Scudder
Pennsylvania
Tax Free Fund
Annual Report
March 31, 1998
Pure No-Load(TM) Funds
For investors seeking double-tax-free income exempt from both Pennsylvania and
regular federal income taxes.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Pennsylvania Tax Free Fund
- --------------------------------------------------------------------------------
Date of Inception: 5/28/87 Total Net Assets as of Ticker Symbol: SCPAX
3/31/98: $78.7 million
- --------------------------------------------------------------------------------
o As of March 31, 1998, Scudder Pennsylvania Tax Free Fund's 30-day net
annualized SEC yield was 4.19%, equivalent to a 7.14% taxable yield for
Pennsylvania investors subject to the 41.29% combined federal and state income
tax rate.
o For its most recent fiscal year ended March 31, 1998, Scudder Pennsylvania Tax
Free Fund posted a total return of 10.08%, compared with the 10.24% average
return of 67 similar funds tracked by Lipper Analytical Services.
o Scudder Pennsylvania Tax Free Fund received a four-star rating from
Morningstar, reflecting "above average" risk-adjusted performance through March
31, 1998.*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
30-Day SEC Yield on March 31, 1998
BAR CHART DATA:
-----------------------------------
Scudder Taxable Yield
Pennsylvania Needed to Equal
Tax Free Fund the Fund's Yield
-----------------------------------
4.19% 7.14%
-----------------------------------
Table of Contents
3 Letter from the Fund's President 18 Notes to Financial Statements
4 Performance Update 20 Report of Independent Accountants
5 Portfolio Summary 21 Tax Information
6 Portfolio Management Discussion 22 Shareholder Meeting Results
9 Glossary of Investment Terms 24 Officers and Trustees
10 Investment Portfolio 25 Investment Products and Services
14 Financial Statements 26 Scudder Solutions
17 Financial Highlights
* For your information, these ratings are subject to change every month and are
calculated from the Fund's five-year average annual return in excess of 90-day
Treasury bill returns with appropriate fee adjustments, and a risk factor that
reflects fund performance below T-bill returns. The Fund received four stars
for three-year performance, four stars for five-year performance, and three
stars for ten-year performance, and was rated among 1525, 782, and 345
municipal funds for the respective periods. Of the funds rated, 10% received
five stars, 22.5% received four stars, and 35% received three stars. Past
performance is no guarantee of future returns.
2 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
We are pleased to report to you concerning Scudder Pennsylvania Tax Free
Fund's performance over its most recent fiscal year ended March 31, 1998. In
addition to the Fund's four-star Morningstar rating as of March 31 (see page 2),
the Fund posted a 10.08% total return for its most recent fiscal year ended
March 31, 1998. Please read the portfolio management discussion beginning on
page 6 for more information about the Fund's performance, investment
environment, and outlook.
As of January 1, 1998, the Fund's investment adviser changed its name to
Scudder Kemper Investments, Inc., from Scudder, Stevens & Clark, Inc., pursuant
to the acquisition of a majority interest in Scudder, Stevens & Clark by Zurich
Insurance Company, and the combining of Scudder's business with that of Zurich
Kemper Investments, Inc. January 1 also marked changes in your Fund's portfolio
management team. Donald C. Carleton, former Lead Portfolio Manager, retired
after 15 years at Scudder Kemper Investments. We thank Don for his many years of
service, and we welcome the Fund's new portfolio management team: Philip G.
Condon, Lead Portfolio Manager, and Rebecca L. Wilson, Portfolio Manager, with a
combined 30 years of investment industry experience.
For those of you interested in new Scudder products, we recently introduced
three industry sector funds as a part of our Choice Series: Scudder Financial
Services Fund, which seeks long-term growth by investing in financial services
companies in the U.S. and abroad; Scudder Health Care Fund, which seeks
long-term growth from health care companies located around the world; and
Scudder Technology Fund, which pursues long-term growth by investing in
companies that develop, produce, or distribute technology. In addition, April 6,
1998 marked the debut of our newest entrant in the growth and income category:
Scudder Real Estate Investment Fund, investing in equity securities of companies
in the real estate industry. Please see page 25 for more information on Scudder
products and services.
As always, please call a Scudder Investor Information representative at
1-800-225-2470 if you have questions about your Fund. Page 26 provides more
information on how to contact Scudder. Thank you for choosing Scudder
Pennsylvania Tax Free Fund to help meet your investment needs.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Pennsylvania Tax Free Fund
3 - Scudder Pennsylvania Tax Free Fund
<PAGE>
PERFORMANCE UPDATE as of March 31, 1998
- ----------------------------------------------------------------
Fund Index Comparisons
- ----------------------------------------------------------------
Total Return
- ---------------------------------------------
Period Ended Growth of Average
3/31/98 $10,000 Cumulative Annual
- ---------------------------------------------
SCUDDER PENNSYLVANIA TAX FREE FUND
- ---------------------------------------------
1 Year $ 11,008 10.08% 10.08%
5 year $ 13,699 36.99% 6.50%
10 Year $ 22,179 121.79% 8.29%
- ---------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND INDEX
- ---------------------------------------------
1 Year $ 11,073 10.73% 10.73%
5 Year $ 13,911 39.11% 6.82%
10 Year $ 22,289 122.89% 8.34%
- ---------------------------------------------
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
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 PENNSYLVANIA TAX FREE FUND
Year Amount
- ----------------------
88 $10,000
89 $11,044
90 $12,011
91 $12,921
92 $14,304
93 $16,190
94 $16,627
95 $17,806
96 $19,133
97 $20,148
98 $22,179
LEHMAN BROTHERS MUNICIPAL BOND INDEX
Year Amount
- ----------------------
88 $10,000
89 $10,719
90 $11,851
91 $12,943
92 $14,238
93 $16,022
94 $16,393
95 $17,611
96 $19,088
97 $20,129
98 $22,289
The unmanaged Lehman Brothers Municipal Bond Index is a market value-weighted
measure of municipal bonds issued across the United States. Index issues have a
credit rating of at least Baa and a maturity of at least two years. Index
returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
- -----------------------------------------------------------------
Returns and Per Share Information
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
Yearly Periods Ended March 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------------------------------------------------------------------------------------------------
NET ASSET VALUE... $ 12.08 $ 12.27 $ 12.35 $ 12.80 $ 13.46 $ 13.01 $ 13.13 $ 13.31 $ 13.27 $ 13.85
INCOME DIVIDENDS.. $ .85 $ .84 $ .82 $ .77 $ .76 $ .75 $ .73 $ .71 $ .71 $ .70
CAPITAL GAINS
DISTRIBUTIONS..... $ .06 $ .01 $ -- $ .21 $ .21 $ .09 $ .03 $ .07 $ .02 $ .03
FUND TOTAL
RETURN (%)........ 11.00 8.75 7.58 10.70 13.19 2.70 7.45 7.45 5.30 10.08
INDEX TOTAL
RETURN (%)........ 7.21 10.56 9.22 10.02 12.52 2.32 7.43 8.38 5.45 10.73
</TABLE>
All performance is historical and 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 ten year periods would have been lower.
4 - Scudder Pennsylvania Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of March 31, 1998
- ---------------------------------------------------------------------------
Diversification
- ---------------------------------------------------------------------------
Hospital/Health 24%
Water/Sewer Revenue 19%
General Obligations 12%
Pollution Control/
Industrial Development 11%
Sales & Specialty Tax 6%
Port/Airport Revenue 5%
Higher Education 5%
Housing Finance Authority 4%
Country General Obligation/Lease 4%
Miscellaneous Municipal 10%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
The Fund invests in a broad
selection of Pennsylvania tax-free
bonds.
- --------------------------------------------------------------------------
Quality
- --------------------------------------------------------------------------
AAA* 77%
AA 4%
A 6%
BBB 8%
Not Rated 5%
- --------------------------------------
100%
- --------------------------------------
Weighted average quality: AA
*Contains cash equivalents
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Overall portfolio quality remains
high, with over 85% of portfolio
securities rated A or better as of
March 31.
- --------------------------------------------------------------------------
Effective Maturity
- --------------------------------------------------------------------------
Less than 1 year 7%
1-5 years 27%
5-8 years 14%
8-15 years 35%
Greater than 15 years 17%
- --------------------------------------
100%
- --------------------------------------
Weighted average effective maturity:
8.9 years
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Our continuing goal is to have an
average effective maturity similar
to that of the Lehman Brothers
Municipal Bond Index, but with a
superior, call-protected structure.
- -----------------------------------------------------------------------------
For more complete details about the Fund's investment portfolio,
see page 10.
5 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Portfolio Management Discussion
Dear Shareholders,
For its most recent fiscal year ended March 31, 1998, Scudder Pennsylvania Tax
Free Fund posted a solid total return as interest rates continued a slow and
steady decline against a backdrop of low inflation and healthy economic growth.
The Fund's 10.08% total return for the period consisted of a $0.58 increase in
net asset value to $13.85, income distributions of $0.70 per share, and a
long-term capital gain distribution of $0.03 per share. This return is in
keeping with the 10.24% average of 67 similar funds tracked by Lipper over the
12-month period. On March 31, 1998, the Fund's 30-day net annualized SEC yield
was 4.19%, equivalent to a taxable yield of 7.14% for shareholders subject to
the 41.29% maximum combined state and federal income tax rate. The Fund's tax
equivalent yield is significantly higher than current yields available from
taxable investments of similar maturity and credit quality.
Pennsylvania Update
After a slowdown in 1996, the Commonwealth of Pennsylvania experienced stronger
economic growth in 1997. Pennsylvania is expecting to finish its 1998 fiscal
year with a sixth consecutive operating surplus in its General Fund. Revenue
growth exceeded the Commonwealth's estimates by $216 million as of February
1998, with personal income tax collections contributing the majority of the
increase. During its 1997 economic resurgence, job growth in the service and
trade sectors boosted the Commonwealth's employment growth ranking from 44th in
the nation to 17th. Pennsylvania's unemployment rate in January 1998 was 4.6%,
slightly below the national average. The Commonwealth has a low debt burden,
benefiting from a favorable economy which has led to stronger finances,
increases in reserves, and job growth.
Steady Growth and
Low Inflation
The long-running U.S. economic scenario of moderate growth and low inflation
forges on. Asia, expected by many to export its way out of economic crisis and
in doing so derail U.S. growth, has so far increased exports only modestly. At
the same time, the U.S. bond market has benefited from Federal Reserve inaction
on interest rates, falling commodity prices, mixed economic statistics, and
portfolio rebalancing by investors who have acted to reduce the overweighting of
stocks in their portfolios. Moreover, the municipal bond market has enjoyed its
first significant increase in investor interest in four years. During the Fund's
most recent fiscal year, yields of 10-year Treasury bonds declined 1.3
percentage points and their prices rose 9.3%, while yields of comparable
municipal bonds declined almost three quarters of a percentage point and their
prices increased 5.2%.
It's important to note that in the current environment of lower municipal bond
yields, "real" interest rates -- interest rates minus increases in the CPI, a
recognized barometer of inflation -- have rarely been higher. Real interest
rates depict the level of income bondholders actually earn, taking into account
the erosion in value of their principal from inflation. The chart on the
following page illustrates the widening gap between yield levels and inflation
since March 1995.
6 - Scudder Pennsylvania Tax Free Fund
<PAGE>
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART TITLE:
Municipal Yields Compared with Inflation
March 31, 1995 - March 31, 1998
LINE CHART DATA:
-----------------------------------------------------
10-year
CPI municipal bonds
-----------------------------------------------------
3/95 2.73% 4.65%
2.90 5.00
2.95 5.15
1/96 2.99 5.00
3.04 4.85
2.50 5.10
2.23 4.75
1/97 2.08 4.50
1.84 4.60
1.60 4.20
1.40 4.30
3/98 1.40 4.50
(Chart indicates a 3.10% spread between the 10-year municipal
bonds at 4.50% (3/98) and the CPI at 1.40% (3/98).)
Municipal yields represented by 10-year, AAA-rated municipal bonds.
Inflation represented by CPI (Consumer Price Index).
Sources: Salomon Brothers; Datastream
- ----------
Noncallable Bonds
Remain a Focus
As a means of locking in a substantial income stream for Scudder Pennsylvania
Tax Free Fund over time, we continue to emphasize 10- to 20-year noncallable
bonds. As of March 31, over 40% of the Fund's securities had maturities in this
range. During the Fund's most recent fiscal year, we sold bonds with weaker call
protection and purchased additional noncallable bonds that were attractively
priced. We also continue to look for opportunities to add high yielding
BBB-rated and non-rated bonds to the portfolio. Higher yielding bonds, while
carrying some additional credit risk, generally exhibit less interest rate
sensitivity than municipal bonds rated A or above. Overall, the Fund held 13% of
bonds in the BBB-rated and nonrated categories as of the end of March. (For a
summary of the Fund's quality, diversification, and maturity structure, see page
5.) Lastly, our continuing goal is to have an average effective maturity similar
to that of the Lehman Brothers Municipal Bond Index, the Fund's benchmark, but
with a superior, call-protected structure. As of March 31, the Fund's average
effective maturity was approximately 8.9 years.
Overall portfolio quality remains high, with over 85% of portfolio securities
rated A or better at the close of the period. We continue to invest in a broad
selection of Pennsylvania municipal bonds, including hospital/health,
water/sewer revenue, and general obligation bonds.
Over the long term, we seek to provide a competitive level of federal and state
tax-exempt income for Fund investors -- with total return as an additional
objective -- by concentrating on three broad categories of Pennsylvania
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 existing "callable" 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.
As of March 31, 64% of bonds the Fund held were noncallable.
o Steeply discounted callable bonds, which are unlikely to be subject to
early redemption at par value by their issuers.
7 - Scudder Pennsylvania Tax Free Fund
<PAGE>
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 a
relatively short time.
Outlook
In the words of Federal Reserve Chairman Greenspan, the U.S. economy delivered
"exemplary performance" in 1997, with real GNP growth of 3.8%. We believe this
level of growth will be difficult to maintain in 1998 because of two current
drags on the economy -- burdensome consumer debt, and a high level of corporate
write-offs -- and one that still looms -- possible economic fallout from Asia's
troubles. Any slowdown from current levels of growth would provide a basis for a
sustained decline in interest rates and favorable bond market performance. At
the same time, we believe that the Fed will stand ready to raise interest rates
at the first sign of runaway growth.
We will continue our focus on 10-20 year noncallable municipal bonds as we seek
to boost yield and achieve attractive long-term returns for our investors. At
the same time, we will attempt to limit volatility by maintaining a neutral
average maturity and high overall credit quality as we pursue double-tax-free
income and competitive total return for Scudder Pennsylvania Tax Free Fund
shareholders.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Rebecca L. Wilson
Philip G. Condon Rebecca L. Wilson
Scudder Pennsylvania
Tax Free Fund:
A Team Approach to Investing
Scudder Pennsylvania Tax Free Fund is managed by a team of Scudder Kemper
Investments, Inc. (the "Adviser") 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
the Adviser'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 our extensive resources.
Lead Portfolio Manager Philip G. Condon assumed responsibility for the Fund's
day-to-day management in 1998 and became a member of the team in 1987. Mr.
Condon has been with the Adviser since 1983. Mr. Condon has 18 years of
experience in municipal investing and portfolio management. Rebecca L. Wilson,
Portfolio Manager, became a member of the team in 1998. Ms. Wilson, who joined
the Adviser in 1986, has 12 years of experience in municipal investing and
research.
8 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Glossary of Investment Terms
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 OBLIGATION BOND A municipal bond backed by the "full faith
and credit" (including the taxing and further
borrowing power) of the 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 VALUE (NAV) The price per share of a mutual fund based on
the sum of the market value of all the
securities owned by the fund divided by the
number of outstanding shares.
TAXABLE EQUIVALENT YIELD The level of yield a fully taxable instrument
would have to provide to equal that of a
tax-free municipal bond on an after-tax
basis.
30-DAY SEC YIELD The standard yield reference for bond funds,
based on a 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.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
9 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Investment Portfolio as of March 31, 1998
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Municipal Investments 3.6%
- ------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Allegheny County, PA, Industrial Development Authority, LC Longwood at Oakmont:
Daily Demand Note, 3.9%, 7/1/27* ............................................. 100,000 AA 100,000
Series 1997, Daily Demand Note, 3.9%, 7/1/27* ................................ 400,000 AA1 400,000
Series 1997B, Daily Demand Note, 3.9%, 7/1/27* ............................... 100,000 AA1 100,000
Delaware County, PA, Airport Facilities Revenue, United Parcel Service,
Daily Demand Note, 3.7%, 12/1/15* ............................................ 2,000,000 AAA 2,000,000
Pennsylvania Higher Educational Facilities Authority, Carnegie Mellon
University, Daily Demand Note, Series 1995 D, 3.75%, 11/1/30* ................ 200,000 A1+ 200,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Investments (Cost $2,800,000) 2,800,000
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Municipal Investments 96.4%
- ------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Allegheny County, PA, Airport Revenue, Pittsburgh International Airport, Series
1997A, 5.75%, 1/1/13 (c) ..................................................... 1,500,000 AAA 1,613,009
Allegheny County, PA, Higher Education Building Authority, Community College,
Series 1993A, 5.8%, 6/1/13 (c) ............................................... 2,000,000 AAA 2,146,480
Allegheny County, PA, Sanitary Authority, Sewer Revenues, Series 1986 B,
Prerefunded 6/1/99, 7.5%, 12/1/16 (c) ........................................ 500,000 AAA 521,580
Armstrong County, PA, Hospital Authority, St. Frances Medical Center,
Series A, 6.25%, 6/1/13 (c) .................................................. 1,000,000 AAA 1,080,370
Berks County, PA, Municipal Authority Hospital Revenue, Reading Hospital and
Medical Center Project:
5.5%, 10/1/08 (c) ........................................................... 1,000,000 AAA 1,076,010
5.7%, 10/1/14 (c) ........................................................... 1,000,000 AAA 1,088,630
Bethlehem, PA, Water Authority, Refunding, 4.875%, 11/15/14 (c) ................ 1,000,000 AAA 971,650
Bethlehem, PA, Water Revenue, Series 1992, Prerefunded 11/15/01, 6.25%,
11/15/11 (c)*** .............................................................. 1,000,000 AAA 1,071,980
Blair County, PA, Hospital Authority, Altoona Hospital Project, 5.5%,
7/1/07 (c) ................................................................... 1,000,000 AAA 1,074,130
Bucks County, PA, Water and Sewer Authority Revenue, ETM, 6.375%, 12/1/08** .... 425,000 NR 470,781
Clearfield, PA, Hospital Authority Revenue, Clearfield Hospital, 6.875%,
6/1/16 ....................................................................... 1,450,000 BBB 1,583,676
Commonwealth of Pennsylvania, Certificate of Participation, Lease Revenue,
Series A, 5.25%, 7/1/10 (c) .................................................. 1,890,000 AAA 1,917,140
Delaware County Authority, Commonwealth of Pennsylvania, University Revenue,
Villanova University, Prerefunded 8/1/98, 7.75%, 8/1/18*** ................... 200,000 AAA 206,636
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder Pennsylvania Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Delaware County, PA, Health Facilities Revenue, Mercy Health Corporation of
Southeastern Pennsylvania, Series B, 6%, 11/15/07 ............................ 1,500,000 BBB 1,650,840
Delaware County, PA, Hospital Revenue, Memorial Hospital, 5.5%, 8/15/13 ........ 1,750,000 AAA 1,817,375
Delaware County, PA, Industrial Development Authority, Resource Recovery
Revenue, Series A, Refunding Bond, 6.5%, 1/1/08 .............................. 1,000,000 A 1,124,410
Delaware County, PA, White Horse Village, NC Series 1996 A, 6.6%, 7/1/06 ....... 1,000,000 NR 1,045,750
Erie County, PA, Pollution Control, 5.3%, 4/1/12 ............................... 1,000,000 A 1,025,690
Erie County, PA, Prison Authority, Commonwealth Lease Revenue, Prerefunded
11/1/01, 6.25%, 11/1/11 (c)*** ............................................... 1,000,000 AAA 1,071,280
Harrisburg, PA, General Obligation, Refunding, Zero Coupon, Series D,
9/15/11 (c) .................................................................. 1,000,000 AAA 517,240
Harrisburg, PA, Series 1997F, Zero Coupon, 3/15/12 ............................. 1,770,000 AAA 881,265
Harrisburg, PA, Water Authority Revenue, Series 1993 B, Inverse Floater,
7.72%, 6/18/15 (c)**** ....................................................... 700,000 AAA 791,000
Indiana County, PA, Industrial Development Authority, Pennsylvania Electric
Company, Pollution Control Revenue, 5.35%, 11/1/10 (c) ....................... 1,000,000 AAA 1,064,110
Lebanon County, PA, Good Samaritan Hospital Authority Revenue, Series 1989 B,
Prerefunded 11/1/99, 8.25%, 11/1/18*** ....................................... 600,000 AAA 651,858
Lehigh County, PA, General Purpose, Hospital Authority Revenue, Lehigh Valley
Health Network, 5%, 7/1/13 (c) ............................................... 1,315,000 AAA 1,298,326
Montgomery County, PA, Holy Redeemer Hospital, 6.75%, 2/1/09 (c) ............... 500,000 AAA 512,725
Montgomery County, PA, Redevelopment Authority, Multi-Family Housing Revenue
Refunding, KBF Associates, LP Project, 6.375%, 7/1/12 ........................ 1,500,000 BBB 1,560,180
Pennsylvania Convention Center Authority, Funding Revenue, 6%, 9/1/19 (c) ...... 2,200,000 AAA 2,434,718
Pennsylvania General Obligation:
10%, 4/15/02 (c) ............................................................. 2,500,000 AAA 3,035,300
6.25%, 7/1/10 ................................................................ 1,000,000 AA 1,146,040
Prerefunded 12/15/98, Zero Coupon, 12/15/02*** ............................... 2,040,000 AAA 1,452,031
Pennsylvania Higher Education Facilities Authority, Health Services,
Series 1996 A, 5.6%, 11/15/10 (c) ............................................ 2,480,000 AAA 2,690,552
Pennsylvania Housing Finance Agency, Single Family Mortgage Revenue:
Series 1991-32, 7.15%, 4/1/15 ................................................ 865,000 AA 919,919
Series 1992-33, 6.85%, 10/1/09 ............................................... 840,000 AA 901,580
Pennsylvania Industrial Development Authority, Economic Development Revenue:
5.8%, 1/1/08 (c) ............................................................. 1,000,000 AAA 1,088,430
Series 1996, 6%, 7/1/08 (c) .................................................. 1,000,000 AAA 1,108,140
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Pennsylvania Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pennsylvania Intergovernmental Cooperation Authority, Special Tax Revenue,
City of Philadelphia, Prerefunded 6/15/02, 6.8%, 6/15/12*** .................. 1,000,000 AAA 1,101,460
Philadelphia, PA, Authority for Industrial Development, Commercial
Development Revenues, Series 1997 A, 6.5%, 10/1/27 ........................... 1,000,000 NR 1,075,210
Philadelphia, PA, General Obligation:
11.5%, 8/1/98 (c) ............................................................ 500,000 AAA 512,655
Refunding Revenue, Series A, 11.5%, 8/1/99 (c) ............................... 710,000 AAA 779,218
School District, Series A, 6.25%, 9/1/09 (c) ................................. 1,000,000 AAA 1,136,640
Series 1993 A, 5.5%, 9/1/14 (c) .............................................. 1,500,000 AAA 1,602,390
Philadelphia, PA, Hospital and Higher Education Facilities Authority:
Hospital Revenue:
Albert Einstein Medical Center, 7.5%, 4/1/99 ................................ 275,000 A 284,235
Children's Seashore House, Series A, 7%, 8/15/12 ............................ 1,000,000 A 1,098,270
Temple University, Series 1997, 5.5%, 11/15/27 ............................... 1,000,000 A 1,000,730
Temple University Hospital, Series 1993 A, 6.625%, 11/15/23 .................. 1,100,000 BBB 1,199,858
Philadelphia, PA, Municipal Authority, Lease Revenue Refunding,
Series A, 5.625%, 11/15/14 (c) .............................................. 1,000,000 AAA 1,046,890
Philadelphia, PA, Port Authority Lease Revenue, Series 1993, 6.2%, 9/1/13 (c) .. 2,000,000 AAA 2,172,520
Philadelphia, PA, Water & Wastewater Refunding Revenue, 5.625%, 6/15/09 (c) .... 2,000,000 AAA 2,168,660
Philadelphia, PA, Water and Waste Revenue, 5.625%, 6/15/08 (c) ................. 2,000,000 AAA 2,168,720
Philadelphia, PA, Water Revenue, 6.25%, 8/1/10 (c) ............................. 1,000,000 AAA 1,139,720
Pittsburgh, PA, Water and Sewer System Revenue:
ETM, 7.25%, 9/1/14 (c)** ..................................................... 150,000 AAA 183,428
Series A, 4.75%, 9/1/16 (c) .................................................. 2,000,000 AAA 1,896,360
Series A, Prerefunded 9/1/01, 6.5%, 9/1/14 (c)*** ............................ 1,250,000 AAA 1,366,875
Somerset County, PA, General Authority, Commonwealth Lease Revenue,
Prerefunded 10/15/01, 6.25%, 10/15/11 (c)*** ................................. 1,000,000 AAA 1,070,480
Union County, PA, Higher Education Facilities Authority, University Revenue,
Bucknell University, 6.2%, 4/1/07 (c) ........................................ 1,000,000 AAA 1,076,820
University Area, PA, Sewer Revenue, 5.25%, 11/1/14 (c) ......................... 1,750,000 AAA 1,822,958
Washington County, PA, Lease Revenue, Shadyside Hospital Project, Prerefunded
6/15/00, 7.375%, 12/15/09 (c)*** ............................................. 1,000,000 AAA 1,098,630
Wilson, PA, Area School District, Zero Coupon, 5/15/09 (c) ..................... 2,000,000 AAA 1,189,100
PUERTO RICO
Puerto Rico Public Building Authority, Government Facilities Revenue, 6.25%,
7/1/13 (c) ................................................................... 1,000,000 AAA 1,154,270
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Pennsylvania Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VIRGIN ISLANDS
Virgin Islands Public Finance Authority, General Obligation, Matching
Fund Loan Notes, Series A, 7.25%, 10/1/18 .................................... 1,500,000 NR 1,679,160
- ------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $70,410,998) 75,636,088
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $73,210,998) (a) 78,436,088
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $73,210,998. At March 31,
1998, net unrealized appreciation for all securities based on tax cost was
$5,225,090. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $5,264,428 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$39,338.
(b) 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 by the Investment Adviser to be of
comparable quality to rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, MBIA or BIG.
* 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.
** 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.
*** 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, if any, on the tax-exempt issue and to retire the bonds in
full at the earliest refunding date.
**** 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, 1998.
The accompanying notes are an integral part of the financial statements.
13 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of March 31, 1998
<TABLE>
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $73,210,998) ................. $ 78,436,088
Receivable for investments sold ...................................... 260,000
Interest receivable .................................................. 1,254,399
Receivable for Fund shares sold ...................................... 269,846
Other assets ......................................................... 1,208
----------------
Total assets ......................................................... 80,221,541
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Due to custodian bank ................................................ 19,567
Payable for investments purchased .................................... 1,294,406
Dividends payable .................................................... 121,400
Payable for Fund shares redeemed ..................................... 39,845
Accrued management fee ............................................... 20,932
Other payables and accrued expenses .................................. 29,986
----------------
Total liabilities .................................................... 1,526,136
--------------------------------------------------------------------------------------------
Net assets, at market value $ 78,695,405
--------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation on investments ........................... 5,225,090
Accumulated net realized gain ........................................ 422,774
Paid-in capital ...................................................... 73,047,541
--------------------------------------------------------------------------------------------
Net assets, at market value $ 78,695,405
--------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($78,695,405 / 5,680,795 outstanding shares of beneficial ----------------
interest, $.01 par value, unlimited number of shares authorized) $13.85
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Statement of Operations
year ended March 31, 1998
<TABLE>
<S> <C>
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------
Income:
Interest ............................................................. $ 4,240,429
-----------------
Expenses:
Management fee ....................................................... 450,978
Services to shareholders ............................................. 87,721
Custodian and accounting fees ........................................ 58,471
Trustees' fees and expenses .......................................... 15,067
Auditing ............................................................. 31,683
Reports to shareholders .............................................. 20,102
Registration fees .................................................... 3,926
Legal ................................................................ 5,345
Other ................................................................ 7,132
-----------------
Total expenses before reductions ..................................... 680,425
Expense reductions ................................................... (292,000)
-----------------
Expenses, net ........................................................ 388,425
---------------------------------------------------------------------------------------------
Net investment income 3,852,004
---------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from investment transactions ................ 588,571
Net unrealized appreciation (depreciation) on investments during the
period ............................................................ 2,760,257
---------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions 3,348,828
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 7,200,832
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended March 31,
Increase (Decrease) in Net Assets 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income gain (loss) ......................... $ 3,852,004 $ 4,007,012
Net realized gain (loss) from investment transactions ..... 588,571 84,346
Net unrealized appreciation (depreciation) on investments
during the period ...................................... 2,760,257 (190,591)
---------------- ---------------
Net increase (decrease) in net assets resulting from
operations ............................................. 7,200,832 3,900,767
---------------- ---------------
Distributions to shareholders:
From net investment income ................................ (3,852,004) (4,007,012)
---------------- ---------------
From net realized gains from investment transactions ...... (164,742) (130,973)
---------------- ---------------
Fund share transactions:
Proceeds from shares sold ................................. 13,083,990 13,660,695
Net asset value of shares issued to shareholders in
reinvestment of distributions .......................... 2,523,349 2,572,041
Cost of shares redeemed ................................... (14,274,017) (17,335,755)
---------------- ---------------
Net increase (decrease) in net assets from Fund share
transactions ........................................... 1,333,322 (1,103,019)
---------------- ---------------
Increase (decrease) in net assets ......................... 4,517,408 (1,340,237)
Net assets at beginning of period ......................... 74,177,997 75,518,234
---------------- ---------------
Net assets at end of period ............................... $78,695,405 $74,177,997
---------------- ---------------
Other Information
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period ................. 5,591,548 5,674,116
---------------- ---------------
Shares sold ............................................... 956,693 1,024,372
Shares issued to shareholders in reinvestment of
distributions .......................................... 184,079 192,785
Shares redeemed ........................................... (1,051,525) (1,299,725)
---------------- ---------------
Net increase (decrease) in Fund shares .................... 89,247 (82,568)
---------------- ---------------
Shares outstanding at end of period ....................... 5,680,795 5,591,548
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Financial Highlights
The following table included selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of -----------------------------------------------------------------------------------
period ............................. $13.27 $13.31 $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08 $11.80
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income ................. .70 .71 .71 .73 .75 .76 .77 .82 .84 .79
Net realized and unrealized gain
(loss) on investment transactions .. .61 (.02) .25 .15 (.36) .87 .52 .08 .20 .40
Total from investment
operations ......................... 1.31 .69 .96 .88 .39 1.63 1.29 .90 1.04 1.19
-----------------------------------------------------------------------------------
Less distributions:
From net investment
income ............................. (.70) (.71) (.71) (.73) (.75) (.76) (.77) (.82) (.84) (.85)
From net realized gains on -----------------------------------------------------------------------------------
investment transactions ............ (.03) (.02) (.07) (.03) (.09) (.21) (.07) -- (.01) (.06)
-----------------------------------------------------------------------------------
Total distributions ................... (.73) (.73) (.78) (.76) (.84) (.97) (.84) (.82) (.85) (.91)
-----------------------------------------------------------------------------------
Net asset value, end of -----------------------------------------------------------------------------------
period ............................. $13.85 $13.27 $13.31 $13.13 $13.01 $13.46 $12.80 $12.35 $12.27 $12.08
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) (a) .................. 10.08 5.30 7.45 7.09 2.70 13.19 10.70 7.58 8.75 11.00
Ratios and Supplemental Data
Net assets, end of period
($ millions) ....................... 79 74 76 72 74 61 39 26 18 11
Ratio of operating expenses, net to
average daily net assets (%) ....... .52 .50 .50 .50 .50 .50 .50 .50 .50 .50
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............... .91 .92 .91 .94 .95 1.02 1.13 1.43 1.84 2.43
Ratio of net investment income to
average daily net assets (%) ....... 5.12 5.32 5.30 5.74 5.42 5.79 6.05 6.67 6.78 7.09
Portfolio turnover rate (%) ........... 20.4 11.6 11.1 26.2 17.4 29.2 11.2 7.8 2.0 13.5
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
17 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Pennsylvania 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.
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, 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
provision for federal income taxes was required.
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 in accordance with federal tax regulations which
may differ from generally accepted accounting principles. 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 realized 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
For the year ended March 31, 1998, purchases and sales of long-term municipal
securities aggregated $14,726,861 and $17,033,468, respectively.
18 - Scudder Pennsylvania Tax Free Fund
<PAGE>
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which is effective December 31, 1997, is the same in all
material respects as the corresponding previous Investment Management Agreement,
except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, 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 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 Management Agreement. The Adviser had agreed not
to impose all or a portion of its management fee and to maintain the annualized
expenses of the Fund at not more than 0.50% of average daily net assets until
January 31, 1998 and at not more than 0.60% of average daily net assets for the
period from February 1, 1998 to July 31, 1998. For the year ended March 31,
1998, the Adviser imposed fees amounting to $158,978 of which $20,932 was unpaid
at March 31, 1998 and the portion not imposed amounted to $292,000 for the year
ended March 31, 1998.
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, 1998, the amount charged to the Fund by SSC aggregated
$61,715, of which $5,020 was unpaid at March 31, 1998.
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, 1998, the amount charged to the Fund by SFAC aggregated $36,000, of
which $3,000 was unpaid at March 31, 1998.
The Trust pays each Trustee not affiliated with the Adviser an annual retainer,
divided equally among the series of the Trust, plus specified amounts for
attended board and committee meetings. For the year ended March 31, 1998,
Trustees' fees and expenses charged to the Fund aggregated $15,067.
19 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder State Tax Free Trust and the Shareholders of Scudder
Pennsylvania Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Scudder
Pennsylvania Tax Free Fund, including the investment portfolio, as of March 31,
1998, 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 ten years in the period then
ended. 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, 1998, 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 Pennsylvania Tax Free Fund as of March 31, 1998, 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 ten years in the period then ended, in conformity with generally accepted
accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
May 4, 1998
20 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Tax Information
The Fund paid distributions of $.03 per share from net long-term capital gains
during its year ended March 31, 1998, of which 47.0% represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$610,000 as capital gain dividends for its year ended March 31, 1998, of which
54.0% represents 20% rate gains.
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 1998, 100% constituted exempt interest dividends for regular federal
income tax and Pennsylvania 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.
21 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Pennsylvania Tax
Free Fund (the "Fund") was held on October 24, 1997, at the office of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. At the Meeting, as adjourned
and reconvened, the following matters were voted upon by the shareholders (the
resulting votes for each matter are presented below). With regard to certain
proposals, it was recommended that the Meeting be reconvened in order to provide
shareholders with an additional opportunity to return their proxies. The date of
the reconvened meeting at which the matters were decided is noted after the
proposed matter.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
3,350,032 171,092 137,390 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 3,519,153 139,363
Dawn-Marie Driscoll 3,519,153 139,363
Peter B. Freeman 3,517,736 140,780
George M. Lovejoy, Jr. 3,517,653 140,863
Wesley W. Marple, Jr. 3,517,493 141,023
Daniel Pierce 3,517,583 140,934
Kathryn L. Quirk 3,516,290 142,226
Jean C. Tempel 3,519,080 139,436
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
3,018,015 231,459 264,041 145,001
22 - Scudder Pennsylvania Tax Free Fund
<PAGE>
4. To approve certain amendments to the Declaration of Trust. Sufficient
proxies had not been received by December 2, 1997 to approve the
amendments to the Declaration of Trust. Management has determined not to
continue to seek shareholder approval for this item.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
3,121,056 208,759 194,995 142,782
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
----------------
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<S> <C> <C> <C> <C>
5.1 Diversification 3,061,248 197,391 254,876 145,001
5.2 Borrowing 3,048,139 210,499 254,876 145,001
5.3 Senior securities 3,059,460 199,178 254,876 145,001
5.4 Concentration 3,062,691 198,497 252,326 145,001
5.5 Loans 3,060,360 198,279 254,876 145,001
5.6 Underwriting of securities 3,061,248 200,589 251,678 145,001
5.7 Investment in real estate 3,061,248 200,589 251,678 145,001
5.8 Purchase of physical 3,058,711 203,126 251,678 145,001
commodities
5.9 Investment in Pennsylvania 3,064,851 193,788 254,876 145,001
municipal securities
5.10 Tax diversification 3,061,248 197,391 254,876 145,001
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
3,409,862 75,495 173,157
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
23 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
Trustee; Executive Fellow, Center
for Business Ethics, Bentley
College; President, Driscoll
Associates
Peter B. Freeman
Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business
Administration,
Northeastern University, College
of Business Administration
Kathryn L. Quirk*
Trustee; Vice President and
Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner,
Technology Equity Partners
Donald C. Carleton*
Vice President
Philip G. Condon*
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, Secretary and
Treasurer
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
24 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Growth
- -------------
Worldwide
Scudder Global Fund
Scudder International Growth and Income Fund
Scudder International Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
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 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 Scudder 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'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.
25 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
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-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
26 - Scudder Pennsylvania Tax Free Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with Scudder funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
27 - Scudder Pennsylvania Tax Free Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $200 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
U.S.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich 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 Group. The Zurich 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
[LOGO]
