AVERAGE ANNUAL TOTAL RETURN.
(1)PERFORMANCE IS FOR CLASS S SHARES OF
SCUDDER HIGH YIELD TAX FREE FUND AND
HAS BEEN ADJUSTED TO REFLECT THE
CURRENT, MAXIMUM 4.5% INITIAL SALES
CHARGE APPLICABLE TO CLASS A SHARES
OF THE FUND. CLASS B AND C SHARES OF
THE FUND, THE PERFORMANCE OF EACH OF
WHICH IS NOT INCLUDED IN THE GRAPH,
IS EACH SUBJECT TO RULE 12B-1 FEES
AND A CDSC OF 4% WITHIN THE FIRST
YEAR AFTER PURCHASE, DECLINING TO 0%
AFTER SIX YEARS, FOR CLASS B SHARES
AND 1% WITHIN THE FIRST YEAR OF
PURCHASE FOR CLASS C SHARES, WHICH
WOULD AFFECT PERFORMANCE.
+THE LEHMAN BROTHERS MUNICIPAL BOND
INDEX INCLUDES APPROXIMATELY 15,000
BONDS. TO BE INCLUDED IN THE INDEX, A
MUNICIPAL BOND MUST MEET THE FOLLOWING
CRITERIA: A MINIMUM CREDIT RATING OF
BBB, ISSUED AS A PART OF AN ISSUE OF
AT LEAST $50 MILLION, ISSUED WITHIN
THE LAST FIVE YEARS, AND A MATURITY OF
AT LEAST TWO YEARS. BONDS SUBJECT TO
ALTERNATIVE MINIMUM TAX, VARIABLE-RATE
BONDS AND ZERO-COUPON BONDS ARE
EXCLUDED FROM THE INDEX. SOURCE:
WIESENBERGER.(R)
++THE CONSUMER PRICE INDEX IS A
STATISTICAL MEASURE OF CHANGE, OVER
TIME, IN THE PRICES OF GOODS AND
SERVICES IN MAJOR EXPENDITURE GROUPS
FOR ALL URBAN CONSUMERS. IT IS
GENERALLY CONSIDERED TO BE A MEASURE
OF INFLATION. SOURCE: WIESENBERGER.(R)
8
<PAGE>
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 5/31/00 ON 5/31/99
<S> <C> <C> <C> <C>
REVENUE BONDS 67% 70%
................................................................................
GENERAL OBLIGATION BONDS 10 13
................................................................................
LEASE OBLIGATIONS 5 17
................................................................................
U.S. GOVERNMENT-SECURED BONDS 16 --
................................................................................
CASH AND EQUIVALENTS 2 --
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
QUALITY
<TABLE>
<CAPTION>
ON 5/31/00 ON 5/31/99
<S> <C> <C> <C> <C>
AAA 31% 32%
................................................................................
AA 5 9
................................................................................
A 12 9
................................................................................
BBB 21 22
................................................................................
NOT RATED 31 28
--------------------------------------------------------------------------------
100% 100%
</TABLE>
[PIE CHART] [PIE CHART]
THE RATINGS OF STANDARD & POOR'S CORPORATION (S&P) AND MOODY'S INVESTORS
SERVICE, INC. (MOODY'S) REPRESENT THEIR OPINIONS AS TO THE QUALITY OF SECURITIES
THAT THEY UNDERTAKE TO RATE. THE PERCENTAGE SHOWN REFLECTS THE HIGHER OF MOODY'S
OR S&P RATINGS. PORTFOLIO COMPOSITION WILL CHANGE OVER TIME. RATINGS ARE
RELATIVE AND SUBJECTIVE AND NOT ABSOLUTE STANDARDS OF QUALITY.
AVERAGE MATURITY
<TABLE>
<CAPTION>
ON 5/31/00 ON 5/31/99
<S> <C> <C> <C> <C>
AVERAGE MATURITY 13.4 years 10.7 years
--------------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE
9
<PAGE>
PORTFOLIO STATISTICS
TOP FIVE STATE ALLOCATIONS*
REPRESENTING 44.64 PERCENT OF THE FUND'S PORTFOLIO ON MAY 31, 2000.
<TABLE>
<CAPTION>
PERCENT
<S> <C>
CALIFORNIA 15.76%
-------------------------------------------------------------------------
TEXAS 8.86%
-------------------------------------------------------------------------
NEW YORK 8.05%
-------------------------------------------------------------------------
MASSACHUSETTS 6.37%
-------------------------------------------------------------------------
PENNSYLVANIA 5.60%
-------------------------------------------------------------------------
</TABLE>
* PORTFOLIO COMPOSITION AND HOLDINGS ARE SUBJECT TO CHANGE.
10
<PAGE>
PORTFOLIO OF INVESTMENTS
SCUDDER HIGH YIELD TAX FREE FUND
Portfolio of Investments as of May 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
SHORT-TERM MUNICIPAL INVESTMENTS--1.9% AMOUNT($) VALUE($)
<S> <C> <C> <C> <C> <C>
ARIZONA
Maricopa County, AZ, Pollution Control Revenue,
Arizona Public Service Corporation, Series 1994
F, Daily Demand Note, 4.3%, 5/1/2029* $ 1,700,000 $ 1,700,000
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA
District of Columbia, Series B1, Daily Demand
Note, 4.5%, 6/1/2003* 1,400,000 1,400,000
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
NEW YORK
Long Island, NY, Power Authority, New York
Electricity, Series 6, Daily Demand Note, 4.3%,
5/1/2033* 1,000,000 1,000,000
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
TEXAS
Harris County, TX, Health Facilities Authority
Revenue, St. Lukes Episcopal Hospital, Series
A, Daily Demand Note, 4.4%, 2/15/2027* 4,000,000 4,000,000
---------------------------------------------------------------------------------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $8,100,000) 8,100,000
---------------------------------------------------------------------------------
<CAPTION>
LONG-TERM MUNICIPAL INVESTMENTS--98.1%
<S> <C> <C> <C> <C> <C>
ALASKA
North Slope Borough, AK, General Obligation,
Capital Appreciation, Series 1994 B, Zero
Coupon, 6/30/2005 (b) 7,600,000 5,753,808
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
ARIZONA
Maricopa County, AZ, Industrial Development
Revenue, Resource Recovery, Series 1995, 9.25%,
5/1/2015 3,610,000 3,618,808
McDowell Mountain Ranch, AZ, General Obligation,
Series 1994, 8.25%, 7/15/2019 3,000,000 3,371,940
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
CALIFORNIA
California Community Development Authority,
Apartment Development Revenue Bond, Series 1998
A-4, 5.25%, 5/15/2025 3,750,000 3,473,588
California Pollution Control Financing Authority,
Solid Waste Disposal Revenue, Canadian Fibre of
Riverside PJ, AMT, Series 1997 A, 9%, 7/1/2019 6,000,000 6,202,140
Foothill Eastern Transportation Corridor Agency,
CA,
Toll Road Revenue:
Series 1995 A, Step-up Coupon, 0% to
1/1/2005, 7.05% to 1/1/2010 7,000,000 5,848,780
Series 1995 A, Step-up Coupon, 0% to
1/1/2005, 7.1% to 1/1/2011 4,415,000 3,738,136
Series 1995 A, Step-up Coupon, 0% to
1/1/2005, 7.1% to 1/1/2012 6,000,000 5,095,020
Series 1995 A, Step-up Coupon, 0% to
1/1/2005, 7.15% to 1/1/2014 2,875,000 2,446,223
Long Beach, CA, Aquarium of the Pacific Project,
6.1%, 7/1/2010 4,500,000 4,514,580
Los Angeles County, CA, Certificate of
Participation, Marina Del Ray, AMT, Series 1993
A, 6.25%, 7/1/2003 4,525,000 4,580,974
</TABLE>
The accompanying notes are an integral part of the financial statements. 11
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT($) VALUE($)
<S> <C> <C> <C> <C> <C>
Millbrae California Residential Facilities, AMT,
Series 1997 A, 7.375%, 9/1/2027 $ 1,000,000 $ 957,530
Sacramento, CA, City Financing Authority,
Convention Center Hotel, Series 1999 A, 6.25%,
1/1/2030 4,000,000 3,617,920
San Francisco, CA, City and County Redevelopment
Agency, Residential Facility, AMT, Series 1996
A, 8.5%, 12/1/2026 2,000,000 2,002,580
San Joaquin Hills, CA, Transportation Corridor
Agency:
Series 1993, Prerefunded 1/1/2008, Step-up
Coupon, 0% to 1/1/2002, 7.6% to 1/1/2011(c) 5,000,000 5,206,000
Series 1993, Prerefunded 1/1/2008, Step-up
Coupon, 0% to 1/1/2002, 7.65% to 1/1/2012(c) 15,000,000 15,653,100
Series 1993, Prerefunded 1/1/2008, Step-up
Coupon, 0% to 1/1/2002, 7.65% to 1/1/2013(c) 4,000,000 4,174,160
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
COLORADO
Denver, CO, Airport System Revenue,
Series 1990 A, Zero Coupon, 11/15/2001 5,120,000 4,717,312
Series 1990 A, Zero Coupon, 11/15/2003 3,050,000 2,493,985
Series 1990 A, Zero Coupon, 11/15/2004 3,130,000 2,409,349
Series 1991 A, Zero Coupon, 11/15/2005 1,855,000 1,342,909
Series 1991 D, 7.75%, 11/15/2013 9,775,000 11,249,070
Denver, CO, Urban Renewal Authority, Tax
Increment Revenue, AMT, Series 1989, 7.75%,
9/1/2016 2,500,000 2,626,275
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
CONNECTICUT
Connecticut Development Authority, Aquarium
Project Revenue, Mystic Marinelife Aquarium,
Series 1997, 6.875%, 12/1/2017 1,000,000 971,720
Connecticut State Health Finance Authority,
Edgehill Project, Series 1997 A, 6.875%,
7/1/2017 3,000,000 2,910,510
Mashantucket, CT, Western Pequot Tribe:
Series 1996 B, 6.4%, Prerefunded, 9/1/2007,
9/1/2011(c) 1,510,000 1,535,912
Series 1996 B, 6.4%, 9/1/2011 1,490,000 1,605,103
Series 1997 B, 5.7%, 9/1/2012 1,000,000 938,320
Series 1999 B, Zero Coupon, 9/1/2010 2,000,000 1,043,380
Series 1999 B, Zero Coupon, 9/1/2011 2,000,000 972,820
Series 1999 B, Zero Coupon, 9/1/2012 2,000,000 904,900
Series 1999 B, Zero Coupon, 9/1/2013 2,000,000 841,680
Series 1999 B, Zero Coupon, 9/1/2014 2,000,000 781,960
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
DISTRICT OF COLUMBIA
District of Columbia, American College of
Obstetricians, Series 1999, 4.75%, 8/15/2018(b) 500,000 418,135
District of Columbia, Certificate of
Participation, Series 1993, 7.3%, 1/1/2013 4,650,000 4,828,932
District of Columbia, Hospital Refunding Revenue,
Metlantic Washington Hospital Center, Series
1992 A, Prerefunded 8/15/2002, 7.125%
8/15/2019(c) 3,000,000 3,174,060
District of Columbia, Water and Sewer Authority,
Public Utilities Revenue:
Series 1998, 5.7%, 10/1/2014(b) 4,220,000 4,490,080
Series 2000, 5.8%, 10/1/2016 1,155,000 1,215,441
---------------------------------------------------------------------------------
</TABLE>
12 The accompanying notes are an integral part of the financial statements.
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT($) VALUE($)
<S> <C> <C> <C> <C> <C>
FLORIDA
Bayside, FL, Community Development District,
Capital Improvement Revenue, 6.3%, 5/1/2018 $ 980,000 $ 895,593
Broward County, FL, Housing Finance Authority,
Single Family Mortgage Revenue, Series 1983,
Zero Coupon, 4/1/2014 890,000 223,871
Escambia County, FL, Health Facilities Authority,
Baptist Hospital Revenue, Series 1993 B, 6%,
10/1/2014 1,050,000 933,219
Hillsborough County, FL, Industrial Development
Authority Revenue, University Community
Hospital Project:
Series 1999, 5.625%, 8/15/2019 3,425,000 2,855,525
Series 1999, 5.625%, 8/15/2023 1,550,000 1,255,640
Indian Trace, FL, Special Tax Revenue, Water
Management, Series 1995, 8.25%, 5/1/2005 1,380,000 1,435,517
Palm Beach County, FL, Health Facilities
Authority, Retirement Community Revenue, Series
1998, 5.125%, 11/15/2029 2,000,000 1,536,840
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
GEORGIA
Athens-Clarke County, GA, Wesley Woods, Series
1997, 6.35%, 10/1/2017 1,575,000 1,386,158
Coweta County, GA, Residential Care Facilities
for the Elderly, Wesley Woods, Series 1996 A,
8.25%, 10/1/2026 1,000,000 1,059,650
Municipal Electric Authority of Georgia, Series
1993 Z, 5.5%, 1/1/2012 1,375,000 1,349,563
Rockdale County, GA, Development Authority, Solid
Waste Disposal Revenue, Visy Paper Inc.
Project, AMT, Series 1993, 7.4%, 1/1/2016 4,540,000 4,586,944
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
ILLINOIS
Chicago, IL, O'Hare International Airport,
Special Facilities Revenue, United Airlines
Project, Series 1999 A, 5.35%, 9/1/2016 5,000,000 4,167,850
Hoffman Estates, IL, Tax Increment Revenue,
Capital Appreciation, Junior Lien, Series 1991,
Zero Coupon, 5/15/2006 4,000,000 2,858,840
Illinois Development Finance Authority Hospital
Revenue, Series 1999 A, 5.5%, 11/15/2029 5,000,000 3,823,650
Winnebago County, IL, School District #122,
Series 1992, 6.45%, 6/1/2008(b) 1,500,000 1,600,425
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
INDIANA
Indiana Health Facilities Financing Authority,
Franciscan Eldercare Community Services, Series
1998, 5.875%, 5/15/2029 2,300,000 1,823,624
Indianapolis, IN, Economic Development, Robin Run
Village Project, Series 1992, 7.625%, 10/1/2022 1,500,000 1,541,895
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 13
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT($) VALUE($)
<S> <C> <C> <C> <C> <C>
IOWA
Iowa Financial Authority Retirement Authority,
Wesley Retirement Services, Series 1999, 6.1%,
6/1/2024 $ 2,250,000 $ 1,865,093
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
KANSAS
Manhattan, KS, Health Care Facilities Revenue
Bond, Meadowlark Hills Retirement, Series 1999
A, 6.5%, 5/15/2028 1,000,000 874,240
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
KENTUCKY
Kenten County, KY, Airport Board, Delta Airlines
Inc. Revenue, Series 1992 A, 6.125%, 2/1/2022 4,150,000 3,821,113
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MAINE
Maine Finance Authority, Huntington Common,
Series 1997 A, 7.5%, 9/1/2027 1,000,000 904,050
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MARYLAND
Maryland Economic Development Corporation:
Chesapeake Bay Conference, Series 1999 B,
7.625%, 12/1/2022 12,000,000 11,640,720
University of Maryland, Series 1999 A, 5.75%,
6/1/2031 1,000,000 861,480
Maryland State Health and Higher Educational
Facilities Authority, University of Maryland
Medical System Revenue, Series 2000, 6.75%,
7/1/2030 2,500,000 2,464,975
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS
Boston, MA, Industrial Development Financing
Authority, Springhouse Project, Series 1995,
9.25%, Prerefunded 7/1/2005, 7/1/2025(c) 1,350,000 1,605,299
Lowell, MA, General Obligation, Series 1991,
8.3%, 2/15/2005 365,000 383,819
Massachusetts Health and Educational Facilities
Authority, Cooley Dickson Hospital Inc., Series
1993 A, 7.125%, Prerefunded 5/15/2003,
11/15/2018(c) 1,765,000 1,877,183
Massachusetts Industrial Finance Agency:
Edgewood Retirement Community, Series 1995 A,
9%, 11/15/2025 1,000,000 1,093,430
Solid Waste Disposal, Peabody Monofil
Project, Series 1994, 9%, 9/1/2005 2,155,000 2,218,314
Massachusetts State Development Financial Agency,
Revenue, Health Care Facilities, Series 1999 A,
7.1%, 7/1/2032 4,000,000 3,632,560
Massachusetts State Health and Educational
Facilities Authority:
Caritas Christi Obligation, Series 1999,
5.625%, 7/1/2020 3,000,000 2,360,940
Partners Healthcare Systems, Series 1999 B,
5.125%, 7/1/2019 1,185,000 981,121
South Shore Hospital, Series 1999 F, 5.625%,
7/1/2019 1,000,000 879,250
South Shore Hospital, Series 1999 F, 5.75%,
7/1/2029 4,000,000 3,443,520
Massachusetts State Rites, Series 2000, 5.961%,
11/1/2010 8,000,000 8,795,360
---------------------------------------------------------------------------------
</TABLE>
14 The accompanying notes are an integral part of the financial statements.
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT($) VALUE($)
<S> <C> <C> <C> <C> <C>
MICHIGAN
Detroit, MI, Downtown Development Authority:
Series 1996, Zero Coupon, 7/1/2011 $ 3,150,000 $ 1,623,605
Series 1996, Zero Coupon, 7/1/2012 3,150,000 1,516,851
Kalamazoo, MI, Economic Development Revenue Bond,
Series 1999 A, 7.5%, 5/15/2029 2,000,000 1,804,380
Michigan State Hospital Finance Authority
Revenue, Sinai Hospital, Series 1995, 7.5%,
10/1/2027(b) 2,000,000 2,212,640
Michigan State Strategic Fund Limited, Series
1998 A, 5.75%, 11/15/2018 1,500,000 1,191,240
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
MISSISSIPPI
Mississippi Development Bank, Special Obligation,
Diamond Lakes Utilities, Series 1997 A, 6.25%,
12/1/2017 1,900,000 1,765,613
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
NEVADA
Clark County, NV, Pollution Control Revenue,
Series 1995 D, 5.45%, 10/1/2023 3,470,000 2,828,293
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
NEW HAMPSHIRE
New Hampshire Health and Education Facility
Authority Revenue, New Hampshire College Issue,
Series 2000, 7.4%, 1/1/2023 2,000,000 1,970,080
New Hampshire Higher Education and Health
Facilities Authority:
Monadnock Community Hospital, Series 1990,
9.125%, Prerefunded, 10/1/2000, 10/1/2020(c) 1,370,000 1,415,676
New Hampshire Catholic Charity:
Series 1991, 8.4%, Prerefunded, 8/1/2001,
8/1/2011(c) 600,000 640,422
Series 1997, 5.8%, 8/1/2022 2,760,000 2,252,574
Rivermead at Peterborough:
Series 1998, 5.5%, 7/1/2013 2,635,000 2,257,062
Series 1998, 5.625%, 7/1/2018 500,000 400,625
New Hampshire Higher Educational and Health
Facilities Authority Revenue, Riverwoods at
Exeter:
Series 1997 A, 6.375%, 3/1/2013 725,000 667,602
Series 1997 A, 6.5%, 3/1/2023 1,000,000 872,900
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
NEW JERSEY
New Jersey Economic Development Authority, United
Methodist Homes, Series 1995, 7.5%, Prerefunded
7/1/2005, 7/1/2025(c) 1,000,000 1,111,240
New Jersey State Transportation Certificate of
Participation, Series 16, Inverse Floater,
6.9%, 9/15/2010(b)** 8,250,000 8,666,048
New Jersey State Turnpike Authority Revenue,
Series 2000 R, 6.17%, 1/1/2010(b) 5,000,000 5,281,300
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
NEW MEXICO
Farmington, NM, Pollution Control Revenue:
Series 1997 A, 5.8%, 4/1/2022 5,000,000 4,328,150
Series 1997 C, 5.8%, 4/1/2022 2,000,000 1,731,260
New Mexico State Hospital Equipment Loan Council,
Memorial Medical Center, Series 1998, 5.5%,
6/1/2028 1,450,000 1,113,905
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 15
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT($) VALUE($)
<S> <C> <C> <C> <C> <C>
NEW YORK
Glen Cove Housing Authority, Senior Living
Facility, AMT, Series 1996, 8.25%, 10/1/2026 $ 1,500,000 $ 1,561,545
Islip, NY, New York Community Development Agency,
New York Institute of Technology, Series 1996,
7.5%, 3/1/2026 2,500,000 2,565,450
New York City, NY, General Obligation, Series
1996 A, 7%, 8/1/2007 5,000,000 5,426,450
New York City Municipal Water Finance Authority
Revenue, Series 1997C, 5%, 6/21/2021 5,220,000 4,522,190
New York Metropolitan Transportation Authority:
Series 1991, 7%, Prerefunded 7/1/2001,
7/1/2009(c) 1,000,000 1,043,740
Series 1993 O, 5.75%, 7/1/2013 2,750,000 2,749,835
New York, NY, Series 1999 J, 5.125%, 5/15/2029(b) 10,000,000 8,609,500
New York, State Dormitory Authority Revenue,
Series 310, Inverse Floater, 7.59%,
2/15/2010(b)** 4,250,000 4,607,680
Onondaga County, NY, Industrial Development
Agency, Solid Waste Disposal Facility, Solvay
Paperboard LLC, AMT Series 1998, 7%, 11/1/2030 3,500,000 3,376,240
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA
North Carolina Municipal Power Agency, Electric
Revenue, Series 1999 B, 6.375%, 1/1/2013 2,075,000 2,064,231
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
NORTH DAKOTA
Grand Forks, ND, Health Care Systems Revenue,
Series 2000, 7.125%, 8/15/2024 2,000,000 1,949,140
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
OHIO
Hamilton County, OH, Health System Revenue,
Franciscan Sisters of the Poor Health System,
Providence Hospital, Series 1992, 6.8%,
7/1/2008 5,485,000 5,756,398
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Chester County, PA, Health and Education
Facilities Authority Revenue, Series 1997 A,
5.375%, 5/15/2027 3,270,000 2,696,573
Delaware County, PA, White Horse Village Inc.:
Series 1996, 7.5%, 7/1/2018 2,000,000 1,999,800
Series 1996 A, 6.7%, 7/1/2007 1,000,000 970,830
Latrobe, PA, Industrial Development Authority,
St. Vincent College Project, Series 1998,
5.375%, 5/1/2013 1,885,000 1,718,347
Montgomery County, PA, Health and Educational
Facilities Authority, Philadelphia Geriatric
Center Revenue, Series 1999 A, 7.25%, 12/1/2027 3,125,000 2,877,219
Montgomery County, PA, Industrial Development
Authority, Retirement Community Revenue, Series
1998, 5.25%, 11/15/2028 4,000,000 3,101,120
Montgomery County, PA, Multi-Family Housing
Revenue, Series 1993 A, 6.375%, 7/1/2012 5,500,000 5,375,315
Pennsylvania Higher Education Authority, Medical
College of Pennsylvania, Series 1991 B, 7.25%,
3/1/2005(b) 1,000,000 1,038,110
Philadelphia, PA, Industrial Development
Authority, Commercial Development Revenues,
Series 1997, 6.5%, 10/1/2027 4,500,000 4,228,650
---------------------------------------------------------------------------------
</TABLE>
16 The accompanying notes are an integral part of the financial statements.
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT($) VALUE($)
<S> <C> <C> <C> <C> <C>
SOUTH CAROLINA
South Carolina Jobs Economic Development
Authority, Hospital Facilities Revenue, Series
2000 A, 7.375%, 12/15/2021 $ 2,500,000 $ 2,394,875
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
SOUTH DAKOTA
South Dakota Health and Educational Facilities
Authority Revenue, Prairie Lakes:
Series 1992, 7.125%, Prerefunded, 4/1/2003,
4/1/2010(c) 680,000 724,098
Series 1992, 7.25%, Prerefunded, 4/1/2003,
4/1/2022(c) 680,000 726,301
Series 1992, 7.125%, 4/1/2010 320,000 326,154
Series 1992, 7.25%, 4/1/2022 320,000 321,786
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
TENNESSEE
Elizabethton, TN, Health and Educational
Facilities Board Revenue, Series 2000 B, 8%,
7/1/2033 3,000,000 2,993,100
Johnson City, TN, Health and Educational
Facilities Board Hospital Revenue, 7.5%,
7/1/2033 5,000,000 4,714,150
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
TEXAS
Arlington, TX, Independent School District,
General Obligation, Series 1999, 5%, 2/15/2024 7,000,000 5,994,030
Austin, TX, Bergstrom Landhost Enterprises,
Airport Hotel, Series 1999 A, 6.75%, 4/1/2027 5,000,000 4,466,750
Bexar County, TX, Housing Finance Corporation,
AMT, Series 1999 A, 8.2%, 4/1/2022 618,000 631,015
Dallas-Fort Worth, TX, Airport Revenue, American
Airlines, AMT, Series 1990, 7.5%, 11/1/2025 1,910,000 1,933,264
Dallas-Fort Worth, TX, International Airport,
American Airlines, AMT, Series 1990A, 7.25%,
11/1/2030 5,000,000 5,048,250
Hidalgo County, TX, Health Services, Mission
Hospital, Series 1996, 6.75%, 8/15/2016 2,500,000 2,322,125
Lubbock, TX, Health Facilities Development
Corporation, Carillon Inc., Series 1999 A,
6.5%, 7/1/2019 3,000,000 2,602,500
Magnolia, TX, Independent School District, Series
1999, 5%, 8/15/2017 2,400,000 2,137,344
Midland County, TX, Hospital District, Midland
Memorial Hospital, Series 1992, 7.5%,
Prerefunded 6/1/2002, 6/1/2016(c) 1,500,000 1,580,115
Richardson, TX, Hospital Authority, Hospital
Revenue, Series 1998, 5.625%, 12/1/2028 1,250,000 956,313
Travis County, TX, Health Facilities Development
Corp., Ascension Health, Inverse Floating Rate
Note, Series 1999 A, 6.25%, 11/15/2015** 10,000,000 10,269,900
---------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
UTAH
Salt Lake City, UT, Hospital Revenue, Series
1992, 6.15%, 2/15/2012 2,000,000 2,083,900
---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 17
<PAGE>
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT($) VALUE($)
<S> <C> <C> <C> <C> <C>
VERMONT
Vermont Housing Finance Agency, Northgate Housing
Project, Series 1989, 8.25%, 6/15/2020 $ 1,000,000 $ 1,044,700
----------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
VIRGIN ISLANDS
Virgin Islands Public Financial Authority Revenue,
Series 1992 A, Prerefunded 10/1/2002, 7.25%,
10/1/2018(c)(d) 6,500,000 6,979,830
----------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
VIRGINIA
Fairfax County, VA, Economic Development Authority
Revenue, Series 1999 A, 7.25%, 10/1/2019 3,000,000 2,885,280
Pittsylvania County, VA, Industrial Development
Authority, Multitrade of Pittsylvania County,
L.P. Project:
Series 1994 A, 7.45%, 1/1/2009 1,500,000 1,523,475
Series 1994 A, 7.5%, 1/1/2014 3,500,000 3,555,790
----------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
WASHINGTON
Washington Public Power Supply System:
Nuclear Project #2:
Series 1992 A, 6.3%, 7/1/2012 10,000,000 10,511,100
Series 1994, Inverse Floater, 6.52%,
7/1/2012** 3,000,000 2,636,250
Nuclear Project #3, Series 1989 B, 7.125%,
7/1/2016 2,500,000 2,817,375
----------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
WISCONSIN
Wisconsin State Health and Educational Facilities
Authority:
Aurora Health Care Inc., Series 1999 A, 5.6%,
2/15/2029 7,500,000 5,848,792
National Regency of New Berlin Project, Series
1995, 8%, 8/15/2025 1,480,000 1,525,510
----------------------------------------------------------------------------------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $413,116,355) 420,208,312
----------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $421,216,355) (a) $428,308,312
----------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) The cost for federal income tax purposes was $421,216,355. At May 31, 2000,
net unrealized appreciation for all securities based on tax cost was
$7,091,957. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$16,001,482 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $8,909,525.
(b) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC,
FSA or MBIA/BIG.
(c) Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and
interest on tax-exempt issues and to retire the bonds in full at the
earliest refunding date.
(d) At May 31, 2000, this security has been pledged to cover, in whole or in
part, initial margin requirements for open futures contracts.
* Floating rate and monthly, weekly or daily demand notes are securities whose
yields vary with a designated market index or market rate, such as the
coupon-equivalent of the Treasury bill rate. Variable rate demand notes are
securities whose yields are periodically reset at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable
letter of
18 The accompanying notes are an integral part of the financial statements.
<PAGE>
PORTFOLIO OF INVESTMENTS
credit from a major bank. These notes are carried, for purposes of
calculating average weighted maturity, at the longer of the period remaining
until the next rate change or to the extent of the demand period.
** Inverse floating rate notes are instruments whose yields may change based on
the change in the relationship between long-term and short-term interest
rates and which exhibit added interest rate sensitivity compared to other
bonds with a similar maturity. These securities are shown at their rate as of
May 31, 2000.
AMT: Alternative minimum tax
At May 31, 2000, open futures contracts sold short were as follows:
<TABLE>
<CAPTION>
AGGREGATE
FACE
FUTURES EXPIRATION CONTRACTS VALUE($) VALUE($)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond Index June 2000 275 25,868,350 25,755,469
-------------------------------------------------------------------------------------------------------------------
Total unrealized appreciation on open futures contracts sold short 112,881
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 19
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
As of May 31, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $421,216,355) $428,308,312
----------------------------------------------------------------------------
Cash 3,138,914
----------------------------------------------------------------------------
Receivable for investments sold 20,273
----------------------------------------------------------------------------
Interest receivable 7,022,510
----------------------------------------------------------------------------
Receivable for Fund shares sold 453,212
----------------------------------------------------------------------------
Due from Adviser 29,803
----------------------------------------------------------------------------
Other assets 1,080
----------------------------------------------------------------------------
TOTAL ASSETS 438,974,104
----------------------------------------------------------------------------
LIABILITIES
Dividends payable 804,346
----------------------------------------------------------------------------
Payable for Fund shares redeemed 599,562
----------------------------------------------------------------------------
Payable for daily variation margin on open futures contracts 223,438
----------------------------------------------------------------------------
Accrued management fee 217,812
----------------------------------------------------------------------------
Accrued reorganization costs 44,005
----------------------------------------------------------------------------
Accrued Trustees' fees and expenses 62,512
----------------------------------------------------------------------------
Other accrued expenses and payables 87,410
----------------------------------------------------------------------------
Total liabilities 2,039,085
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $436,935,019
----------------------------------------------------------------------------
NET ASSETS
Net assets consist of:
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on:
----------------------------------------------------------------------------
Investment securities 7,091,957
----------------------------------------------------------------------------
Futures 112,881
----------------------------------------------------------------------------
Accumulated net realized gain (loss) (11,431,848)
----------------------------------------------------------------------------
Paid-in capital 441,162,029
----------------------------------------------------------------------------
NET ASSETS, AT VALUE $436,935,019
----------------------------------------------------------------------------
NET ASSET VALUE
CLASS S SHARES
Net Asset Value, offering and redemption price per share
($436,443,861 / 36,773,001 outstanding shares of
beneficial interest, $.01 par value, unlimited number of
shares authorized) $11.87
----------------------------------------------------------------------------
CLASS A SHARES
Net Asset Value and redemption price per share ($246,117 /
20,756 outstanding shares of beneficial interest, $.01 par
value, unlimited number of shares authorized) $11.86
----------------------------------------------------------------------------
Maximum offering price per share (100 / 95.50 of $11.86) $12.42
----------------------------------------------------------------------------
CLASS B SHARES
Net Asset Value, offering and redemption price (subject to
contingent deferred sales charge) per share ($209,355 /
17,647 outstanding shares of beneficial interest, $.01 par
value, unlimited number of shares authorized) $11.86
----------------------------------------------------------------------------
CLASS C SHARES
Net Asset Value, offering and redemption price (subject to
contingent deferred sales charge) per share ($35,686 /
3,008 outstanding shares of beneficial interest, $.01 par
value, unlimited number of shares authorized) $11.86
----------------------------------------------------------------------------
</TABLE>
20 The accompanying notes are an integral part of the financial statements.
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
For the year ended May 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Interest $ 26,586,349
----------------------------------------------------------------------------
Expenses:
Management fee 2,690,614
----------------------------------------------------------------------------
Services to shareholders 612,246
----------------------------------------------------------------------------
Custodian and accounting fees 99,139
----------------------------------------------------------------------------
Distribution services fees 90
----------------------------------------------------------------------------
Administrative services fees 55
----------------------------------------------------------------------------
Auditing 51,867
----------------------------------------------------------------------------
Legal 11,979
----------------------------------------------------------------------------
Trustees' fees and expenses 103,983
----------------------------------------------------------------------------
Reports to shareholders 25,429
----------------------------------------------------------------------------
Registration fees 58,877
----------------------------------------------------------------------------
Reorganization 49,110
----------------------------------------------------------------------------
Other 53,415
----------------------------------------------------------------------------
Total expenses, before expense reductions 3,756,804
----------------------------------------------------------------------------
Expense reductions (71,315)
----------------------------------------------------------------------------
Total expenses, after expense reductions 3,685,489
----------------------------------------------------------------------------
NET INVESTMENT INCOME 22,900,860
----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (7,062,599)
----------------------------------------------------------------------------
Futures 1,461,286
----------------------------------------------------------------------------
(5,601,313)
----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) during the period
on:
Investments (22,507,180)
----------------------------------------------------------------------------
Futures (25,063)
----------------------------------------------------------------------------
(22,532,243)
----------------------------------------------------------------------------
Net gain (loss) on investment transactions (28,133,556)
----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ (5,232,696)
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 21
<PAGE>
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEAR ENDED
MAY 31, MAY 31, DECEMBER 31,
2000 1999 1998
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 22,900,860 9,072,350 19,190,928
---------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment
transactions (5,601,313) 330,513 768,029
---------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) on investment transactions
during the period (22,532,243) (8,837,591) 3,727,480
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (5,232,696) 565,272 23,686,437
---------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income--Class S shares (22,899,579) (9,072,350) (19,191,807)
---------------------------------------------------------------------------------------------------------
Net investment income--Class A shares (634) -- --
---------------------------------------------------------------------------------------------------------
Net investment income--Class B shares (498) -- --
---------------------------------------------------------------------------------------------------------
Net investment income--Class C shares (149) -- --
---------------------------------------------------------------------------------------------------------
Fund share transactions:
Proceeds from shares sold 206,693,996 89,063,593 173,275,197
---------------------------------------------------------------------------------------------------------
Reinvestment of distributions 15,204,758 6,549,592 12,853,477
---------------------------------------------------------------------------------------------------------
Cost of shares redeemed (206,909,446) (69,149,802) (95,191,076)
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from Fund share transactions 14,989,308 26,463,383 90,937,598
---------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets (13,144,248) 17,956,305 95,432,228
---------------------------------------------------------------------------------------------------------
Net assets at beginning of period 450,079,267 432,122,962 336,690,734
---------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 436,935,019 450,079,267 432,122,962
---------------------------------------------------------------------------------------------------------
</TABLE>
22 The accompanying notes are an integral part of the financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
THE PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
<CAPTION>
2000(A) 2000(A) 2000(A)
<S> <C> <C> <C>
------------------------------------------------ ------ ------ ------
Net asset value, beginning of period $12.02 $12.02 $12.02
------------------------------------------------ ------ ------ ------
Income (loss) from investment operations:
Net investment income .06 .05 .05
------------------------------------------------ ------ ------ ------
Net realized and unrealized gain (loss) on
investment transactions (.16) (.16) (.16)
------------------------------------------------ ------ ------ ------
Total from investment operations (.10) (.11) (.11)
------------------------------------------------ ------ ------ ------
Less distributions from:
Net investment income (.06) (.05) (.05)
------------------------------------------------ ------ ------ ------
Net asset value, end of period $11.86 $11.86 $11.86
------------------------------------------------ ------ ------ ------
TOTAL RETURN (%)(B)(C) (.77) (.92) (.92)
<CAPTION>
RATIOS TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA
<S> <C> <C> <C>
Net assets, end of period ($ thousands) 246 209 36
------------------------------------------------ ------ ------ ------
Ratio of expenses before expense reductions (%) .11** .19** .20**
------------------------------------------------ ------ ------ ------
Ratio of expenses after expense reductions (%) .07** .14** .14**
------------------------------------------------ ------ ------ ------
Ratio of net investment income (%) .52** .45** .45**
------------------------------------------------ ------ ------ ------
Portfolio turnover rate (%) 62 62 62
------------------------------------------------ ------ ------ ------
</TABLE>
(a) For the period May 1, 2000 (commencement of sales of Class A, B and C
shares) to May 31, 2000.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
The accompanying notes are an integral part of the financial statements. 23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES Scudder High Yield Tax Free Fund (the "Fund") is a
diversified series of Scudder Municipal Trust (the
"Trust") which is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"),
as an open-end management investment company
organized as a Massachusetts business trust. On
August 10, 1998, the Board of Trustees of the Trust
changed the fiscal year end of the Fund from
December 31 to May 31.
Beginning May 1, 2000, the Fund offers multiple
classes of shares. Class A shares are offered to
investors subject to an initial sales charge. Class
B shares are offered without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and a contingent deferred sales
charge payable upon certain redemptions. Class B
shares automatically convert to Class A shares six
years after issuance. Class C shares are offered
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions within one year of purchase.
Class C shares do not convert into another class.
Class S shares, generally not available to new
investors, are not subject to initial or contingent
deferred sales charges. Certain detailed financial
information for the Class A, B and C shares is
provided separately and is available upon request.
Investment income, realized and unrealized gains
and losses, and certain fund-level expenses and
expense reductions, if any, are borne pro rata on
the basis of relative net assets by the holders of
all classes of shares except that each class bears
certain expenses unique to that class such as
distribution services, shareholder services,
administrative services and certain other class
specific expenses. Differences in class expenses
may result in payment of different per share
dividends by class. All shares of the Fund have
equal rights with respect to voting subject to
class specific arrangements.
The Fund's financial statements are prepared in
accordance with accounting principles generally
accepted in the United States which require the use
of management estimates. The policies described
below are followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Portfolio debt securities
purchased with an original maturity greater than
sixty days are valued by pricing agents approved by
the officers of the Trust, whose quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost.
All other securities are valued at their fair value
as determined in good faith by the Valuation
Committee of the Board of Trustees.
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 a financial
instrument at a specified price on a specific date
(settlement date). During the period, the Fund
purchased index futures to manage the duration of
the portfolio. In addition, the Fund also sold
index futures to hedge against declines in the
value of portfolio securities.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 depending
upon the daily fluctuations in the value of the
underlying security and are recorded for financial
reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction,
the Fund will realize a gain or loss equal to the
difference between the value of the futures
contract to sell and the futures contract to buy.
Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures
contracts, including the risk that an illiquid
secondary market will limit the Fund's ability to
close out a futures contract prior to the
settlement date and that a change in the value of a
futures contract may not correlate exactly with the
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.
FEDERAL INCOME TAXES. The Fund's policy is to
comply with the requirements of the Internal
Revenue Code, as amended, which are applicable to
regulated investment companies and to distribute
all of its taxable and tax-exempt income to its
shareholders. Accordingly, the Fund paid no federal
income taxes and no federal income tax provision
was required.
At May 31, 2000, the Fund had a net tax basis
capital loss carryforward of approximately
$6,600,000 which may be applied against any
realized net taxable capital gains of each
succeeding year, until fully utilized or until May
31, 2005 ($3,900,000) and May 31, 2008
($2,700,000), the respective expiration dates or
whichever occurs first.
In addition, from November 1, 1999 through May 31,
2000 the Fund incurred approximately $3,600,000 of
net realized capital losses. As permitted by tax
regulations, the Fund intends to elect to defer
these losses and treat them as arising in the
fiscal year ending May 31, 2001.
DISTRIBUTION OF INCOME AND GAINS. All of the net
investment income of the Fund is declared as a
daily dividend and is distributed to shareholders
monthly. 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 at least annually.
The timing and characterization of certain income
and capital gains distributions are determined
annually in accordance with federal tax regulations
which may differ from accounting principles
generally accepted in the United States. 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.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Interest income is recorded on
the accrual basis. Realized gains and losses from
investment transactions are recorded on an
identified cost basis.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
All premium and original issue discounts are
amortized/accreted for both tax and financial
reporting purposes.
--------------------------------------------------------------------------------
2 PURCHASES AND SALES
OF SECURITIES During the year ended May 31, 2000, purchases and
sales of municipal securities (excluding short-term
investments) aggregated $259,408,311 and
$255,052,118, respectively.
--------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. Under the Investment
Management Agreement (the "Agreement") with Scudder
Kemper Investments, Inc. ("Scudder Kemper" or the
"Adviser"), the Adviser directs the investments of
the Fund in accordance with its investment
objective, 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 0.65% on
the first $300,000,000 of the Fund's average daily
net assets and 0.60% of such net assets in excess
of $300,000,000, computed and accrued daily and
payable monthly. Effective May 1, 2000, the Adviser
agreed to maintain the annualized expenses of the
classes of the Fund until October 1, 2000 as
follows: Class S shares 0.80%, Class A shares
0.80%, Class B shares 1.60% and Class C shares
1.58%. Included in expense reductions is $26,253
due from the Adviser. For the year ended May 31,
2000, the fee pursuant to this agreement aggregated
$2,690,614, which was equivalent to an annual
effective rate of 0.64% of the Fund's average daily
net assets.
DISTRIBUTION SERVICE AGREEMENT. In accordance with
Rule 12b-1 under the 1940 Act, Kemper Distributors,
Inc. ("KDI"), a subsidiary of the Adviser, receives
a fee of 0.75% of average daily net assets of
Classes B and C. Pursuant to the agreement, KDI
enters into related selling group agreements with
various firms at various rates for sales of Class B
and C shares. For the year ended May 31, 2000, the
Distribution Fee was as follows:
<TABLE>
<CAPTION>
TOTAL UNPAID AT
DISTRIBUTION FEE AGGREGATED MAY 31, 2000
----------------------------------------------------------------------------
<S> <C> <C>
Class B.......................................... $69 $69
Class C.......................................... 21 21
--- ---
$90 $90
</TABLE>
UNDERWRITING AGREEMENT AND CONTINGENT DEFERRED
SALES CHARGE. KDI is the principal underwriter for
Classes A, B and C. Underwriting commissions paid
in connection with the distribution of Class A
shares for the year ended May 31, 2000 aggregated
$225, of which none was paid to other firms.
In addition, KDI receives any contingent deferred
sales charge (CDSC) from Class B share redemptions
occurring within six years of purchase and Class C
share redemptions occurring within one year of
purchase. There is no such charge upon redemption
of any share appreciation or reinvested dividends.
Contingent deferred sales charges are based on
declining rates ranging from 4% to 1% for Class B
and 1% for Class C, of the value of the shares
redeemed. For the year ended May 31, 2000, there
was no CDSC for Classes B and C.
ADMINISTRATIVE SERVICES FEES. KDI provides
information and administrative services to Classes
A, B and C shareholders at an annual rate of up to
0.25% of
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS
average daily net assets for each such class. KDI
in turn has various agreements with financial
services firms that provide these services and pays
these firms based upon the assets of shareholder
accounts the firms service. For the year ended May
31, 2000, the Administrative Services Fee was as
follows:
<TABLE>
<CAPTION>
TOTAL FEES WAIVED UNPAID AT
ADMINISTRATIVE SERVICES FEE AGGREGATED BY KDI MAY 31, 2000
------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A.............................. $25 $-- $25
Class B.............................. 23 -- 23
Class C.............................. 7 -- 7
--- -- ---
$55 $-- $55
</TABLE>
SHAREHOLDER SERVICES FEES. Kemper Service Company
("KSC"), an affiliate of the Adviser, is the
transfer, dividend-paying and shareholder service
agent for the Fund's Classes A, B and C shares. For
the year ended May 31, 2000, the amount charged to
Classes A, B and C by KSC aggregated $4, $7, and
$4, respectively, all of which is unpaid at May 31,
2000. Scudder Service Corporation ("SSC"), a
subsidiary of the Adviser, is the transfer,
dividend-paying and shareholder service agent for
the Class S shares. For the year ended May 31,
2000, the amount charged to the Class S shares by
SSC for shareholder services aggregated $304,605,
of which $25,663 is unpaid at May 31, 2000.
FUND ACCOUNTING FEES. Scudder Fund Accounting
Corporation ("SFAC"), a subsidiary of the Adviser,
is responsible for determining the daily net asset
value per share and maintaining the portfolio and
general accounting records of the Fund. For the
year ended May 31, 2000, the amount charged to the
Fund by SFAC aggregated $76,576, of which $10,469
is unpaid at May 31, 2000.
TRUSTEES' FEES. The Trust pays each Trustee not
affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus
specified amounts for attended board and committee
meetings. For the year ended May 31, 2000,
Trustees' fees and expenses aggregated $44,376. In
addition, a one-time fee of $59,607 for Class S
shares was accrued for payment to those Trustees
not affiliated with the Adviser who are not
standing for re-election, under the reorganization
discussed in Note F. Inasmuch as the Adviser will
also benefit from administrative efficiencies of a
consolidated Board, the Adviser has agreed to bear
$29,803 of such costs.
--------------------------------------------------------------------------------
4 EXPENSE OFF-SET
ARRANGEMENTS The Fund has entered into arrangements with its
custodian and transfer agent whereby credits
realized as a result of uninvested cash balances
were used to reduce a portion of the Fund's
expenses. During the year ended May 31, 2000, the
Fund's custodian and transfer agent fees (Class S
shares only) were reduced by $2,414 and $12,845,
respectively, under these arrangements.
--------------------------------------------------------------------------------
5 LINE OF CREDIT The Fund and several Scudder Funds (the
"Participants") share in a $1 billion revolving
credit facility for temporary or emergency
purposes, including the meeting of redemption
requests that otherwise might require the untimely
disposition of securities. The Participants are
charged an annual commitment fee which is
allocated, pro rata based upon net assets, among
each of the Participants. Interest is calculated
based on the market rates at the time of the
borrowing. The Fund may borrow up to a maximum of
33 percent of its net assets under the agreement.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6 REORGANIZATION In early 2000, Scudder Kemper initiated a
restructuring program for most of its Scudder
no-load open-end funds in response to changing
industry conditions and investor needs. The program
proposes to streamline the management and
operations of most of the no-load open-end funds
Scudder Kemper advises principally through the
liquidation of several small funds, mergers of
certain funds with similar investment objectives,
the creation of one Board of Directors/ Trustees
and the adoption of an administrative fee covering
the provision of most of the services currently
paid for by the affected funds. Costs incurred in
connection with this restructuring initiative for
Class S shares are being borne jointly by Scudder
Kemper and certain of the affected funds. These
costs, including printing, shareholder meeting
expenses and professional fees, are presented as
reorganization expenses in the Statement of
Operations of the Fund.
--------------------------------------------------------------------------------
7 SHARE TRANSACTIONS The following tables summarize share and dollar
activity in the Fund:
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31, 2000
-------------------------------
SHARES DOLLARS
<S> <C> <C>
SHARES SOLD
Class A shares 27,398 $ 324,369
----------------------------------------------------------------------------
Class B shares 17,635 208,844
----------------------------------------------------------------------------
Class C shares 2,995 36,000
----------------------------------------------------------------------------
Class S shares 17,085,134 206,124,783
----------------------------------------------------------------------------
17,133,162 206,693,996
----------------------------------------------------------------------------
SHARES ISSUED TO SHAREHOLDERS IN REINVESTMENT OF DISTRIBUTIONS
Class A shares 50 590
----------------------------------------------------------------------------
Class B shares 12 142
----------------------------------------------------------------------------
Class C shares 13 149
----------------------------------------------------------------------------
Class S shares 1,253,142 15,203,877
----------------------------------------------------------------------------
1,253,217 15,204,758
----------------------------------------------------------------------------
SHARES REDEEMED
Class A shares (6,692) (79,462)
----------------------------------------------------------------------------
Class B shares -- --
----------------------------------------------------------------------------
Class C shares -- --
----------------------------------------------------------------------------
Class S shares (17,028,771) (206,829,984)
----------------------------------------------------------------------------
(17,035,463) (206,909,446)
----------------------------------------------------------------------------
NET INCREASE (DECREASE)
Class A shares 20,756 245,497
----------------------------------------------------------------------------
Class B shares 17,647 208,986
----------------------------------------------------------------------------
Class C shares 3,008 36,149
----------------------------------------------------------------------------
Class S shares 1,309,505 14,498,676
----------------------------------------------------------------------------
1,350,916 $ 14,989,308
----------------------------------------------------------------------------
</TABLE>
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEAR ENDED
MAY 31, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
SHARES DOLLARS SHARES DOLLARS
<S> <C> <C> <C> <C>
SHARES SOLD
Class S shares 6,916,529 $ 89,063,593 13,488,602 $173,275,197
---------------------------------------------------------------------------------
SHARES ISSUED TO SHAREHOLDERS IN REINVESTMENT OF DISTRIBUTIONS
Class S shares 509,777 6,549,592 1,000,254 12,853,477
---------------------------------------------------------------------------------
SHARES REDEEMED
Class S shares (5,377,235) (69,149,802) (7,412,740) (95,191,076)
---------------------------------------------------------------------------------
NET INCREASE (DECREASE)
Class S shares 2,049,071 $ 26,463,383 7,076,116 $ 90,937,598
---------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE TRUSTEES OF SCUDDER MUNICIPAL TRUST AND TO THE CLASS A, CLASS B AND CLASS
C SHAREHOLDERS OF SCUDDER HIGH YIELD TAX FREE FUND:
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations and
of changes in net assets and the financial highlights for the Class A, Class B
and Class C shares present fairly, in all material respects, the financial
position of Scudder High Yield Tax Free Fund (the "Fund") at May 31, 2000, the
results of its operations, the changes in its net assets, and the financial
highlights for the Class A, Class B and Class C shares for the periods indicated
therein, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights for the Class
A, Class B and Class C shares (hereafter referred to as "financial statements")
are the responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at May 31,
2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
July 20, 2000
30
<PAGE>
TAX INFORMATION
TAX INFORMATION
Of the dividends paid from net investment income for the taxable year ended May
31, 2000, 100% are designated as exempt interest dividends for federal income
tax purposes.
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 account, please call 1-800-SCUDDER.
31
<PAGE>
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
HENRY P. BECTON, JR. PHILIP G. CONDON JOHN R. HEBBLE
Trustee Vice President Treasurer
LINDA C. COUGHLIN ASHTON P. GOODFIELD CAROLINE PEARSON
Trustee and President Vice President Assistant Secretary
DAWN-MARIE DRISCOLL ANN M. MCCREARY
Trustee Vice President
PETER B. FREEMAN JOHN MILLETTE
Trustee Vice President and
GEORGE M. LOVEJOY, JR. Secretary
Trustee
WESLEY W. MARPLE, JR.
Trustee
KATHRYN L. QUIRK
Trustee, Vice President
and Assistant Secretary
JEAN C. TEMPEL
Trustee
</TABLE>
<TABLE>
<S> <C>
.............................................................................................
LEGAL COUNSEL WILLKIE FARR & GALLAGHER
787 Seventh Avenue
New York, NY 10019
.............................................................................................
SHAREHOLDER SERVICE AGENT KEMPER SERVICE COMPANY
P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02109
.............................................................................................
TRANSFER AGENT KEMPER SERVICE COMPANY
P.O. Box 219557
Kansas City, MO 64121
.............................................................................................
INDEPENDENT AUDITORS PRICEWATERHOUSECOOPERS LLP
160 Federal Street
Boston, MA 03110
.............................................................................................
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
[SCUDDER INVESTMENTS LOGO]
Printed in the U.S.A. on recycled paper.
This report is not to be distributed
unless preceded or accompanied by a
Scudder High Yield Tax Free Fund prospectus.
SHTF - 2(7/27/00) 1116480
