Scudder
Massachusetts
Tax Free Fund
Annual Report
March 31, 1996
o For investors seeking double tax-free income exempt from both Massachusetts
and regular federal income taxes.
o A pure no-load(TM) fund with no commissions to buy, sell, or exchange
shares.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
CONTENTS
2 In Brief
3 Letter from the Fund's President
4 Performance Update
5 Portfolio Summary
6 Portfolio Management Discussion
10 Investment Portfolio
15 Financial Statements
18 Financial Highlights
19 Notes to Financial Statements
23 Report of Independent Accountants
24 Tax Information
25 Officers and Trustees
26 Investment Products and Services
27 How to Contact Scudder
IN BRIEF
o For its fiscal year ended March 31, 1996, Scudder Massachusetts Tax Free
Fund posted a total return of 8.28%, earning the Fund the number one
ranking among the 48 Massachusetts tax-free funds tracked by Lipper
Analytical Services. The Fund also ranked number one among its peers for
the three-, four-, and five-year periods ended March 31, 1996. See page 6
for additional information on the Fund's rankings.
o As of March 31, 1996, the Fund's 30-day net annualized SEC yield was 4.82%,
equivalent to a 9.07% taxable yield for Massachusetts investors subject to
the 46.85% combined federal and state income tax rate.
30-Day Yield on March 31, 1996
--------------------------------------------------------------
Scudder Massachusetts Tax Free Fund 4.82%
--------------------------------------------------------------
Taxable yield needed to equal the Fund's 9.07%
yield
--------------------------------------------------------------
2
<PAGE>
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Widespread declines in U.S. interest rates helped create generally
hospitable conditions for bonds during the past 12 months. Scudder Massachusetts
Tax Free Fund wrapped up the fiscal year ended March 31, 1996, with a total
return of 8.28%, reflecting appreciation in the Fund's share price and an
attractive stream of double-tax-free income to investors. From a competitive
standpoint, these results were especially rewarding, as the Fund ranked number
one among similar Massachusetts tax-free funds over not only the one-year
period, but also the three-, four-, and five-year periods ended March 31, 1996,
as tracked by Lipper Analytical Services, Inc.
As bond markets regained strength during 1995, taxable bonds led the march
back, while tax-free municipal bonds recovered at a more leisurely pace. By
fall, municipal bonds had become attractively valued compared to Treasuries,
which helped renew investor interest and resulted in outperformance versus
taxable bonds.
Recent indicators raised concerns that the economy may be stronger than
originally believed, which unsettled the market. Still, ample evidence of slower
growth and the absence of mounting inflationary pressures suggests that the
economic expansion is indeed winding down. This latter scenario would be
beneficial to bonds. Given the current economic uncertainties, the Fund's
challenge is to not only stand ready to participate in potential price rallies
but also provide a measure of price stability should the market weaken instead,
while continuing to supply competitive levels of double tax-free income.
In closing, we wish to take this opportunity to announce that a new member
joined the Scudder Family of Funds as of May 8 -- Scudder Emerging Markets
Growth Fund. The new Fund focuses on the stock markets of developing nations
around the globe. For more information about Scudder Emerging Markets Growth
Fund and other Scudder products and services, please see page 26. For questions
about Scudder Massachusetts Tax Free Fund, please call a Scudder Investor
Relations representative at 1-800-225-2470.
Sincerely,
/s/David S. Lee
David S. Lee
President,
Scudder Massachusetts Tax Free Fund
3
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
PERFORMANCE UPDATE as of March 31, 1996
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
SCUDDER MASSACHUSETTS TAX FREE FUND
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,828 8.28% 8.28%
5 Year $15,212 52.12% 8.75%
Life of
Fund* $21,025 110.25% 8.76%
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
3/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,838 8.38% 8.38%
5 Year $14,745 47.45% 8.07%
Life of
Fund* $20,703 107.03% 8.58%
*The Fund commenced operations on
May 28, 1987. Index comparisons
begin on May 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED MARCH 31
Scudder Massachusetts Tax Free Fund
Year Amount
- ----------------------
5/31/87 $10,000
'88 $10,773
'89 $11,796
'90 $12,726
'91 $13,821
'92 $15,267
'93 $17,496
'94 $18,086
'95 $19,418
'96 $21,025
Lehman Brothers Municipal Bond Index
Year Amount
- ----------------------
5/31/87 $10,000
'88 $10,847
'89 $11,628
'90 $12,855
'91 $14,041
'92 $15,444
'93 $17,378
'94 $17,781
'95 $19,102
'96 $20,703
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 assume reinvestment of dividends and,
unlike Fund returns, do not reflect any fees or expenses.
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
YEARLY PERIODS ENDED MARCH 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988* 1989 1990 1991 1992 1993 1994 1995 1996
-----------------------------------------------------------------------
NET ASSET VALUE... $12.28 $12.23 $12.25 $12.44 $12.81 $13.61 $13.16 $13.33 $13.70
INCOME DIVIDENDS.. $ .62 $ .88 $ .82 $ .83 $ .81 $ .84 $ .81 $ .74 $ .72
CAPITAL GAINS
AND OTHER
DISTRIBUTIONS..... $ -- $ .20 $ .11 $ -- $ .09 $ .16 $ .12 $ .01 $ --
FUND TOTAL
RETURN (%)........ 7.73 9.50 7.89 8.60 10.46 14.59 3.37 7.37 8.28
INDEX TOTAL
RETURN (%)........ 8.48 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38
</TABLE>
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results.
Investment return and principal value will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than when purchased. If
the Adviser had not temporarily capped expenses, the average annual
total return for the Fund for the one year, five year, and life of Fund
periods would have been lower.
4
<PAGE>
PORTFOLIO SUMMARY as of March 31, 1996
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Hospital/Health 19%
General Obligation 18%
Water/Sewer Revenue 13% We took advantage of the
Electric Utility Revenue 12% diversity of the state's
State Agency/Lease 8% economy to invest in a wide
Higher Education 7% variety of municipal bonds.
Housing Finance Authority 7%
Public Housing Authority 5%
Miscellaneous Municipal 11%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
QUALITY
- --------------------------------------------------------------------------
AAA 36%
AA 4% Quality remains high, with
A 51% 91% of the Fund's portfolio
BBB 5% rated A or better.
Not Rated 4%
----
100%
====
Weighted average quality: A
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
EFFECTIVE MATURITY
- --------------------------------------------------------------------------
Less than 1 year 5%
1-5 years 2% We chose to lock in a
5-10 years 52% substantial income stream by
10-20 years 37% purchasing and holding 15- to
20 years or greater 4% 20-year noncallable bonds.
----
100%
====
Weighted average effective maturity: 10 years
- -----------------------------------------------------------------------
For more complete details about the Fund's Investment Portfolio,
see page 10.
5
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Through the up and down periods the bond market experienced over its most
recent fiscal year, Scudder Massachusetts Tax Free Fund performed well and
continued to provide a high double tax-free yield. On March 31, 1996, the Fund's
30-day net annualized SEC was 4.82% -- equivalent to a 9.07% taxable yield for
shareholders subject to the 46.85% maximum combined state and federal income tax
rate. This translates into a clear yield advantage over taxable investments of
comparable maturity and credit quality. During the 12-month period ended March
31, 1996, the Fund's shareholders received $0.72 per share of income exempt from
both federal and Massachusetts state income taxes.
Scudder Massachusetts
Tax Free Fund:
Consistent Top Performer
(Returns for periods ended
March 31, 1996)
-----------------------------------
Period Rank Number of
Funds
-----------------------------------
1 year 1 of 48
-----------------------------------
2 years 2 of 38
-----------------------------------
3 years 1 of 27
-----------------------------------
4 years 1 of 22
-----------------------------------
5 years 1 of 19
-----------------------------------
Past performance does not guarantee future results.
Over the 12-month period, the Fund's share price increased $0.37 to $13.70
per share. The combination of share price appreciation and interest income of
$0.72 per share during the fiscal year enabled the Fund to post a positive total
return of 8.28% over the 12-month period. This return gives Scudder
Massachusetts Tax Free Fund the number one ranking for the one-year period ended
March 31, 1996, among the 48 Massachusetts tax-free funds tracked by Lipper
Analytical Services, Inc. The Fund also earned the number one ranking among its
peers for the three-, four- and five-year periods, as well as the number two
ranking for the two-year period.
Major Market Influences
During the Fund's 1995-1996 fiscal year, credit markets in general were
choppy as a result of alternating periods of increasing and declining interest
rates. As we mentioned in our September 1995 report, April through June 1995 was
marked by steadily rising bond prices and declining yields as a relatively slow
U.S. economy created the conditions for a rally. In July the Federal Reserve
made the first of three moves to ease interest rates, but the market reacted
with a two-month downturn, temporarily losing faith that the Fed would ease
further.
From there, other influences spurred a sustained rally. From August through
December the Republican majority in Congress staged a series of partial
government shutdowns in their efforts to achieve a balanced budget agreement on
their terms. Many bond market participants viewed these events as indications
that significant U.S. budget deficit reduction would now be possible. Another
plus for bonds during this period was the low yield level of Japanese short-term
6
<PAGE>
PORTFOLIO MANAGEMENT DISCUSSION
rates -- as low as 0.5%. Many arbitrageurs took this opportunity to borrow
Japanese yen inexpensively and then purchase U.S. Treasury securities in heavy
volume over the five-month period, providing an additional boost for U.S. bond
prices. In the first quarter of 1996, however, bonds were once again set back as
Congressional balanced budget efforts failed and the Japanese and U.S. economies
showed some signs of heating up.
Municipals Regain Momentum
The municipal market, which typically follows the Treasury market but at a
more moderate pace, was temporarily affected by Congressional discussions of
"flat tax" legislation beginning in the second quarter of 1995. For some
investors, the flat tax cloud overhanging the market did not completely lift
until the Presidential primaries were underway in early 1996, when additional
scrutiny from the press and public deflated the proposal.
Municipal bonds underperformed Treasuries during the first three quarters
of the Fund's fiscal year, as Treasury yields declined dramatically. During the
first quarter of 1996, municipal bonds performed better than Treasuries as most
taxable bonds were negatively affected by stronger-than-expected economic
indicators.
Locking In Higher Yields
During the past 12-month period, one of our principal strategies was to buy
and hold noncallable intermediate-maturity bonds (those with maturities of 15 to
20 years) to take advantage of some excellent opportunities to lock in a
substantial income stream for the Fund over an extended period of time. As of
March 31, 12% of the Fund's securities had maturities in this range. As another
measure to maintain a high yield while also further diversifying the Fund's
holdings, we increased slightly the number of BBB-rated and non-rated bonds in
the portfolio. These bonds, while carrying some additional credit risk,
generally exhibit less interest rate sensitivity than municipal bonds rated A
and above. As of March 31, the Fund held 9% of bonds in these two categories.
(For a summary of the Fund's quality, diversification, and maturity structure,
see page 5.) Lastly, despite a focus on 15- to 20-year bonds, the Fund's average
maturity declined from 12 to 10 years during the fiscal year for two reasons:
First, we pulled back the Fund's average maturity slightly late last fall
because bonds seemed fully valued given the existing market and economic
environment. Second, bonds the portfolio already held drew one year closer to
maturity.
7
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
Portfolio quality remains high, with 91% of the Fund's portfolio rated A or
better as of March 31. And the Fund continues to invest in a broad selection of
Massachusetts municipal bonds, including hospital/health, general obligation,
and water/sewer revenue bonds.
Longer-Term Strategy Unchanged
The Fund seeks to provide investors with a competitive level of federal and
state tax-exempt income while emphasizing total return. We pursue these
objectives by concentrating on three broad categories of Massachusetts municipal
bonds:
o Noncallable bonds, which an issuer cannot redeem before the maturity
date. When interest rates fall, bond issuers tend to reduce their borrowing
expenses by redeeming "callable" existing bonds and issuing new securities that
pay lower interest rates. Noncallable bonds provide a relatively stable stream
of income and solid price appreciation potential over time. During the period,
we sold bonds with weak call protection in favor of those with better call
protection. As of March 31, 44% of bonds the Fund held were noncallable.
o Deeply discounted callable bonds, which are unlikely to be subject to
early redemption at par value by their issuers because of their current low
prices.
o "Cushion" bonds. We balance the Fund's long-maturity bonds by
purchasing so-called cushion bonds -- bonds with high coupons that compensate
investors for the fact that they can be redeemed by their issuer in several
years.
A Diverse State Economy Fuels Growth
The Massachusetts economy has continued to grow in its fourth year,
following the 1990-1992 recession. Governor Weld has proposed a conservative
fiscal year 1997 budget, with a projected revenue increase of 4.4% over 1996
levels and only a 2.8% rise in expenditures. The state continues to benefit from
diversification among its traditional manufacturing, high technology, and
service industries. Unemployment was a moderate 5.3% as of October 1995, below
the national average of 5.5%. And overall, Massachusetts' economic climate is
still generally favorable for bond issuers and investors. The major uncertainty
facing the state's economy is a political one: Who becomes the new governor and
sets the fiscal tone for the state if Governor Weld is elected to the U.S.
Senate in November?
8
<PAGE>
PORTFOLIO MANAGEMENT DISCUSSION
Our Near-Term Outlook
Demand for municipals may improve now that the low-rate flat tax proposal
has disappeared from current political discourse. In terms of the U.S. economy,
we still believe that consumers' heavy debt loads could hinder momentum and
create a slowdown sometime later this year or early next year, which would
benefit bonds. But economic indicators are sufficiently mixed that it is unclear
to us when and to what extent this might occur. Meanwhile, the Federal Reserve
is in a neutral stance, neither easing nor tightening credit, and inflation
remains in check. Adding to the uncertainty is the wait until Presidential and
Congressional elections, which will play a significant role in how
optimistically the bond market will view the prospects for federal budget
deficit reduction. Market participants have applauded, however, as both parties
have claimed fiscal responsibility as part of their respective political
platforms.
For these reasons we are currently maintaining a neutral stance and average
effective maturity for the Fund, and will continue to do so until the direction
of the U.S. economy becomes clearer. In pursuit of Scudder Massachusetts Tax
Free Fund's objectives, we will continue to emphasize noncallable
intermediate-maturity municipal bonds. We will also pay close attention to
credit quality as we position the Fund to seek high double tax-free income and a
competitive total return.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Kathleen A. Meany
Philip G. Condon Kathleen A. Meany
Scudder Massachusetts
Tax Free Fund:
A Team Approach to Investing
Scudder Massachusetts Tax Free Fund is managed by a team of Scudder
investment professionals who each play an important role in the Fund's
management process. Team members work together to develop investment strategies
and select securities for the Fund. They are supported by Scudder's large staff
of economists, research analysts, traders, and other investment specialists who
work in our offices across the United States and abroad. We believe our team
approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Lead Portfolio Manager Philip G. Condon joined Scudder in 1983 and has had
responsibility for Scudder Massachusetts Tax Free Fund's day-to-day operations
since 1989. Phil, who has 16 years of experience in municipal investing and
portfolio management, also is Lead Portfolio Manager of Scudder Massachusetts
Limited Term Tax Free Fund. Kathleen A. Meany, Portfolio Manager, has 19 years
of investment experience and has worked on the Fund since 1988. Kate joined
Scudder in 1988 and also works with Phil as a Portfolio Manager of Scudder
Massachusetts Limited Term Tax Free Fund.
9
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS TAX FREE FUND
INVESTMENT PORTFOLIO as of March 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
-------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
3.2% SHORT-TERM MUNICIPAL INVESTMENTS
------------------------------------------------------------------------------------------------
MASSACHUSETTS Boston, MA, Water and Sewer Commission,
Series A, Weekly Demand Note, 3.1%, 11/1/15* ...... 100,000 MIG1 100,000
Massachusetts General Obligation, Dedicated
Income Tax, Series B, Daily Demand Note,
3.5%, 12/1/97* .................................... 5,300,000 MIG1 5,300,000
Massachusetts Health & Educational Facilities
Authority, Capital Assets Program, Series 1989
G-1, Weekly Demand Note, 3%, 1/1/19 (d)* .......... 900,000 AAA 900,000
Massachusetts Health and Educational Facilities
Authority:
Harvard University, Series I, Weekly
Demand Note, 3.2%, 2/1/16* ...................... 250,000 A1+ 250,000
Series B, Daily Demand Note, 3.35%, 7/1/05 (d)* .. 100,000 A1+ 100,000
Series C, Daily Demand Note, 3.35%, 7/1/05 (d)* .. 100,000 A1+ 100,000
Massachusetts Industrial Finance Agency, Merritt
Care, Daily Demand Note, 3.8%, 4/1/09* ............ 500,000 MIG1 500,000
PUERTO RICO Puerto Rico, SAVRS, Series 1996, 3.56%,
7/1/11(d)* ........................................ 2,300,000 AAA 2,300,000
Puerto Rico Electric Power Authority, ARCS,
Series 1996, 3.32%, 7/1/23 (d)* ................... 300,000 AAA 300,000
----------
TOTAL SHORT-TERM MUNICIPAL INVESTMENTS
(Cost $9,850,000) .................................. 9,850,000
----------
------------------------------------------------------------------------------------------------
96.8% LONG-TERM MUNICIPAL INVESTMENTS
------------------------------------------------------------------------------------------------
MASSACHUSETTS Boston, MA, General Obligation, Series A, 6.5%,
7/1/12 (d) ........................................ 2,320,000 AAA 2,498,524
Boston, MA, Industrial Development Authority,
Springhouse Project, 9.25%, 7/1/25 ................ 1,000,000 NR 1,021,470
Chicopee, MA, Electric System Revenue, ETM,
7.125%, 1/1/17*** ................................. 1,210,000 AAA 1,408,040
Dedham-Westwood, MA, Water District, General
Obligation, 5%, 10/15/08 (d) ...................... 1,035,000 AAA 1,009,559
Haverhill, MA, Unlimited Tax, General Obligation,
Series A, 7%, 6/15/12 (d) ......................... 600,000 AAA 660,312
Massachusetts Bay Transportation Authority:
Certificate of Participation, 7.75%, 1/15/06 ...... 1,000,000 A 1,148,870
General Transportation System:
Series A, 5.4%, 3/1/07 ........................... 13,325,000 A 13,302,614
Series 1996 A, 5.5%, 3/1/09 ...................... 1,000,000 A 1,001,790
Series A, 5.5%, 3/1/12 ........................... 3,000,000 A 2,971,620
Series B, 6.2%, 3/1/16 ........................... 2,100,000 A 2,213,673
Series C, 6.1%, 3/1/13 ........................... 1,250,000 A 1,312,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
10
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
--------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts General Obligation:
Consolidated Loan, Series A, 7.5%, 6/1/04 ........ 12,400,000 A 14,466,708
Hynes Convention Center, Zero Coupon, 9/1/04 ..... 2,000,000 A 1,306,500
Series A, 6.5%, 6/1/08 ........................... 5,500,000 A 5,931,035
Series B, 6.5%, 8/1/08 ........................... 5,400,000 A 5,986,116
Series C, Zero Coupon, 12/1/04 ................... 8,415,000 A 5,511,404
Series D, 5.125%, 11/1/10 (d) .................... 5,000,000 AAA 4,817,700
Massachusetts Health & Educational
Facilities Authority:
Anna Jaques Hospital, Series B, 6.875%,
10/1/12 ........................................ 2,000,000 BBB 2,049,720
Berkshire Health Systems, Series D, 5.6%,
10/1/08 (d) .................................... 1,760,000 AAA 1,801,993
Boston College, Series 1993 K, 5.25%, 6/1/09 .... 2,880,000 A 2,871,648
Charlton Memorial Hospital, Series B,
7.25%, 7/1/07 (b) .............................. 10,000,000 A 10,838,300
Community College Program, Series A,
6.5%, 10/1/09 (d) .............................. 1,000,000 AAA 1,076,670
Cooley Dickinson Hospital Inc.:
Issue A, 7.125%, 11/15/18, prerefunded
5/15/03** ..................................... 2,115,000 NR 2,408,816
Issue B, 5.25%, 11/15/10 (d) ................... 2,005,000 AAA 1,937,351
Deaconess Hospital, Series B, 6.625%,
4/1/12 (d) ..................................... 2,000,000 AAA 2,130,800
Faulkner Hospital, Series C, 6%, 7/1/13 ......... 2,650,000 BBB 2,496,433
Massachusetts General Hospital, Series F,
6.25%, 7/1/12 (d) .............................. 3,500,000 AAA 3,771,495
Medical Academic and Scientific, Series A,
6.5%, 1/1/09 ................................... 5,000,000 AAA 5,167,400
Medical Center of Central Massachusetts,
Series A, 7%, 7/1/12 (d) ....................... 3,600,000 AAA 3,919,716
Newton-Wellesley Hospital:
Series D, 7%, 7/1/15 (d) ....................... 1,500,000 AAA 1,628,895
Series E, 5.9%, 7/1/11 (d) ..................... 3,015,000 AAA 3,098,335
Northeastern University, Series E:
6.4%, 10/1/07 (d) .............................. 1,000,000 AAA 1,083,300
6.5%, 10/1/12 (d) .............................. 450,000 AAA 486,306
St. Luke's Hospital New Bedford, Series C,
Yield Curve Notes, 7.62%, 8/15/10 (d)**** ...... 3,400,000 AAA 3,310,750
South Shore Hospital, 6.5%, 7/1/10 (d) .......... 2,500,000 AAA 2,670,675
Stonehill College, Series E, 6.55%, 7/1/12 (d) .. 5,000,000 AAA 5,389,550
Suffolk University, Series 1996 C, 5.65%,
7/1/11 ......................................... 1,045,000 AAA 1,035,626
Tufts University, Series C, 7.4%, 8/1/18 ........ 530,000 A 572,898
Wellesley College, Series D, 5.1%, 7/1/09 ....... 1,800,000 AA 1,755,846
Massachusetts Housing Finance Agency:
Housing Project Refunding Revenue:
Series A, 6.3%, 10/1/13 ........................ 7,000,000 A 7,019,040
Series B, 6.05%, 12/1/09 (d) ................... 3,000,000 AAA 3,016,140
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
11
<PAGE>
<TABLE>
SCUDDER MASSACHUSETTS TAX FREE FUND
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
---------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Housing Project Revenue, Series A,
6.375%, 4/1/21 .............................. 3,905,000 A 3,888,052
Residential Development, Series C, 6.875%,
11/15/11 .................................... 15,250,000 AAA 16,207,853
Single-Family Mortgage Revenue:
Series 2, 8.25%, 6/1/14 ..................... 240,000 AA 246,411
Series 3, 7.875%, 6/1/14 .................... 4,000,000 AA 4,138,520
Series 44, 5.9%, 12/1/13 .................... 3,000,000 AA 2,986,680
Massachusetts Industrial Finance Agency:
Edgewood Retirement Community, Series A,
9%, 11/15/25 ................................ 1,650,000 NR 1,645,793
First Mortgage, Evanswood Bethzatha, Series A,
7.875%, 1/15/20 ............................. 1,000,000 NR 1,024,640
Holy Cross College, Issue II, 6.375%,
11/1/09 ..................................... 1,000,000 A 1,069,790
Massachusetts Biomedical Research Corp.:
Series A, Zero Coupon, 8/1/00 ............... 2,860,000 A 2,321,118
Series A, Zero Coupon, 8/1/01 ............... 3,650,000 A 2,793,856
Series A, Zero Coupon, 8/1/02 (b) ........... 3,650,000 A 2,641,030
Pollution Control Revenue:
Boston Edison Company, Series A,
5.75%, 2/1/14 .............................. 2,000,000 BBB 1,889,480
Eastern Edison Company Project,
5.875%, 8/1/08 ............................. 4,750,000 BBB 4,639,325
Provider Lease Program, Series 1988 A-1,
8.4%, 7/15/08 ............................... 1,930,000 NR 2,000,889
Resource Recovery, North Andover Solid Waste,
Series A, 6.3%, 7/1/05 ...................... 6,500,000 BBB 6,713,070
Solid Waste Disposal, Peabody Monofil Project,
9%, 9/1/05 (e) .............................. 3,000,000 NR 3,085,770
Sturdy Memorial Hospital, 7.9%, 6/1/09 ....... 1,895,000 A 2,031,630
Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue:
Series A, 5%, 7/1/05 (d) .................... 2,020,000 AAA 2,009,496
Series A, 5.1%, 7/1/06 (d) .................. 8,980,000 AAA 8,929,712
Series A, 6.75%, 7/1/06 ..................... 2,855,000 A 3,109,038
Series A, 5.1%, 7/1/08 (d) .................. 840,000 AAA 823,443
Series A, 5%, 7/1/12 (d) .................... 1,000,000 AAA 938,460
Series A, 5%, 7/1/17 (d) .................... 3,610,000 AAA 3,243,188
Series B, 6.75%, 7/1/08 ..................... 9,000,000 A 9,770,760
Series B, 4.95%, 7/1/09 (d) ................. 1,575,000 AAA 1,515,890
Series C, 6.625%, 7/1/10 (d) ................ 3,500,000 AAA 3,743,705
Series C, 6.625%, 7/1/10 .................... 1,000,000 A 1,074,100
Massachusetts Port Authority Revenue,
Tax Exempt Receipts, ETM, Zero Coupon,
7/1/13*** .................................... 1,000,000 AAA 855,020
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
12
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unaudited
----------------
Principal Credit Market
Amount ($) Rating (c) Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Massachusetts Special Obligation:
Series 1996 A, 5.5%, 6/1/11 (d) ............... 5,000,000 AAA 4,933,850
Series A, 5.8%, 6/1/14 ........................ 2,000,000 AA 1,997,580
Massachusetts Water Pollution Abatement Trust,
Pooled Loan Program:
Series 2, 5.625%, 2/1/10 ..................... 2,820,000 AAA 2,851,697
Series 2, 5.7%, 2/1/15 ....................... 1,150,000 AAA 1,149,368
Massachusetts Water Resource Authority:
Series A, 6.5%, 7/15/09 ....................... 15,000,000 A 16,564,350
Series A, 6.5%, 7/15/19 ....................... 3,000,000 A 3,270,210
Series B, 6%, 11/1/08 ......................... 5,785,000 A 6,008,648
General Revenue, Series C, 5.25%, 12/1/08 ..... 2,705,000 A 2,648,466
General Revenue, Series C, 5.25%, 12/1/15 ..... 4,030,000 A 3,798,638
Nantucket, MA, General Obligation, 6.8%, 12/1/11 1,000,000 A 1,089,480
New England Educational Loan Marketing
Corporation, Massachusetts Student Loan
Revenue, 5.7%, 7/1/05 ......................... 6,250,000 A 6,348,188
South Essex, MA, Sewer District, Series B,
6.75%, 6/1/13, prerefunded 6/1/04 (d)** ....... 1,000,000 AAA 1,138,910
University of Massachusetts, Building Authority
Revenue, Series B:
6.625%, 5/1/09 ............................... 2,415,000 A 2,711,731
6.625%, 5/1/10 ............................... 2,575,000 A 2,885,957
6.75%, 5/1/11 ................................ 2,745,000 A 3,099,599
6.875%, 5/1/14 ............................... 1,300,000 A 1,472,523
Worcester, MA, General Obligation:
6.9%, 5/15/05, prerefunded 5/15/02 (d)** ...... 1,850,000 AAA 2,096,457
6.9%, 5/15/06, prerefunded 5/15/02 (d)** ...... 1,500,000 AAA 1,699,830
PUERTO RICO Puerto Rico Aqueduct and Sewer Authority,
Refunding Revenue, 6%, 7/1/09 ................. 1,000,000 A 1,037,930
Puerto Rico Highway and Transportation Authority,
Highway Revenue, Series 1996 Y, 6.25%,
7/1/14 ........................................ 2,000,000 A 2,107,160
-----------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS
(Cost $288,820,883) ........................... 302,353,029
-----------
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $298,670,883) (a) ....................... 312,203,029
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
13
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $298,670,883. At March 31,
1996, net unrealized appreciation for all securities based on tax cost was
$13,532,146. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $14,688,036 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$1,155,890.
(b) At March 31, 1996 these securities, in part, have been pledged to cover
initial margin requirements for open futures contracts.
<TABLE>
AT MARCH 31, 1996, OPEN FUTURES CONTRACTS PURCHASED LONG WERE AS FOLLOWS
(NOTE A):
<CAPTION>
Aggregate
Futures Expiration Contracts Face Value($) Market Value($)
------- ---------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
Muni Bond Index June 1996 70 7,930,388 7,879,375
--------- ---------
Total net unrealized depreciation on open futures contracts purchased long (51,013)
=========
</TABLE>
(c) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings
shown are assigned by either Standard & Poor's Ratings Group, Moody's
Investors Service, Inc. or Fitch Investors Service, Inc. Unrated securities
(NR) have been determined to be of comparable quality to rated eligible
securities.
(d) Bond is insured by one of these companies: AMBAC, Connie Lee, FGIC, FSA or
MBIA.
(e) Restricted Security -- Security which has not been registered with the
Securities and Exchange Commission under the Securities Act of 1933.
Information concerning such restricted security at March 31, 1996 is as
follows:
Security Acquisition Date Cost($)
-------- ---------------- -------
MIFA, Solid Waste, Peabody Monofil 12/30/94 3,000,000
* 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.
** 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 the tax-exempt issue and to retire the bonds in full at the
earliest refunding date.
*** 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.
**** Inverse floating rate notes are instruments whose yields have an inverse
relationship to benchmark interest rates. These securities are shown at
their rate as of March 31, 1996.
The accompanying notes are an integral part of the financial statements.
----
14
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
MARCH 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $298,670,883)
(Note A) ....................................... $312,203,029
Cash ............................................... 59,441
Receivables:
Interest ....................................... 5,036,669
Fund shares sold ............................... 221,291
Daily variation margin on open futures contracts
(Note A) ................................... 37,188
------------
Total assets ............................... 317,557,618
LIABILITIES
Payables:
Investments purchased .......................... $2,119,194
Dividends ...................................... 587,938
Fund shares redeemed ........................... 326,835
Accrued management fee (Note C) ................ 158,239
Other accrued expenses (Note C) ................ 80,486
----------
Total liabilities .......................... 3,272,692
------------
Net assets, at market value ........................ $314,284,926
============
NET ASSETS
Net assets consist of:
Unrealized appreciation (depreciation) on:
Investments ................................ 13,532,146
Futures .................................... (51,013)
Accumulated net realized loss .................. (3,605,166)
Shares of beneficial interest .................. 229,423
Additional paid-in capital ..................... 304,179,536
------------
Net assets, at market value ........................ $314,284,926
============
NET ASSET VALUE, offering and redemption price
per share ($314,284,926 [Divided by] 22,942,284
outstanding shares of beneficial interest, $.01
par value, unlimited number of shares
authorized) .................................... $ 13.70
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
15
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest ............................................. $18,492,382
Expenses:
Management fee (Note C) .............................. $1,858,029
Services to shareholders (Note C) .................... 238,141
Custodian and accounting fees (Note C) ............... 111,599
Trustees' fees and expenses (Note C) ................. 14,245
Reports to shareholders .............................. 47,008
Auditing ............................................. 36,005
Legal ................................................ 16,575
State registration ................................... 9,412
Other ................................................ 17,380
----------
Total expenses before reductions ..................... 2,348,394
Expense reductions (Note C) .......................... (31,230)
----------
Expenses, net ........................................ 2,317,164
-----------
Net investment income ................................ 16,175,218
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS
Net realized gain from:
Investments ....................................... 529,642
Futures ........................................... 51,931 581,573
----------
Net unrealized appreciation (depreciation)
during the period on:
Investments ....................................... 7,388,834
Futures ........................................... (24,013) 7,364,821
------------------------
Net gain on investments .............................. 7,946,394
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . $24,121,612
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
16
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ...................... $ 16,175,218 $ 17,734,143
Net realized gain (loss) from investment
transactions ............................ 581,573 (2,995,407)
Net unrealized appreciation on
investment transactions during the period 7,364,821 4,923,078
------------ -------------
Net increase in net assets resulting from
operations .............................. 24,121,612 19,661,814
------------ -------------
Distributions to shareholders:
From net investment income ($.72 and $.74
per share, respectively) ................ (16,175,218) (17,734,143)
------------ -------------
In excess of net realized gains
($.01 per share) ........................ -- (348,200)
------------ -------------
Fund share transactions:
Proceeds from shares sold .................. 58,182,143 80,817,626
Net asset value of shares issued to
shareholders in reinvestment
of distributions ........................ 9,475,939 11,772,714
Cost of shares redeemed .................... (57,794,885) (129,761,019)
------------ -------------
Net increase (decrease) in net assets from
Fund share transactions ................. 9,863,197 (37,170,679)
------------ -------------
INCREASE (DECREASE) IN NET ASSETS .......... 17,809,591 (35,591,208)
Net assets at beginning of period .......... 296,475,335 332,066,543
------------ -------------
NET ASSETS AT END OF PERIOD ................ $314,284,926 $ 296,475,335
============ =============
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES
Shares outstanding at beginning of period .. 22,236,389 25,223,573
------------ -------------
Shares sold ................................ 4,245,322 6,244,742
Shares issued to shareholders in
reinvestment of distributions ........... 690,492 905,250
Shares redeemed ............................ (4,229,919) (10,137,176)
------------ -------------
Net increase (decrease) in Fund shares ..... 705,895 (2,987,184)
------------ -------------
Shares outstanding at end of period ........ 22,942,284 22,236,389
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
----
17
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
FOR THE PERIOD
MAY 28, 1987
(COMMENCEMENT OF
YEARS ENDED MARCH 31, OPERATIONS) TO
----------------------------------------------------------------------------- MARCH 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................ $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28 $12.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income (a) ..... .72 .74 .81 .84 .81 .83 .82 .81 .69
Net realized and unrealized
gain (loss) on investment
transactions ................ .37 .18 (.33) .96 .46 .19 .13 .22 .21
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................. 1.09 .92 .48 1.80 1.27 1.02 .95 1.03 .90
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment income .... (.72) (.74) (.81) (.84) (.81) (.83) (.82) (.88) (.62)
From net realized gains on
investment transactions ..... -- -- (.08) (.16) (.09) -- (.11)(b) (.20) --
In excess of net realized
gains ....................... -- (.01) (.04) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ............. (.72) (.75) (.93) (1.00) (.90) (.83) (.93) (1.08) (.62)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period .. $13.70 $13.33 $13.16 $13.61 $12.81 $12.44 $12.25 $12.23 $12.28
====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) (c) ............ 8.28 7.37 3.37 14.59 10.46 8.60 7.89 9.50 7.73**
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions) .................. 314 296 332 267 120 67 46 31 16
Ratio of operating expenses,
net to average daily net
assets (%) (a) ................ .75 .47 .07 -- .48 .60 .60 .51 .50*
Ratio of net investment
income to average daily
net assets (%) ................ 5.23 5.73 5.80 6.36 6.38 6.72 6.60 7.23 7.55*
Portfolio turnover rate (%) ..... 20.9 10.2 17.0 29.6 23.2 27.1 45.5 110.5 95.9*
(a) Reflects a per share
amount of expenses,
exclusive of management
fees, reimbursed by the
Adviser of .................. $ -- $ -- $ .01 $ .02 $ -- $ -- $ -- $ .01 $ .10
Reflects a per share amount
of management fees and
other fees not imposed of ... $ -- $ .04 $ .09 $ .08 $ .05 $ .06 $ .07 $ .07 $ .05
Operating expense ratio
before expense
reductions(%) ............... .76 .77 .77 .83 .93 1.05 1.16 1.20 2.25*
<FN>
(b) Includes $.01 per share distributions in excess of realized gains pursuant to Internal Revenue Code Section 4982.
(c) Total returns are higher due to maintenance of the Fund's expenses.
* Annualized
** Not annualized
</FN>
</TABLE>
----
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Scudder Massachusetts Tax Free Fund (the "Fund") is a non-diversified series of
Scudder State Tax Free Trust (the "Trust"). The Trust is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. There are
currently six series in the Trust.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles 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 with remaining maturities greater
than sixty days are valued by pricing agents approved by the Officers of the
Fund, which 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. All other debt securities are valued at their fair value as
determined in good faith by the Valuation Committee of the Board of Trustees.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
RESTRICTED SECURITIES. The Fund may not purchase restricted securities (for
these purposes, restricted security means a security which cannot be sold to the
public without registration under the Securities Act of 1933 or the availability
of an exemption from registration, or which is subject to other legal or
contractual delays in or restrictions on resale), if, as a result thereof, more
than 10% of the value of the Fund's total assets would be invested in restricted
securities. The aggregate fair value of restricted securities at March 31, 1996
amounted to $3,085,770 which represents 1.0% of net assets.
FUTURES CONTRACTS. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the year ended
March 31, 1996, the Fund purchased interest rate futures to manage the duration
of the portfolio and sold interest rate futures to hedge against declines in the
value of portfolio securities.
----
19
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
- --------------------------------------------------------------------------------
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
AMORTIZATION AND ACCRETION. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment companies
and to distribute all of its taxable and tax-exempt income to its shareholders.
Accordingly, the Fund paid no federal income taxes and no provision for federal
income taxes was required.
At March 31, 1996, the Fund had a net tax basis capital loss carryforward of
approximately $1,283,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until March 31,
2003, the expiration date.
In addition, from November 1, 1995 through March 31, 1996, the Fund incurred
approximately $111,000 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 year ending March 31, 1997.
----
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Fund
is declared as a dividend to shareholders of record as of the close of business
each day and is paid to shareholders monthly. During any particular year, net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed and, therefore,
will be distributed to shareholders. An additional distribution may be made to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to investments in futures contracts. 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
period. Accordingly, the Fund may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Fund.
The Fund uses the specific identification method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
OTHER. Investment security transactions are accounted for on a trade date basis.
Distributions of net gains to shareholders are recorded on the ex-dividend
date. Interest income is accrued pro rata to the earlier of the call or maturity
date.
B. PURCHASES AND SALES OF SECURITIES
- --------------------------------------------------------------------------------
During the year ended March 31, 1996, purchases and sales of municipal
securities (excluding short-term investments) aggregated $68,151,323 and
$62,200,274, respectively.
The aggregate face value of future contracts opened and closed during the year
ended March 31, 1996 was $30,542,656 and $27,063,393, respectively.
C. RELATED PARTIES
- --------------------------------------------------------------------------------
Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens & Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a fee
equal to an annual rate of approximately 0.60% of the Fund's average daily net
assets, computed and accrued daily and payable monthly. The Adviser has agreed
not to impose all or a portion of its management fee until December 31, 1995 and
during
----
21
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
- --------------------------------------------------------------------------------
such period to maintain the annualized expenses of the Fund at not more than
0.75% of average daily net assets. For the year ended March 31, 1996, the
Adviser imposed fees amounting to $1,826,799 and the portion not imposed
amounted to $31,230.
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 March 31, 1996, the amount charged to the Fund by SSC aggregated
$184,353, of which $15,222 is unpaid at March 31, 1996.
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
March 31, 1996, the amount charged to the Fund by SFAC aggregated $58,015, of
which $4,904 is unpaid at March 31, 1996.
The Trust pays each Trustee not affiliated with the Adviser $12,000 annually,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1996,
Trustees' fees and expenses charged to the Fund aggregated $14,245.
----
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES OF SCUDDER STATE TAX FREE TRUST AND THE SHAREHOLDERS OF SCUDDER
MASSACHUSETTS TAX FREE FUND:
We have audited the accompanying statement of assets and liabilities of Scudder
Massachusetts Tax Free Fund, including the investment portfolio, as of March 31,
1996, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the eight years in the period
then ended, and for the period May 28, 1987 (commencement of operations) to
March 31, 1988. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Massachusetts Tax Free Fund as of March 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the eight years in the period then ended, and for the period May 28, 1987
(commencement of operations) to March 31, 1988, in conformity with generally
accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 16, 1996
----
23
<PAGE>
SCUDDER MASSACHUSETTS TAX FREE FUND
TAX INFORMATION
- --------------------------------------------------------------------------------
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 1996, 100% constituted exempt interest dividends for regular federal
income tax and Massachusetts personal income tax purposes.
Please consult a tax adviser if you have any questions about federal or state
income tax laws, or on how to prepare your tax returns. If you have specific
questions about your Scudder Fund account, please call a Scudder Investor
Relations Representative at 1-800-225-5163.
----
24
<PAGE>
OFFICERS AND TRUSTEES
David S. Lee*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; Attorney and Corporate Director
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dudley H. Ladd*
Trustee
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Juris Padegs*
Trustee
Daniel Pierce*
Trustee
Jean C. Tempel
Trustee; General Partner, TL Ventures
Philip G. Condon*
Vice President
Donald C. Carleton*
Vice President
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Jeremy L. Ragus*
Vice President
Rebecca Wilson*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
25
<PAGE>
INVESTMENT PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
<C> <C> <C>
The Scudder Family of Funds
- -----------------------------------------------------------------------------------------------------------------
Money Market Income
Scudder Cash Investment Trust Scudder Emerging Markets Income Fund
Scudder U.S. Treasury Money Fund Scudder Global Bond Fund
Tax Free Money Market+ Scudder GNMA Fund
Scudder Tax Free Money Fund Scudder Income Fund
Scudder California Tax Free Money Fund* Scudder International Bond Fund
Scudder New York Tax Free Money Fund* Scudder Short Term Bond Fund
Tax Free+ Scudder Zero Coupon 2000 Fund
Scudder California Tax Free Fund* Growth
Scudder High Yield Tax Free Fund Scudder Capital Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Managed Municipal Bonds Scudder Emerging Markets Growth Fund
Scudder Massachusetts Limited Term Tax Free Fund* Scudder Global Fund
Scudder Massachusetts Tax Free Fund* Scudder Global Discovery Fund
Scudder Medium Term Tax Free Fund Scudder Gold Fund
Scudder New York Tax Free Fund* Scudder Greater Europe Growth Fund
Scudder Ohio Tax Free Fund* Scudder International Fund
Scudder Pennsylvania Tax Free Fund* Scudder Latin America Fund
Growth and Income Scudder Pacific Opportunities Fund
Scudder Balanced Fund Scudder Quality Growth Fund
Scudder Growth and Income Fund Scudder Small Company Value Fund
Scudder Value Fund
The Japan Fund
Retirement Plans and Tax-Advantaged Investments
- -----------------------------------------------------------------------------------------------------------------
IRAs 403(b) Plans
Keogh Plans SEP-IRAs
Scudder Horizon Plan+++* (a variable annuity) Profit Sharing and Money Purchase
401(k) Plans Pension Plans
Closed-End Funds#
- -----------------------------------------------------------------------------------------------------------------
The Argentina Fund, Inc. The Latin America Dollar Income Fund, Inc.
The Brazil Fund, Inc. Montgomery Street Income Securities, Inc.
The First Iberian Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Scudder World Income Opportunities Fund, Inc.
Institutional Cash Management
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Scudder Institutional Fund, Inc. Scudder Treasurers Trust(TM)++
Scudder 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. +A portion of the income from the tax-free funds may
be subject to federal, state, and local taxes. *Not available in all states.
+++A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance agencies,
1-800-225-2470. #These funds, advised by Scudder, Stevens & Clark, Inc. are
traded on various stock exchanges. ++For information on Scudder Treasurers
Trust,(TM) an institutional cash management service that utilizes certain
portfolios of Scudder Fund, Inc. ($100,000 minimum), call 1-800-541-7703.
26
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HOW TO CONTACT SCUDDER
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Account Service and Information
For existing account service and transactions
SCUDDER INVESTOR RELATIONS
1-800-225-5163
For personalized information about your Scudder accounts; exchanges
and redemptions; or information on any Scudder fund
SCUDDER AUTOMATED INFORMATION LINE (SAIL)
1-800-343-2890
Investment Information
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To receive information about the Scudder funds, for additional
applications and prospectuses, or for investment questions
SCUDDER INVESTOR RELATIONS
1-800-225-2470
For establishing 401(k) and 403(b) plans
SCUDDER DEFINED CONTRIBUTION SERVICES
1-800-323-6105
Please address all correspondence to
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THE SCUDDER FUNDS
P.O. BOX 2291
BOSTON, MASSACHUSETTS
02107-2291
Or stop by a Scudder Funds Center
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Many shareholders enjoy the personal, one-on-one service of the
Scudder Funds Centers. Check for a Funds Center near you-- they can be
found in the following cities:
Boca Raton New York
Boston Portland, OR
Chicago San Diego
Cincinnati San Francisco
Los Angeles Scottsdale
For information on Scudder For information on Scudder
Treasurers Trust,(TM) an Institutional Funds,* funds
institutional cash management designed to meet the broad
service for corporations, investment management and
non-profit organizations service needs of banks and
and trusts that uses certain other institutions, call
portfolios of Scudder Fund, Inc.* 1-800-854-8525.
($100,000 minimum), call
1-800-541-7703.
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Scudder Investor Relations and Scudder Funds Centers are services provided
through Scudder Investor Services, Inc., Distributor.
* Contact Scudder Investor Services, Inc., Distributor, to receive a
prospectus with more complete information, including management fees and
expenses. Please read it carefully before you invest or send money.
27
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Celebrating Over 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 38 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped us become one of the
largest and most respected investment managers in the world. Though times have
changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
