SCUDDER
INVESTMENTS(SM)
[LOGO]
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BOND/TAX FREE
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Scudder Medium Term
Tax Free Fund
Fund #045
Annual Report
May 31, 2000
The fund seeks a high level of income free from regular federal income taxes and
seeks to limit principal fluctuation.
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
14 Glossary of Investment Terms
15 Investment Portfolio
23 Financial Statements
26 Financial Highlights
27 Notes to Financial Statements
31 Report of Independent Accountants
32 Tax Information
33 Officers and Trustees
34 Investment Products and Services
36 Scudder Solutions
2 | Scudder Medium Term Tax Free Fund
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Scudder Medium Term Tax Free Fund
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ticker symbol SCMTX fund number 045
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Date of o In an environment of rising interest rates,
Inception: Scudder Medium Term Tax Free Fund posted a
4/12/83 total return of -0.20% for its most recent
fiscal year ended May 31, 2000. The fund's
return outpaced the -1.04% average
Total Net performance of the fund's peers over the
Assets as of same period, according to Lipper.
5/31/00:
$522 million o For the one-, three-, five-, and 10-year
periods, the fund's total returns placed it
in the top quartile of similar municipal
bond funds as tracked by Lipper Analytical
Services. Please see page 9 for additional
Lipper performance information.
o As of May 31, 2000, Scudder Medium Term Tax
Free Fund's 30-day net annualized SEC yield
was 4.79%, equivalent to a 7.48% taxable
yield for investors subject to the 36%
federal income tax rate.
o Scudder Medium Term 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.
Scudder Medium Term Tax Free Fund | 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 Scudder
Medium Term Tax Free Fund's most recent fiscal year ended May 31, 2000. The fund
posted a -0.20% total return during the period, but outperformed the -1.04%
average return of its peers for the same period as compiled by Lipper. To match
the fund's tax-free 4.79% 30-day SEC yield on May 31, a taxable investment for
investors in the 36% tax bracket would have had to yield 7.48%. 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 compared with Treasuries, 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 | Scudder Medium Term Tax Free Fund
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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 Medium Term Tax Free Fund, please call 1-800-SCUDDER, or visit Scudder's
Web site at www.scudder.com.
Sincerely,
/s/Linda C. Coughlin
Linda C. Coughlin
President,
Scudder Medium Term Tax Free Fund
Scudder Medium Term 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
LINE CHART DATA:
Scudder Medium Lehman Brothers
Term Tax Free Fund Municipal Bond Index*
'90 10000 10000
'91 10862 11008
'92 11933 12090
'93 13276 13537
'94 13719 13871
'95 14721 15135
'96 15400 15820
'97 16449 17139
'98 17712 18748
'99 18383 19624
'00 18347 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 Medium Term Tax Free Fund
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1 year $ 9,980 -.20% -.20%
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5 year $ 12,463 24.63% 4.50%
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10 year** $ 18,347 83.47% 6.26%
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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 the long-term, investment grade tax-exempt
bond market consisting of municipal bonds with a maturity of at least
two years. Generally, the Index's average effective maturity is longer
than the Fund's. Index returns assume dividends are reinvested and,
unlike Fund returns, do not reflect any fees or expenses.
** On November 1, 1990, the Fund adopted its present name and objectives.
Prior to that date, the Fund was known as the 1990 Portfolio of the
Scudder Tax Free Target Fund and its objective was to provide high
tax-free income and current liquidity. Since adopting its current
objectives, the cumulative and average annual total returns are 79.64%
and 6.30%, respectively.
6 | Scudder Medium Term Tax Free Fund
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Returns and Per Share Information
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Yearly periods ended May 31
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
Scudder Medium Lehman Brothers
Term Tax Free Fund Municipal Bond Index*
1991 8.62 10.08
1992 9.86 9.83
1993 11.26 11.97
1994 3.34 2.47
1995 7.30 9.11
1996 4.61 4.57
1997 6.81 8.29
1998 7.68 9.39
1999 3.79 4.67
2000 -0.20 -0.88
<TABLE>
<CAPTION>
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>
Fund Total
Return (%) 8.62 9.86 11.26 3.34 7.30 4.61 6.81 7.68 3.79 -.20
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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 ($) 10.27 10.60 11.09 10.80 11.01 10.92 11.10 11.38 11.26 10.68
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Income
Dividends ($) .60 .65 .64 .58 .55 .53 .52 .52 .51 .52
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Capital Gains
Distributions ($) -- .01 .03 .09 -- .07 .03 .04 .04 .04
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</TABLE>
* The unmanaged Lehman Brothers Municipal Bond Index is a market
value-weighted measure of the long-term, investment grade tax-exempt
bond market consisting of municipal bonds with a maturity of at least
two years. Generally, the Index's average effective maturity is longer
than the Fund's. Index returns assume dividends are reinvested and,
unlike Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. If the
Adviser had not maintained the Fund's expenses, the total returns for
the Fund would have been lower. Portfolio Summary
Scudder Medium Term Tax Free Fund | 7
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Diversification
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A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
Electric Utility Revenue 18% Diversification remains
Other General Obligation/ an important strategy
Lease 17% for the fund, allowing
State General Obligation/ us to spread risk over a
Lease 14% large number of sectors,
Core Cities/Lease 13% maturities and
Hospital/Health Revenue 9% geographic regions.
Sales/Special Tax 6%
Resource Recovery 4%
Miscellaneous Municipal 19%
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100%
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Quality
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A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
AAA 65% Overall portfolio
AA 12% quality remains high,
A 17% with over 75% of fund
BBB 4% holdings rated AAA or AA.
Not Rated 2%
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100%
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Weighted average quality: AA
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Effective Maturity
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A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
Less than 1 year 2% Our focus on six- to
1 < 5 years 42% eight-year maturities
5 < 10 years 36% during the period helped
10 < 15 years 20% the fund to outperform
----------------------------------- its peer group.
100%
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Weighted average effective maturity: 6.07 years
For more complete details about the Fund's investment portfolio, see page 15. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8 | Scudder Medium Term Tax Free Fund
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Portfolio Management Discussion
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May 31, 2000
Dear Shareholders,
Scudder Medium Term Tax Free Fund achieved its objectives and ranked in the top
quartile of similar 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 posted a -0.20% total return for the 12 months ended May 31, 2000. This
return placed the fund 30th out of 125 peers over the period as compiled by
Lipper Analytical Services, Inc. The fund's solid competitive results also
placed it in the top 25% of similar funds for the three-, five-, and 10-year
periods as shown in the table below.
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 -1.04% average return of similar
municipal
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Solid Competitive Results
(Average annual returns for periods ended May 31, 2000)
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Scudder Lipper
Medium Term Average Number
Tax Free Fund Annual of Funds Percentile
Period Return Return Rank Tracked Ranking
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1 Year -0.20% -1.04% 30 of 125 Top 24%
3 Years 3.71% 3.35% 29 of 115 Top 25%
5 Years 4.50% 4.12% 21 of 100 Top 21%
10 Years 6.26% 5.84% 4 of 24 Top 16%
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Past performance does not guarantee future results.
Scudder Medium Term Tax Free Fund | 9
<PAGE>
bond funds during the 12 months ended May 31, 2000. In addition, Scudder Medium
Term Tax Free Fund received a five-star (highest) rating from Morningstar as of
November 30 (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.
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 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. Longer-maturity municipal bond yields reached a historically
attractive ratio -- providing nearly all of the yield of comparable-maturity
Treasuries.
Fund Strategy
Scudder Medium Term Tax Free Fund's primary investment goals are to generate
high federally tax-free income while maintaining a significant degree of price
stability. 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
10 | Scudder Medium Term Tax Free Fund
<PAGE>
favorable stance over the near term. Accordingly, our recent portfolio strategy
has been to:
1) purchase bonds at the shorter end of our permissible range. Over the
period, the fund sold bonds where the municipal yield curve was
historically flat, and purchased bonds in the six- to eight-year range.
Our focus on shorter maturities helped the fund to outperform its peer
group.
2) swap securities to improve coupon position. We purchase premium coupon
bonds and sell bonds priced near par to avoid holding bonds that lose
value as they become subject to the market discount tax for potential
buyers. We also buy bonds after they become market discounts (i.e.,
when they are cheap) and have the opportunity for strong performance
when the market rallies. To offset recognized capital gains, we sell
bonds that are valued at a loss where possible.
In addition, the fund has maintained its cautious stance on the market with
respect to interest rate risk. As of May 31, the fund's average duration was
4.80 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.)
Longer-term, we continue to emphasize call protection when purchasing bonds for
the fund's portfolio. (Generally a bond is called in by its issuer so that it
can be refinanced at a lower prevailing rate.) Our call-protection strategy
provides a more reliable income stream for the fund than would exist if the
portfolio held a significant proportion of bonds that could be called in before
their stated maturities.
Lastly, the fund's overall level of portfolio quality remains high, with over
75% of the fund's portfolio rated AAA or AA, or of equivalent quality. And
diversification remains an important strategy for the fund, allowing us to
spread risk over a large number of sectors, maturities,
Scudder Medium Term Tax Free Fund | 11
<PAGE>
and geographic areas. As of May 31, the fund held securities issued in 32 states
plus the District of Columbia and the Virgin Islands. The Portfolio Summary on
page 8 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 municipal yields still
close to those of comparable Treasuries, and tax-equivalent yields near
double-digit levels for investors in the highest tax brackets. In January 2000,
The Bond Buyer's Revenue Bond Index (comprised of long-maturity, A-rated bonds)
reached 6.35%, the highest level since August 1995.
In terms of fund strategy, if the yield curve remains relatively flat, we will
continue to seek competitive returns by purchasing six- to eight-year premium
cushion bonds and noncallable bonds. And 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/Ashton P. Goodfield /s/Philip G. Condon
Ashton P. Goodfield Philip G. Condon
12 | Scudder Medium Term Tax Free Fund
<PAGE>
Scudder Medium Term Tax Free Fund:
A Team Approach to Investing
Scudder Medium Term 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 Ashton P. Goodfield, who joined the Adviser in 1986,
assumed responsibility for the fund's day-to-day management and overall
investment strategies in 1994. Ms. Goodfield has been a portfolio manager for
the Adviser since 1990.
Portfolio manager Philip G. Condon joined the team in 1998 and joined the
Adviser in 1983. Mr. Condon has 22 years of experience in municipal investing
and portfolio management.
Scudder Medium Term Tax Free Fund | 13
<PAGE>
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 based on the sum of
Value (NAV) the market value of all the securities owned by the fund
divided by the number of outstanding shares.
Taxable The level of yield a fully taxable instrument would have
Equivalent to provide to equal that of a tax-free municipal bond
Yield on an after-tax basis.
30-Day SEC The standard yield reference for bond funds, based on a
Yield formula prescribed by the SEC. This annualized yield
calculation reflects the 30-day average of the income
earnings of every holding in a given fund's portfolio, net
of expenses, assuming each is held to maturity.
Total Return The most common yardstick to measure the performance of a
fund. Total return -- annualized or 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.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
14 | Scudder Medium Term Tax Free Fund
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Investment Portfolio as of May 31, 2000
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<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
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Short-Term Municipal Investments 0.4%
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<S> <C> <C>
District of Columbia
District of Columbia, General Obligation, General
Fund Recovery, Series 1991 B, Daily Demand Note, ------------
4.5%, 6/1/2003* (Cost $2,000,000) ....................... 2,000,000 2,000,000
------------
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Long-Term Municipal Investments 99.6%
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Alaska
North Slope Borough, AK, General Obligation:
Series 1992 A, Zero Coupon, 6/30/2002 (b) ............ 3,275,000 2,936,856
Series 1992 A, Zero Coupon, 6/30/2003 (b) ............ 7,000,000 5,935,860
Series 1994 B, Zero Coupon, 6/30/2004 (b) ............ 19,500,000 15,637,245
Series 1995 A, Zero Coupon, 6/30/2006 (b) ............ 11,150,000 7,963,442
Arizona
Arizona Health Facilities Authority, Phoenix Baptist
Hospital and Medical Center, Series 1992, ETM, 6.1%,
9/1/2003 (b)** ....................................... 2,000,000 2,061,420
Maricopa County, AZ, School District #28, Kyrene
Elementary School, Series 1993 B, Zero Coupon,
7/1/2003 ............................................. 2,000,000 1,701,580
Maricopa County, AZ, School District #41:
Capital Appreciation Bond:
Series 1993, Zero Coupon, 1/1/2004 (b) ............ 6,000,000 4,964,040
Series 1994, Zero Coupon, 7/1/2006 (b) ............ 7,605,000 5,480,011
Gilbert School:
Series 1994, Zero Coupon, 7/1/2005 (b) ............ 1,790,000 1,364,607
Series 1994, Zero Coupon, 1/1/2006 (b) ............ 2,925,000 2,165,231
Arkansas
Rogers, AR, Sales & Use Tax Revenue, Series 1996, 5.35%,
11/1/2011 ............................................ 2,500,000 2,517,825
California
California Health Facilities Finance Authority, Summit
Medical Center, Series 1996 A, 6%, 5/1/2006 (b) ...... 3,150,000 3,321,014
Foothill Eastern Transportation Corridor Agency, CA, Toll
Road Revenue, Series 1995 A, Step-up Coupon,
0% to 1/1/2005, 7.05% to 1/1/2009 .................... 7,275,000 6,023,991
Long Beach, CA, Aquarium of the Pacific Project, Series
1995 A, 5.75%, 7/1/2005 .............................. 1,300,000 1,299,922
Colorado
Colorado Housing Finance Authority, Single Family
Mortgage Revenue, Series D, 6.125%, 11/1/2023 ........ 7,645,000 7,620,918
</TABLE>
The accompanying notes are an integral part of the financial statements.
Scudder Medium Term Tax Free Fund | 15
<PAGE>
<TABLE>
<CAPTION>
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Principal
Amount ($) Value ($)
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<S> <C> <C>
Connecticut
Bristol, CT, Resource Recovery, Ogden Martin System,
Series 1995, 6.125%, 7/1/2003 ............................ 8,750,000 8,821,400
Connecticut State Health and Educational Facilities
Authority, Windham Community Memorial Hospital,
Series 1996 C, 5.75%, 7/1/2011 ........................... 3,300,000 2,921,325
District of Columbia
District of Columbia, Certificate of Participation,
Series 1993, 6.875%, 1/1/2003 ............................ 1,380,000 1,395,125
District of Columbia, General Obligation:
Series 1989 B, Zero Coupon, 6/1/2001 (b) ................. 7,100,000 6,759,697
Series 1992 A, ETM, 5.8%, 6/1/2004 (b)** ................. 3,415,000 3,490,984
Series 1993 A, 5.625%, 6/1/2002 (b) ...................... 2,240,000 2,262,086
Series 1993 A, 5.8%, 6/1/2004 (b) ........................ 3,535,000 3,606,902
Series 1993 A, 4.95%, 6/1/2005 (b) ....................... 2,030,000 1,997,926
Series 1993 A, ETM, 5.875%, 6/1/2005 (b)** ............... 1,790,000 1,841,803
Series 1993 A, 5.875%, 6/1/2005 (b) ...................... 1,860,000 1,907,263
Series 1993 B, 5.3%, 6/1/2005 (b) ........................ 8,000,000 7,996,560
District of Columbia Redevelopment Land Agency,
Revenue, Series 1996, 5.625%, 11/1/2010 .................. 1,550,000 1,556,216
District of Columbia Water and Sewer Authority,
Public Utility Revenue, Series 1998, 6%, 10/1/2013 (b) ... 3,630,000 3,757,885
Florida
Dade County, FL, Guaranteed Entitlement Revenue:
Series 1990, Zero Coupon, Prerefunded 2/1/2006,
8/1/2014 (b) (c) .................................... 4,000,000 1,629,760
Series 1990, Zero Coupon, Prerefunded 2/1/2006,
8/1/2018 (b) (c) .................................... 6,000,000 1,792,320
Georgia
Forsyth County, GA, School District, Series 1999,
6%, 2/1/2014 ............................................. 1,000,000 1,028,650
State of Georgia, General Obligation, Series 1999 B,
6.75%, 9/1/2010 .......................................... 5,370,000 5,952,215
Hawaii
State of Hawaii, General Obligation, Series 1993 C, 4.75%,
11/1/2008 ................................................ 7,050,000 6,571,094
Illinois
Chicago, IL, Water Revenue, Series 1997, Zero Coupon,
11/1/2011 (b) ............................................ 5,000,000 2,588,650
Cook County, IL, General Obligation, Series 1999 B,
5.125%, 11/15/2011 (b) ................................... 3,060,000 2,928,757
Cook County, IL, School District 401, Elmwood Park,
Series 1997, Zero Coupon, 12/1/2007 (b) .................. 2,180,000 1,438,560
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 | Scudder Medium Term Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
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Principal
Amount ($) Value ($)
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<S> <C> <C>
Hoffman Estates, IL, Tax Increment Revenue:
Series 1991, Zero Coupon, 5/15/2004 .................... 2,450,000 1,967,669
Series 1991, Zero Coupon, 5/15/2006 .................... 8,500,000 6,075,035
Illinois Development Finance Authority, Commonwealth
Edison, Series 1994, 5.3%, 1/15/2004 (b) ............... 7,500,000 7,516,650
Illinois Educational Facilities Authority, Loyola University,
Series 1991 A, ETM, Zero Coupon, 7/1/2002 (b)** ........ 2,130,000 1,912,783
Illinois Health Facilities Authority, Evangelical Hospitals,
Series 1992 B, ETM, 6.1%, 4/15/2001 (b)** .............. 1,240,000 1,254,496
Illinois State First Series, 6%, 1/1/2012 (b) ............... 3,305,000 3,411,718
Illinois State Toll Highway Authority, Series 1998 A, 5.5%,
1/1/2013 (b) ........................................... 2,200,000 2,182,158
Kendall, Kane and Will Counties, IL, School District #308,
Series 1991, Zero Coupon, 3/1/2003 (b) ................. 1,345,000 1,161,677
Metropolitan Pier and Exposition Authority of Illinois,
Series 1992, Zero Coupon, 6/15/2004 (b) ................ 10,500,000 8,450,295
Rosemont, IL, Series 1990 B, Zero Coupon, 12/1/2002 (b) ..... 2,785,000 2,443,615
Rosemont, IL, Series 1990 C, Zero Coupon, 12/1/2002 (b) ..... 3,345,000 2,934,970
State of Illinois, General Obligation, Series 1994, 4.6%,
12/1/2005 (b) .......................................... 5,000,000 4,811,350
Indiana
Indianapolis, IN, Local Improvements, Series 1992 B,
6%, 1/10/2013 (b) ...................................... 3,000,000 3,107,700
Indianapolis, IN, Local Improvements, Series 1992 D,
6.75%, 2/1/2014 (b) .................................... 8,000,000 8,775,520
Indianapolis, IN, Resource Recovery Revenue, Ogden
Martin Systems Inc. Project, Series 1996, 6.75%,
12/1/2007 (b) .......................................... 6,000,000 6,447,900
Madison County, IN, Hospital Authority, Holy Cross
Health System, Series 1991, 6.7%, Prerefunded
12/1/2001, 12/1/2002 (b) (c) ........................... 1,385,000 1,446,106
Iowa
Iowa Certificate of Participation, Series 1992 A, 6.25%,
7/1/2002 (b) ........................................... 5,000,000 5,105,100
Iowa Finance Authority, Hospital Facilities Revenue, 6.5%,
2/15/2007 (b) .......................................... 2,000,000 2,057,640
Kansas
Kansas City, KS, Utility System Revenue:
Series 1991, ETM, Zero Coupon, 3/1/2003 (b)** .......... 3,850,000 3,333,253
Series 1991, Zero Coupon, 3/1/2003 (b) ................. 2,750,000 2,379,630
Louisiana
Jefferson Parish, LA, School Board Sales and Use Tax
Revenue, Series 1986 A, ETM, 7.35%, 2/1/2003** ......... 5,055,000 5,301,330
</TABLE>
The accompanying notes are an integral part of the financial statements.
Scudder Medium Term Tax Free Fund | 17
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
-------------------------------------------------------------------------------------
<S> <C> <C>
Lousiana Housing Finance Agency, Single Family Mortgage
Revenue, Series 1995 C-1, 5.125%, 12/1/2010 (b) ...... 510,000 486,101
Louisiana Regional Transportation Authority, Series 1998 A,
7.95%, 12/1/2013 ..................................... 2,815,000 3,411,836
Orleans, LA, Levee District, Series 1986, 5.95%,
11/1/2014 (b) ........................................ 1,755,000 1,781,641
Massachusetts
Massachusetts General Obligation:
Series 1992 A, 6.4%, 8/1/2003 ........................ 1,000,000 1,038,020
Series 1992 B, 6.375%, 8/1/2002 ...................... 2,150,000 2,209,813
Massachusetts Housing Finance Agency:
1992 Series C, 6.25%, 5/15/2002 ...................... 2,000,000 2,044,100
1992 Series C, 6.25%, 11/15/2002 ..................... 3,420,000 3,513,571
Massachusetts State Industrial Finance Agency:
North Andover Solid Waste, Series 1993 A,
6.15%, 7/1/2002 ................................. 3,250,000 3,278,145
Sturdy Memorial Hospital, Series 1989, 7.9%, 6/1/2009 1,440,000 1,457,683
Michigan
Detroit, MI, General Obligation:
Series 1999 B, 5.875%, 4/1/2013 (b) .................. 2,410,000 2,449,861
Series 1999 B, 5.875%, 4/1/2014 (b) .................. 2,555,000 2,586,299
Forest Hills, MI, Public Schools, General Obligation,
Series 1999, 5%, 5/1/2013 (b) ........................ 1,525,000 1,441,598
Michigan Municipal Bond Authority, Local Government
Loan Program, Series 1999, Zero Coupon,
6/15/2006 (b) ........................................ 4,750,000 3,424,940
Michigan State Hospital Finance Authority, Series 1999 A,
6%, 5/15/2014 (b) .................................... 3,000,000 3,047,070
Romulus, MI, School District, Series 1992-ll, Zero Coupon,
Prerefunded 5/1/2007, 5/1/2022 (c) ................... 12,400,000 3,120,212
Mississippi
Mississippi Higher Education Assistance Corp.,
Series 1992 A, 6.2%, 1/1/2002 ........................ 1,200,000 1,215,624
Nevada
Clark County, NV, School District, General Obligation:
Series 1997 B, 6.5%, 6/15/2007 (b) ................... 7,000,000 7,462,630
Series 1999, 5.25%, 6/15/2013 (b) .................... 5,000,000 4,777,100
Nevada State Housing Division, Single Family Mortgage
Revenue, Series 1993 R, 5.95%, 10/1/2011 (b) ......... 985,000 986,537
New Hampshire
New Hampshire Higher Education and Health Authority
Revenue, Series 1997 A, 5.75%, 8/1/2011 .............. 1,300,000 1,151,865
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 | Scudder Medium Term Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
<S> <C> <C>
New York
Metropolitan Transportation Authority of New York:
Commuter Facilities Revenue:
Series 1991, 6.75%, 7/1/2000 ................... 1,200,000 1,201,812
Series 1991, 6.9%, 7/1/2001 .................... 1,280,000 1,305,613
Transit Facilities:
Series 1991, 6.75%, 7/1/2000 ................... 2,270,000 2,273,428
Series 1991, 6.9%, 7/1/2001 .................... 2,415,000 2,463,324
Series 1993 O, 5.75%, 7/1/2007 ................. 1,975,000 1,997,772
Nassau County, NY, General Obligation, Series E, 7%,
3/1/2004 (b) ........................................ 1,000,000 1,038,100
New York City, NY, General Obligation:
Series 1992 B, 6.4%, 10/1/2002 (b) .................. 1,605,000 1,656,986
Series 1992 B, 6.4%, 10/1/2002 ...................... 3,300,000 3,388,572
Series 1992 B, 6.6%, 10/1/2003 ...................... 205,000 213,065
Series 1992 B, 6.6%, Prerefunded 10/1/2002,
10/1/2003 (c) .................................. 9,995,000 10,496,149
Series 1992 C-1, 6.3%, 8/1/2003 (b) ................. 50,000 51,715
Series 1992 H, ETM, 6.9%, 2/1/2001** ................ 505,000 512,474
Series 1994 A, 7%, 8/1/2004 ......................... 7,650,000 8,115,120
Series 1994 A, 6%, 8/1/2005 ......................... 2,560,000 2,653,875
Series 1995 B, 6.75%, 8/15/2003 ..................... 7,000,000 7,301,210
Series 1995 B, 7.25%, 8/15/2007 ..................... 2,900,000 3,194,988
Series 1995 E, 6.6%, 8/1/2004 ....................... 2,500,000 2,616,625
Series 1996 A, 7%, 8/1/2006 ......................... 2,000,000 2,158,140
Series 1996 G, 6.75%, 2/1/2009 ...................... 5,000,000 5,397,200
New York State Dormitory Authority:
City University System, Consolidated Revenue Lease,
Series 1993 A, 5.5%, 7/1/2003 ....................... 8,000,000 8,040,080
College and University Pooled Capital Program, Series
1985, 7.8%, 12/1/2005 (b) ........................... 150,000 153,477
New York State Energy Research and Development
Authority, Pollution Control Revenue, Series 1995 E,
5.9%, 12/1/2006 (b) ................................. 5,200,000 5,395,676
New York State Medical Care Facilities, Finance Agency
Revenue, Mount Sinai Hospital Series 1992 C, 5.95%,
8/15/2009 ........................................... 4,655,000 4,729,108
New York State Thruway Authority, Special Obligation,
Series 1991 A, Zero Coupon, 1/1/2002 ................ 3,155,000 2,901,086
North Carolina
North Carolina Municipal Power Agency #1, Catawba
Electric Revenue, Series 1992, 7.25%, 1/1/2007 (b) .. 5,000,000 5,489,950
</TABLE>
The accompanying notes are an integral part of the financial statements.
Scudder Medium Term Tax Free Fund | 19
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
<S> <C> <C>
North Dakota
Grand Forks, ND, Health Care Facilities, United Hospital
Obligation Group, Series 1991 A, 6%, 12/1/2002 (b) ... 1,160,000 1,184,488
Ohio
Franklin County, OH, Health Care Facilities Revenue, Ohio
Presbyterian Series:
Series 1997, 5.15%, 7/1/2007 .................... 1,000,000 919,160
Series 1997, 5.4%, 7/1/2010 ..................... 1,000,000 890,430
Hamilton County, OH, Health System Revenue, Franciscan
Sisters of the Poor, Providence Hospital, Series 1992,
6.375%, 7/1/2004 ..................................... 4,495,000 4,680,374
Oregon
Oregon State Department of Administrative Services,
Series 1999, 5.75%, 4/1/2013 (b) ..................... 4,000,000 4,050,600
Pennsylvania
Armstrong County, PA, Hospital Authority, St. Frances
Medical Center, Series 1992 A, 6.2%, 6/1/2003 (b) .... 3,090,000 3,171,360
Delaware County, PA, General Obligation, 5.125%,
10/1/2014 (b) ........................................ 4,200,000 3,930,528
Montgomery County, PA, Multi Family Housing Revenue,
Series 1993 A, 6%, 7/1/2004 .......................... 2,210,000 2,201,182
Philadelphia, PA, School District, Series 1999 C, 5.875%,
3/1/2013 (b) ......................................... 1,000,000 1,015,090
Scranton-Lackawanna, PA, Health and Welfare Authority,
Series 1998, 5.5%, 7/1/2008 (b) ...................... 2,725,000 2,723,093
State of Pennsylvania, First Series, 6%, 1/15/2013 (b) .... 5,000,000 5,155,850
South Carolina
South Carolina Jobs-Economic Development Authority,
Franciscan Sisters of the Poor Health System Inc.,
Series 1992, 6.375%, 7/1/2004 ........................ 3,420,000 3,563,640
Tennessee
Johnson City, TN, Health and Educational, Medical Center
Hospital, Series 1998, 5.5%, 7/1/2013 (b) ............ 3,305,000 3,271,454
Nashville and Davidson Counties, Water and Sewer
Revenue, Series 1998 B, 5.25%, 1/1/2013 (b) .......... 3,310,000 3,220,762
Texas
Austin, TX, Combined Utility System Revenue, Series
1992, Zero Coupon, 11/15/2009 (b) .................... 6,775,000 3,985,733
Brownsville, TX, Utility System Revenue, 6.25%,
9/1/2014 (b) ......................................... 6,500,000 6,851,390
Denison, TX, Hospital Authority, Texoma Medical
Center Inc. Project, Series 1997, 6.125%,
8/15/2012 (b) ........................................ 1,000,000 887,140
Harris County, TX, Toll Road Revenue, Series 1994 A,
Zero Coupon, 8/15/2006 (b) ........................... 3,915,000 2,792,413
</TABLE>
The accompanying notes are an integral part of the financial statements.
20 | Scudder Medium Term Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
<S> <C> <C>
Houston, TX, Water Conveyance System Contract, Series
1993 J, 6.25%, 12/15/2013 (b) ....................... 2,500,000 2,626,025
Lower Colorado River Authority, TX, 5.875%,
5/15/2014 (b) ....................................... 2,500,000 2,523,350
Richardson, TX, Hospital Authority, Richardson Medical
Center:
Series 1993, 6.5%, Prerefunded 12/1/2003,
12/1/2012 (b) (c) ......................... 630,000 664,562
Series 1993, 6.5%, 12/1/2012 (b) ............... 1,005,000 961,182
Texas Municipal Power Agency:
Series 1989, Zero Coupon, 9/1/2007 (b) .............. 8,385,000 5,626,167
Series 1993, Zero Coupon, 9/1/2014 (b) .............. 1,800,000 774,126
Texas Public Finance Authority, Series 1990, Zero Coupon,
2/1/2009 (b) ........................................ 5,860,000 3,603,490
Texas State, Series 1998 B, 5.125%, 10/1/2014 (b) ........ 1,600,000 1,495,856
Texas Water Development Board, Series 1999 B,
5.75%, 7/15/2014 .................................... 3,555,000 3,567,762
Travis County, TX, Health Services, Series 1999 A, 6.25%,
11/15/2013 .......................................... 5,000,000 5,182,300
Utah
Intermountain Power Agency, UT, Power Supply Revenue:
Series 1988 B, Zero Coupon, 7/1/2001 (b) ............ 10,495,000 9,944,642
Series 1996 B, 6.25%, 7/1/2006 (b) .................. 8,000,000 8,377,680
Salt Lake County, UT, Water Conservation District, Series
1992 A, Zero Coupon, 10/1/2003 (b) .................. 3,200,000 2,681,856
Virgin Islands
Virgin Islands, Water and Public Finance Authority, Series
1998, 5.25%, 7/1/2009 ............................... 2,000,000 1,905,440
Washington
Clark County, WA:
Public Utility District #1, 6%, 1/1/2007 (b) ........ 5,000,000 5,186,500
School District #117, Series 1998, 5%, 12/1/2011 (b) 1,820,000 1,723,886
Thurston County, WA, School District, General Obligation,
Series 1996 B, Zero Coupon, 12/1/2010 (b) ........... 4,000,000 2,208,000
Washington State Public Power Supply System:
Nuclear Project #2:
Series 1991 A, 6.3%, 7/1/2001 .................. 6,000,000 6,086,640
Series 1993 A, 5.8%, 7/1/2007 .................. 2,120,000 2,158,033
Series 1994 A, 4.9%, 7/1/2005 .................. 4,330,000 4,217,420
Series 1994 A, 5.25%, 7/1/2008 ................. 3,000,000 2,936,130
Nuclear Project #3:
Series 1989 B, 7.15%, 7/1/2001 ................. 1,310,000 1,338,296
Series 1989 B, Zero Coupon, 7/1/2004 ........... 8,000,000 6,422,960
</TABLE>
The accompanying notes are an integral part of the financial statements.
Scudder Medium Term Tax Free Fund | 21
<PAGE>
--------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------
Washington State, Higher Education Facilities Revenue
Bond, Series 1998, 4.95%, 4/1/2011 ................ 1,500,000 1,407,795
West Virginia
South Charleston, WV, Pollution Control Revenue, Union
Carbide, Series 1985, 7.625%, 8/1/2005 ............ 2,000,000 2,142,600
Wisconsin
Milwaukee County, WI, General Obligation, Series 1993 A,
Zero Coupon, 12/1/2010 (b) ........................ 3,500,000 1,932,000
Wisconsin Health and Education Facilities Authority:
Columbia Hospital Inc., Series 1991, 6.125%,
11/15/2001 (b) ............................... 1,000,000 1,014,430
Mercy Health System Corporation:
Series 1995, 6%, 8/15/2005 (b) ............... 1,400,000 1,438,822
Series 1995, 6.125%, 8/15/2006 (b) ........... 1,480,000 1,531,853
Series 1995, 6.25%, 8/15/2007 (b) ............ 1,000,000 1,044,390
Wheaton Franciscan Hospital:
Series 1991, 6%, 8/15/2002 (b) ............... 1,000,000 1,016,380
Series 1993, 5.8%, 8/15/2004 (b) ............. 1,675,000 1,704,782
--------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $506,837,371) 510,885,968
--------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $508,837,371) (a) 512,885,968
--------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $508,837,371. At May 31,
2000, net unrealized appreciation based on tax cost for all securities
was $4,048,597. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of value
over tax cost of $8,543,377 and aggregate gross unrealized depreciation
for all securities in which there was an excess of tax cost over value
of $4,494,780.
(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.
* Floating rate and monthly, weekly or daily demand notes are securities
whose yields vary with a designated market index or market rate, such
as the coupon-equivalent of the Treasury bill rate. Variable rate
demand notes are securities whose yields are periodically reset at
levels that are generally comparable to tax-exempt commercial paper.
These securities are payable on demand within seven calendar days and
normally incorporate an irrevocable letter of credit or line of credit
from a major bank. These notes are carried, for purposes of calculating
average weighted maturity, at the longer of the period remaining until
the next rate change or to the extent of the demand period.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by
a trustee and used to pay principal and interest on bonds so
designated.
The accompanying notes are an integral part of the financial statements.
22 | Scudder Medium Term Tax Free Fund
<PAGE>
Financial Statements
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Statement of Assets and Liabilities as of May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
------------------------------------------------------------------------------------
<S> <C> <C>
Investments in securities, at value (cost $508,837,371) ........... $ 512,885,968
Cash .............................................................. 2,805,647
Receivable for investments sold ................................... 535,000
Interest receivable ............................................... 7,251,461
Receivable for Fund shares sold ................................... 238,592
Other assets ...................................................... 12,211
-------------
Total assets ...................................................... 523,728,879
Liabilities
-----------------------------------------------------------------------------------
Dividends payable ................................................. 719,145
Payable for Fund shares redeemed .................................. 687,078
Accrued management fee ............................................ 264,464
Accrued reorganization costs ...................................... 19,418
Accrued Trustees' fees and expenses ............................... 29,670
Other accrued expenses and payables ............................... 133,977
-------------
Total liabilities ................................................. 1,853,752
-----------------------------------------------------------------------------------
Net assets, at value $ 521,875,127
-----------------------------------------------------------------------------------
Net Assets
-----------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation (depreciation) on investment securities 4,048,597
Accumulated net realized gain (loss) .............................. (4,138,668)
Paid-in capital ................................................... 521,965,198
-----------------------------------------------------------------------------------
Net assets, at value $ 521,875,127
-----------------------------------------------------------------------------------
Net Asset Value
-----------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($521,875,127 / 48,880,026 outstanding shares of
beneficial interest, $.01 par value, unlimited ---------------
number of shares authorized) ................................. $ 10.68
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Scudder Medium Term Tax Free Fund | 23
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations for the year ended May 31, 2000
--------------------------------------------------------------------------------
Investment Income
--------------------------------------------------------------------------------
Income:
Interest ...................................................... $ 31,721,039
------------
Expenses:
Management fee ................................................ 3,392,370
Services to shareholders ...................................... 474,901
Custodian and accounting fees ................................. 123,820
Auditing ...................................................... 62,623
Legal ......................................................... 4,751
Trustees' fees and expenses ................................... 95,446
Reports to shareholders ....................................... 29,388
Registration fees ............................................. 12,129
Reorganization ................................................ 21,642
Other ......................................................... 26,557
------------
Total expenses, before expense reductions ..................... 4,243,627
Expense reductions ............................................ (50,129)
------------
Total expenses, after expense reductions ...................... 4,193,498
--------------------------------------------------------------------------------
Net investment income ......................................... 27,527,541
--------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
--------------------------------------------------------------------------------
Net realized gain (loss) from investments ..................... (3,831,129)
Net unrealized appreciation (depreciation) during the
period on investments..................................... (26,236,547)
--------------------------------------------------------------------------------
Net gain (loss) on investment transactions (30,067,676)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (2,540,135)
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
24 | Scudder Medium Term Tax Free Fund
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Months Year Ended
Year Ended Ended May 31, December 31,
Increase (Decrease) in Net Assets May 31, 2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ........... $ 27,527,541 $ 12,413,677 $ 30,375,825
Net realized gain (loss) on
investment transactions ....... (3,831,129) 1,867,179 2,094,910
Net unrealized appreciation
(depreciation) on investment
transactions during the
period ........................ (26,236,547) (14,113,518) 3,869,091
------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations .................... (2,540,135) 167,338 36,339,826
------------- ------------- -------------
Distributions to shareholders from:
Net investment income ........... (27,527,541) (12,413,677) (30,380,935)
------------- ------------- -------------
Net realized gains .............. (1,872,606) (409,765) (2,121,192)
------------- ------------- -------------
Fund share transactions:
Proceeds from shares sold ....... 79,862,278 45,891,601 148,879,720
Reinvestment of distributions ... 19,937,265 8,500,137 20,941,810
Cost of shares redeemed ......... (189,254,436) (76,655,887) (152,419,713)
------------- ------------- -------------
Net increase (decrease) in net
assets from Fund share
transactions .................. (89,454,893) (22,264,149) 17,401,817
------------- ------------- -------------
Increase (decrease) in net assets (121,395,175) (34,920,253) 21,239,516
Net assets at beginning of period 643,270,302 678,190,555 656,951,039
------------- ------------- -------------
Net assets at end of period ..... $ 521,875,127 $ 643,270,302 $ 678,190,555
------------- ------------- -------------
Other Information
------------------------------------------------------------------------------------
Shares outstanding at beginning
of period ....................... 57,106,903 59,066,560 57,554,739
------------- ------------- -------------
Shares sold ..................... 7,343,425 4,009,345 13,026,477
Shares issued to shareholders in
reinvestment of distributions.. 1,833,310 745,387 1,831,600
Shares redeemed ................. (17,403,612) (6,714,389) (13,346,256)
------------- ------------- -------------
Net increase (decrease) in Fund
shares........................... (8,226,877) (1,959,657) 1,511,821
Shares outstanding at end of ------------- ------------- -------------
period........................... 48,880,026 57,106,903 59,066,560
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Scudder Medium Term Tax Free Fund | 25
<PAGE>
Financial Highlights
--------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
2000(a) 1999(b) 1998(c) 1997(c) 1996(c) 1995(c)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $11.26 $11.48 $11.41 $11.15 $11.26 $10.39
--------------------------------------------------------
--------------------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------------------
Net investment income .52 .21 .52 .52 .53 .54
--------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.54) (.21) .11 .31 (.09) .92
--------------------------------------------------------
--------------------------------------------------------------------------------------------
Total from investment operations (.02) -- .63 .83 .44 1.46
--------------------------------------------------------------------------------------------
Less distributions from:
--------------------------------------------------------------------------------------------
Net investment income (.52) (.21) (.52) (.52) (.53) (.54)
--------------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.04) (.01) (.04) (.05) (.02) (.05)
--------------------------------------------------------
--------------------------------------------------------------------------------------------
Total distributions (.56) (.22) (.56) (.57) (.55) (.59)
--------------------------------------------------------------------------------------------
Net asset value, end of period $10.68 $11.26 $11.48 $11.41 $11.15 $11.26
--------------------------------------------------------
--------------------------------------------------------------------------------------------
Total Return (%) (.20) (.02)** 5.58 7.69 4.02 14.32(d)
--------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 522 643 678 657 651 712
--------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) .74(e) .72* .72 .74 .72 .72
--------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) .73(e) .72* .72 .74 .72 .70
--------------------------------------------------------------------------------------------
Ratio of net investment income
(loss) (%) 4.77 4.49* 4.51 4.67 4.75 4.92
--------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 21 13* 11 13 14 36
--------------------------------------------------------------------------------------------
</TABLE>
(a) For the year ended May 31, 2000.
(b) 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.
(c) For the year ended December 31.
(d) Total returns may have been lower had certain expenses not been
reduced.
(e) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .72%
and .72%, respectively.
* Annualized
** Not annualized
26 | Scudder Medium Term Tax Free Fund
<PAGE>
Notes to Financial Statements
--------------------------------------------------------------------------------
A. Significant Accounting Policies
Scudder Medium Term Tax Free Fund (the "Fund") is a diversified series of
Scudder Tax Free 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.
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.
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 $3,200,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until May 31,
2008, the expiration date.
From November 1, 1999 through May 31, 2000, the Fund incurred approximately
$878,000 of net realized capital losses. As permitted by tax regulation, the
Fund intends to elect to defer these losses and treat them as arising in the
fiscal year ended 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
Scudder Medium Term Tax Free Fund | 27
<PAGE>
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. As a result, net investment income and net realized gain (loss) on
investment transactions for a reporting period may differ significantly from
distributions during such periods. 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 premiums 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 $119,584,510 and $220,306,397,
respectively.
C. Related Parties
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 0.60% of the first
$500,000,000 of the Fund's average daily net assets and 0.50% of such net assets
in excess of $500,000,000 computed and accrued daily and payable monthly. For
the year ended May 31, 2000, the management fee aggregated $3,392,370, which was
equivalent to an annualized effective rate of 0.59% of the Fund's average daily
net assets.
28 | Scudder Medium Term Tax Free Fund
<PAGE>
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended May 31, 2000, the amount charged to the Fund by SSC aggregated
$296,632, of which $19,495 is unpaid at May 31, 2000.
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 $84,065, of which
$6,243 is unpaid at May 31, 2000.
The Fund pays each Trustee not affiliated with the Adviser an annual retainer,
plus specified amounts for attended board and committee meetings. For the year
ended May 31, 2000, Trustees' fees and expenses aggregated $39,434. In addition,
a one-time fee of $56,012 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 $28,006 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 were reduced by $4,889 and $17,234,
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
Scudder Medium Term Tax Free Fund | 29
<PAGE>
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 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.
30 | Scudder Medium Term Tax Free Fund
<PAGE>
Report of Independent Accountants
--------------------------------------------------------------------------------
To the Trustees of Scudder Tax Free Trust and the Shareholders of Scudder Medium
Term 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 present fairly, in all
material respects, the financial position of Scudder Medium Term 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 each of the periods indicated
therein, in conformity with accounting principles generally accepted in the
United States. These financial statements and 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, provide a reasonable basis for the opinion
expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
July 7, 2000
Scudder Medium Term Tax Free Fund | 31
<PAGE>
Tax Information
--------------------------------------------------------------------------------
The Fund paid distributions of $0.035 per share from net long-term capital gains
during its year ended May 31, 2000, of which 100% represents 20% rate gains.
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.
32 | Scudder Medium Term Tax Free Fund
<PAGE>
Officers and Trustees
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Linda C. Coughlin* Ashton P. Goodfield*
o President and Trustee o Vice President
Henry P. Becton, Jr. Ann M. McCreary*
o Trustee; President and General o Vice President
Manager, WGBH Educational Foundation
John Millette*
Dawn-Marie Driscoll o Vice President and Secretary
o Trustee; Executive Fellow, Center
for Business Ethics, Bentley John R. Hebble*
College; President, Driscoll o Treasurer
Associates
Caroline Pearson*
Peter B. Freeman o Assistant Secretary
o Trustee; Corporate Director and Trustee
George M. Lovejoy, Jr.
o Trustee; President and Director,
Fifty Associates; Chairman *Scudder Kemper Investments, Inc.
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
</TABLE>
Scudder Medium Term Tax Free Fund | 32
<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>
34 | Scudder Medium Term Tax Free Fund
<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.
Scudder Medium Term Tax Free Fund | 35
<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.
36 | Scudder Medium Term Tax Free Fund
<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
Scudder Medium Term Tax Free Fund | 37
<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
