Scudder
Massachusetts
Tax Free Fund
Annual Report
March 31, 1998
Pure No-Load(TM) Funds
For investors seeking double tax-free income, exempt from both Massachusetts
state personal income tax and regular federal income tax.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Massachusetts Tax Free Fund
- --------------------------------------------------------------------------------
Date of Inception: 5/28/87 Total Net Assets as of Ticker Symbol: SCMAX
3/31/98: $373.9 million
- --------------------------------------------------------------------------------
o As of March 31, 1998, Scudder Massachusetts Tax Free Fund's 30-day net
annualized SEC yield was 4.19%, equivalent to a 7.88% taxable yield for
Massachusetts investors subject to the 46.85% combined federal and state income
tax rate.
o For its most recent fiscal year ended March 31, 1998, Scudder Massachusetts
Tax Free Fund posted a total return of 9.82%, compared with the 9.98% average
return of 56 similar funds tracked by Lipper Analytical Services. The Fund
continues to hold the number one ranking for total return over the ten-year
period ended March 31 as compiled by Lipper. Please see page 6 for additional
information on the Fund's rankings.
o Scudder Massachusetts 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
Massachusetts needed to equal
Tax Free Fund the Fund's yield
-----------------------------------------------
4.19% 7.88%
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Table of Contents
3 Letter from the Fund's President 20 Notes to Financial Statements
4 Performance Update 23 Report of Independent Accountants
5 Portfolio Summary 24 Tax Information
6 Portfolio Management Discussion 25 Shareholder Meeting Results
10 Glossary of Investment Terms 28 Officers and Trustees
11 Investment Portfolio 29 Investment Products and Services
16 Financial Statements 30 Scudder Solutions
19 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 Massachusetts Tax Free Fund
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Letter from the Fund's President
Dear Shareholders,
We are pleased to report to you concerning Scudder Massachusetts 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 continues to hold the number one ranking for total return among
Massachusetts tax-free funds over the ten-year period 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.
More good news -- Massachusetts' economic revival continues unabated. The
Commonwealth's unemployment level is at a nine-year low, per capita income is
significantly higher than the national average, and officials project a large
budget surplus for the 1998 fiscal year. Please read the "Massachusetts Update"
on page 6 for additional details.
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 28 for more information on Scudder
products and services.
Lastly, at the start of 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.
As always, please call a Scudder Investor Information representative at
1-800-225-2470 if you have questions about your Fund. Page 29 provides more
information on how to contact Scudder. Thank you for choosing Scudder
Massachusetts Tax Free Fund to help meet your investment needs.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President
Scudder Massachusetts Tax Free Fund
3 - Scudder Massachusetts 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 Massachusetts Tax Free Fund
- -------------------------------------------
1 Year $10,982 9.82% 9.82%
5 Year $13,908 39.08% 6.82%
10 Year $22,587 125.87% 8.49%
- -------------------------------------------
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 Massachusetts
Tax Free Fund
Year Amount
- ---------------------
'88 $10,000
'89 $10,949
'90 $11,813
'91 $12,829
'92 $14,172
'93 $16,240
'94 $16,788
'95 $18,024
'96 $19,516
'97 $20,567
'98 $22,587
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 $12.23 $12.25 $12.44 $12.81 $13.61 $13.16 $13.33 $13.70 $13.72 $14.34
Income Dividends $ .88 $ .82 $ .83 $ .81 $ .84 $ .81 $ .74 $ .72 $ .70 $ .70
Capital Gains and
Other Distributions $ .20 $ .11 $ -- $ .09 $ .16 $ .12 $ .01 $ -- $ -- $ --
Fund Total
Return (%) 9.50 7.89 8.60 10.46 14.59 3.37 7.37 8.28 5.39 9.82
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, 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 five year, and ten year
periods would have been lower.
4 - Scudder Massachusetts Tax Free Fund
<PAGE>
PORTFOLIO SUMMARY as of March 31, 1998
- ---------------------------------
Diversification
- ---------------------------------
Hospital/Health 21%
General Obligation 18%
Higher Education 12%
Water/Sewer Revenue 11%
Housing Finance Authority 10%
Electric Utility Revenue 8%
Other Gneral Obligation/Lease 5%
Port/Airport Revenue 4%
Miscellaneous Municipal 11%
- ---------------------------------
100%
- ---------------------------------
The Fund continues to invest in a
broad selection of Massachusetts
municipal bonds.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- ------------------------------
Quality
- ------------------------------
AAA 40%
AA 4%
A 42%
BBB 9%
BB 2%
Not Rated 3%
- ------------------------------
100%
- ------------------------------
Weighted average quality: AA
Overall portfolio quality remains
high, with over 80% of portfolio
securities rated A or better as of
March 31.
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 1%
1-5 years 26%
5-10 years 30%
10-15 years 33%
15 years or greater 10%
- ------------------------------
100%
- ------------------------------
Weighted average effective maturity: 8.95 years
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.
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
For more complete details about the Fund's investment portfolio, see page 11.
5 - Scudder Massachusetts Tax Free Fund
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Portfolio Management Discussion
Dear Shareholders,
For its most recent fiscal year ended March 31, 1998, Scudder Massachusetts 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 9.82% total return for the period consisted of a $0.62 increase in
net asset value to $14.34 and income distributions of $0.70 per share. This
return was in keeping with the 9.98% average of 56 similar funds tracked by
Lipper over the 12-month period. In addition, the Fund ranked number one in
total return among its peers for the ten-year period ended March 31, 1998.
Massachusetts Update
Massachusetts is maximizing the benefits of the steady growth the national
economy is experiencing. The Commonwealth's economic indicators are positive,
revenues continue to exceed projections, and unemployment is at its lowest level
since 1989. The Commonwealth projects that it will finish its 1998 fiscal year
with an operating surplus of $800 million, or 7% of revenues. Massachusetts'
personal income tax, which represents 30% of General Fund revenues, is the
primary revenue source funding the surplus.
At the root of the Commonwealth's fiscal health is a strong job market. Job
growth in the services sector was the principal factor in bringing the
unemployment rate down to 3.3% versus the national average of 4.6% in February
1998. Massachusetts' per capita income in 1996 was $29,439 -- 22% higher than
the national average. The Commonwealth's debt levels are high, but manageable,
given its high wealth levels. Overall, we continue to view Massachusetts' credit
trend as improving.
Scudder Massachusetts Tax Free Fund:
Superior Long-Term Performance
(Average annual returns for periods ended March 31, 1998)
---------------------------------------------------------
Scudder
Massachusetts Number
Tax Free Lipper of
Period Fund return average Rank Funds
------ ----------- ------- ---- -----
1 Year 9.82% 9.98% 33 of 56
3 Years 7.81 7.34 8 of 49
5 Years 6.82 6.14 2 of 26
10 Years 8.49 7.85 1 of 16
Past performance does not guarantee future results.
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
6 - Scudder Massachusetts 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
- ----------
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 above
illustrates the widening gap between yield levels and inflation since March
1995.
Noncallable Bonds Remain a Focus
As a means of locking in a substantial income stream for Scudder Massachusetts
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 16% 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 9 years.
Overall portfolio quality remains high, with 83% of portfolio securities rated A
or better at the close of the period. We continue to invest in a broad selection
of Massachusetts municipal bonds, including hospital/health, general obligation,
and higher education bonds.
Over the long term, we seek to provide a competitive level of federal and state
7 - Scudder Massachusetts Tax Free Fund
<PAGE>
tax-exempt income for Fund investors -- with total return as an additional
objective -- 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 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, 46% 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.
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
8 - Scudder Massachusetts Tax Free Fund
<PAGE>
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 Massachusetts Tax Free Fund
shareholders.
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 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.
Philip G. Condon, Lead Portfolio Manager of the Fund, joined the Adviser in
1983 and has 18 years of experience in municipal investing and portfolio
management. Mr. Condon has had responsibility for Scudder Massachusetts Tax
Free Fund since 1989. Kathleen A. Meany, Portfolio Manager of the Fund, has
worked on Scudder Massachusetts Tax Free Fund since 1988. Ms. Meany joined the
Adviser in 1988 and has 21 years of municipal investment and portfolio
management experience.
9 - Scudder Massachusetts 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)
10 - Scudder Massachusetts Tax Free Fund
<PAGE>
Investment Portfolio as of March 31, 1998
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Municipal Investments 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts
Boston, MA, General Obligation, Series A, 6.5%, 7/1/12 (c) .................... 2,320,000 AAA 2,540,609
Boston, MA, Industrial Development Authority, Springhouse Project, 9.25%,
7/1/25 ...................................................................... 2,000,000 NR 2,499,600
Chicopee, MA, Electric Revenue, ETM, 7.125%, 1/1/17** ......................... 1,210,000 AAA 1,473,974
Easton, MA, General Obligation, Series 1997, 5%, 10/1/17 (c) .................. 1,205,000 AAA 1,185,841
Haverhill, MA, Unlimited Tax, General Obligation, Series A, 7%, 6/15/12 (c) ... 600,000 AAA 675,414
Holyoke, MA, General Obligation, Series 1996A, 6%, 6/15/09 (c) ................ 1,560,000 AAA 1,698,388
Mashpee, MA, General Obligation:
Series 1997, 5.125%, 2/1/11 (c) ............................................. 1,025,000 AAA 1,053,905
Series 1997, 5.35%, 2/1/12 (c) .............................................. 1,525,000 AAA 1,590,697
Massachusetts Bay Transportation Authority:
Certificates of Participation, 7.75%, 1/15/06 ............................... 1,000,000 A 1,169,880
General Transportation System:
Series A, 5.4%, 3/1/07 ..................................................... 8,325,000 A 8,863,711
Series A, 5.5%, 3/1/09 ..................................................... 1,000,000 A 1,072,970
Series A, 5.5%, 3/1/12 ..................................................... 3,000,000 A 3,211,260
Series B, 6.2%, 3/1/16 ..................................................... 2,100,000 A 2,406,663
Series C, 6.1%, 3/1/13 ..................................................... 1,250,000 A 1,403,125
Massachusetts General Obligation:
Consolidated Loan, Series A, 7.5%, 6/1/04 ................................... 12,400,000 A 14,244,004
Hynes Convention Center, Zero Coupon, 9/1/04 ................................ 2,000,000 A 1,516,480
Series 96A, 6%, 11/1/10 ..................................................... 10,000,000 A 11,234,000
Series A, ETM, 6.5%, 6/1/08** ............................................... 3,170,000 AAA 3,481,389
Series A, 6.5%, 6/1/08 ...................................................... 330,000 A 361,885
Series B, 6.5%, 8/1/08 ...................................................... 5,400,000 A 6,313,464
Series C, Zero Coupon, 12/1/04 .............................................. 8,415,000 A 6,312,092
Massachusetts Health & Educational Facilities Authority:
Anna Jaques Hospital, Series B, 6.875%, 10/1/12 ............................. 2,000,000 BBB 2,163,380
Berkshire Health System, Series D, 5.6%, 10/1/08 (c) ........................ 1,760,000 AAA 1,904,954
Boston College, Series 1993K, 5.25%, 6/1/09 ................................. 2,880,000 A 3,031,574
Charlton Memorial Hospital, Series B, 7.25%, 7/1/07 ......................... 10,000,000 A 11,114,000
Community College Program, Series A, 6.5%, 10/1/09 (c) ...................... 1,000,000 AAA 1,113,060
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cooley Dickenson Hospital Inc.:
Series B, 5.25%, 11/15/10 (c) ........................................ 2,005,000 AAA 2,078,463
Prerefunded 5/15/03, 7.125%, 11/15/18* ............................... 2,035,000 AAA 2,287,767
Deaconess Hospital, Series B, 6.625%, 4/1/12 (c) ...................... 2,000,000 AAA 2,213,100
Hallmark Health System, Series 1997A, 5%, 7/1/11 (c) .................. 1,750,000 AAA 1,751,453
Lowell General Hospital, Series 1996B, 5.2%, 6/1/10 (c) ............... 1,180,000 AAA 1,226,150
Massachusetts General Hospital, Series F, 6.25%, 7/1/12 (c) ........... 5,000,000 AAA 5,670,000
Medical Academic & Scientific, Series B, 6.5%, 1/1/09 ................. 5,000,000 AAA 5,484,300
Medical Center of Central Massachusetts, Series A, 7%, 7/1/12 (c) ..... 3,600,000 AAA 3,925,548
Melrose-Wakefield, Series 1996C, 6%, 7/1/12 ........................... 1,000,000 NR 1,080,000
Milford-Whitinsville Regional, Series 1998C, 5.75%, 7/15/13 ........... 1,750,000 BBB 1,830,780
Newton-Wellesley Hospital:
Series E, 5.9%, 7/1/11 (c) ........................................... 3,015,000 AAA 3,266,662
Series 1997G, 6%, 7/1/12 (c) ......................................... 1,000,000 AAA 1,093,720
North Adams Regional Hospital, Series C, 6.625%, 7/1/18 ............... 1,560,000 BBB 1,690,572
Northeastern University:
Series E, 6.4%, 10/1/07 (c) .......................................... 1,000,000 AAA 1,100,740
Series E, 6.5%, 10/1/12 (c) .......................................... 450,000 AAA 494,631
Partners Healthcare, Series 1997A, 5.25%, 7/1/13 (c) .................. 2,000,000 AAA 2,021,860
South Shore Hospital, 6.5%, 7/1/10 (c) ................................ 2,500,000 AAA 2,722,475
Southcoast Health System:
Series 1998A, 5.5%, 7/1/10 (c) ....................................... 1,570,000 AAA 1,664,797
Series 1998A, 5%, 7/1/18 (c) ......................................... 3,725,000 AAA 3,609,413
St. Luke's Hospital New Bedford, Series C, Yield Curve Notes, 7.32%,
8/15/10 (c)*** ..................................................... 3,400,000 AAA 3,829,250
Stonehill College, Series E, 6.55%, 7/1/12 (c) ........................ 5,000,000 AAA 5,485,050
Suffolk University, Series 1996C, 5.65%, 7/1/11 (c) ................... 1,045,000 AAA 1,107,825
Tufts University, Series C, 7.4%, 8/1/18 .............................. 530,000 A 547,013
Massachusetts Housing Finance Project Refunding Revenue:
Residential Development, Series C, 6.875%, 11/15/11 ................. 15,250,000 AAA 16,598,704
Series A, 6.3%, 10/1/13 ............................................. 7,000,000 A 7,430,150
Series A, 6.375%, 4/1/21 ............................................ 3,905,000 A 4,138,480
Series B, 6.05%, 12/1/09 (c) ........................................ 3,000,000 AAA 3,092,880
Single-Family Housing Revenue, Series 44, 5.9%, 12/1/13 ............. 3,000,000 AA 3,126,900
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Massachusetts Industrial Finance Agency:
Assisted Living Facilities Revenue, TNG Marina Bay LLC Project, Series 1997,
7.5%, 12/1/27 ............................................................ 1,000,000 NR 1,012,080
Babson College, Series 1997A, 5.375%, 10/1/17 ............................... 1,700,000 A 1,728,458
College of the Holy Cross:
Issue II, 6.375%, 11/1/09 .................................................. 1,000,000 AAA 1,105,870
Series 1996, 5.25%, 3/1/09 (c) ............................................. 1,190,000 AAA 1,247,132
Series 1996, 5.5%, 3/1/16 (c) .............................................. 5,000,000 AAA 5,189,400
Concord Academy, Series 1997, 5.45%, 9/1/17 ................................. 1,205,000 BBB 1,204,940
Dana Hall School, Series 1997A, 5.7%, 7/1/13 ................................ 1,000,000 BBB 1,048,520
Deerfield Academy, 5.125%, 10/1/17 .......................................... 1,520,000 AAA 1,511,655
Dexter School Project, Series 1997, 5.4%, 5/1/13 (c) ........................ 1,000,000 AAA 1,034,540
East Boston Neighborhood, Series 1996, 7.625%, 7/1/26 ....................... 2,750,000 BB 2,869,295
Edgewood Retirement Community, Series A, 9%, 11/15/25 ....................... 1,650,000 NR 2,038,262
First Mortgage, Evanswood Bethzatha, Series A, 7.875%, 1/15/20 .............. 1,000,000 NR 1,076,180
Massachusetts Biomedical Research Corp.:
Series A, Zero Coupon, 8/1/00 .............................................. 2,860,000 A 2,600,398
Series A, Zero Coupon, 8/1/01 .............................................. 3,650,000 A 3,170,500
Series A, Zero Coupon, 8/1/02 .............................................. 3,650,000 A 3,026,471
Merrimack College:
Series 1997, 5%, 7/1/11 (c) ................................................ 1,490,000 AAA 1,509,087
Series 1997, 5%, 7/1/12 (c) ................................................ 1,560,000 AAA 1,566,552
Series 1997, 5%, 7/1/17 (c) ................................................ 1,000,000 AAA 981,740
Nantucket Electric AMT:
Series 1996A, 5.75%, 7/1/08 (c) ............................................ 1,400,000 AAA 1,516,004
Series 1996A, 5.75%, 7/1/09 (c) ............................................ 1,400,000 AAA 1,501,878
Series 1996A, 5.875%, 7/1/17 (c) ........................................... 2,000,000 AAA 2,118,260
Pollution Control Revenue:
Boston Edison Company, Series A, 5.75%, 2/1/14 ............................. 2,000,000 BBB 2,069,880
Eastern Edison Company Project, 5.875%, 8/1/08 ............................. 4,750,000 BBB 4,921,095
Provider Lease Program, Series A-1, 8.4%, 7/15/08 ........................... 1,805,000 NR 1,818,014
Resource Recovery, North Andover Solid Waste, Series A, 6.3%, 7/1/05 ........ 6,500,000 BBB 7,039,955
Solid Waste Disposal, Peabody Monofil Project, 9%, 9/1/05 ................... 2,905,000 NR 3,193,263
Sturdy Memorial Hospital, 7.9%, 6/1/09 ...................................... 1,735,000 BBB 1,828,985
Worcester Polytechnical Institute:
Series 1997, 5%, 9/1/10 (c) ................................................ 1,645,000 AAA 1,682,309
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1997 II, 5.125%, 9/1/11 (c) .......................................... 1,300,000 AAA 1,331,122
Series 1997 II, 5.125%, 9/1/16 (c) .......................................... 2,600,000 AAA 2,595,580
Massachusetts Municipal Wholesale Electric Company, Power Supply System Revenue:
Series A, 6.75%, 7/1/06 ...................................................... 2,855,000 BBB 3,111,979
Series A, 5.1%, 7/1/08 (c) ................................................... 840,000 AAA 876,750
Series B, 6.75%, 7/1/08 ...................................................... 9,000,000 BBB 9,824,670
Series B, 4.95%, 7/1/09 (c) .................................................. 1,575,000 AAA 1,593,050
Series C, 6.625%, 7/1/10 ..................................................... 1,000,000 BBB 1,079,240
Series C, 6.625%, 7/1/10 (c) ................................................. 3,500,000 AAA 3,849,580
Massachusetts Port Authority Revenue:
Series 1997A, 5.125%, 7/1/16 ................................................. 3,500,000 AA 3,493,945
Series 1998A, 5.75%, 7/1/10 .................................................. 2,000,000 AA 2,195,680
Series 1998A, 5.75%, 7/1/12 .................................................. 2,350,000 AA 2,578,303
Series 1998A, 5.5%, 7/1/15 ................................................... 2,670,000 AA 2,788,468
Series 1998A, 5.5%, 7/1/16 ................................................... 1,650,000 AA 1,718,607
Special Facilities USAir Project, Series 1996A, 5.75%, 9/1/16 (c) 1,000,000 AAA 1,051,150
Tax Exempt Receipts, ETM, Zero Coupon until 7/1/03 then 13%, 7/1/13** 1,000,000 AAA 1,047,950
Massachusetts Special Obligation Revenue, Series 1996A, 5.5%, 6/1/11 (c) 5,000,000 AAA 5,278,150
Massachusetts Turnpike Authority, Metropolitan Highway System:
Series 1997A, 5%, 1/1/10 ..................................................... 2,000,000 A 2,023,080
Series 1997A, 5%, 1/1/11 ..................................................... 3,000,000 A 3,009,690
Massachusetts Water Pollution Abatement Trust, Pooled Loan Program:
Series 2, 5.625%, 2/1/10 ..................................................... 2,820,000 AAA 3,010,801
Series 2, 5.7%, 2/1/15 ....................................................... 1,150,000 AAA 1,213,549
Massachusetts Water Resource Authority:
Series A, 6.5%, 7/15/09 ...................................................... 15,000,000 A 17,573,250
Series A, 6.5%, 7/15/19 ...................................................... 3,000,000 A 3,558,810
Series B, 6%, 11/1/08 ........................................................ 5,785,000 A 6,217,429
General Revenue, Series A, 5.5%, 8/1/13 (c) .................................. 1,445,000 AAA 1,548,924
General Revenue, Series A, 5.5%, 8/1/14 (c) .................................. 1,745,000 AAA 1,865,702
General Revenue, Series C, 5.25%, 12/1/08 .................................... 2,705,000 A 2,847,067
General Revenue, Series C, 5.25%, 12/1/15 .................................... 4,030,000 A 4,146,991
Nantucket, MA, General Obligation:
6.8%, 12/1/11 ................................................................ 1,000,000 AAA 1,107,490
Series 1997, 5%, 7/15/17 (c) ................................................. 2,710,000 AAA 2,660,461
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Credit
Principal Rating (b) Market
Amount ($) (Unaudited) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New England Educational Loan Marketing Corporation, Massachusetts Student Loan
Revenue, 5.7%, 7/1/05 ........................................................ 6,250,000 A 6,563,188
North Attleboro, MA, General Obligation, Series 1997, 5%, 3/1/11 (c) ........... 1,120,000 AAA 1,136,038
Somerville, MA, General Obligation, Series 1997, 5.25%, 2/15/12 (c) ............ 1,180,000 AAA 1,215,424
Springfield, MA, General Obligation:
5%, 9/1/09 ................................................................... 1,000,000 AAA 1,028,010
Series 1996, 5.3%, 8/1/11 (c) ................................................ 1,250,000 AAA 1,295,000
University of Massachusetts, Building Authority Revenue:
Series B, 6.625%, 5/1/09 ..................................................... 2,415,000 A 2,832,336
Series B, 6.625%, 5/1/10 ..................................................... 2,575,000 A 3,037,032
Series B, 6.75%, 5/1/11 ...................................................... 2,745,000 A 3,284,200
Series B, 6.875%, 5/1/14 ..................................................... 1,300,000 A 1,567,124
Worcester, MA, General Obligation:
Prerefunded 5/15/02, 6.9%, 5/15/05 (c)* ...................................... 1,850,000 AAA 2,072,666
Prerefunded 5/15/06, 6.9%, 5/15/06 (c)* ...................................... 1,500,000 AAA 1,680,540
Puerto Rico
Puerto Rico Highway and Transportation Authority, Highway Revenue, Series 1996 Y,
6.25%, 7/1/14 ................................................................ 2,000,000 A 2,278,120
- ------------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $341,585,927) 369,002,871
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $341,585,927) (a) 369,002,871
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $341,585,927. At March 31,
1998, net unrealized appreciation for all securities based on tax cost
was $27,416,944. This consisted of aggregate gross unrealized
appreciation for all securities in which there was an excess of market
value over tax cost of $27,649,806 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $232,862.
(b) All of the securities held have been determined by the Adviser 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.
(c) Bond is insured by one of these companies: AMBAC, FGIC, FSA or MBIA.
* 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, 1998.
The accompanying notes are an integral part of the financial statements.
15 - Scudder Massachusetts Tax Free Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of March 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets
----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $341,585,927) ............. $ 369,002,871
Cash .............................................................. 149,970
Interest receivable ............................................... 5,603,698
Receivable for Fund shares sold ................................... 217,649
Other assets ...................................................... 4,969
----------------
Total assets ...................................................... 374,979,157
Liabilities
----------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares redeemed .................................. 177,662
Dividends payable ................................................. 619,137
Accrued management fee ............................................ 186,239
Other payables and accrued expenses ............................... 90,293
----------------
Total liabilities ................................................. 1,073,331
-------------------------------------------------------------------------------------------
Net assets, at market value $ 373,905,826
-------------------------------------------------------------------------------------------
Net Assets
----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation (depreciation) on investments ......... 27,416,944
Accumulated net realized loss ..................................... (2,165,561)
Paid-in capital ................................................... 348,654,443
-------------------------------------------------------------------------------------------
Net assets, at market value $ 373,905,826
-------------------------------------------------------------------------------------------
Net Asset Value
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($373,905,826 / 26,075,571 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) $14.34
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16 - Scudder Massachusetts Tax Free Fund
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
year ended March 31, 1998
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Income:
Interest .......................................................... $ 20,136,913
----------------
Expenses:
Management fee .................................................... 2,110,713
Services to shareholders .......................................... 271,743
Custodian and accounting fees ..................................... 113,710
Trustees' fees and expenses ....................................... 24,368
Reports to shareholders ........................................... 43,721
Auditing .......................................................... 42,407
Legal ............................................................. 18,135
Other ............................................................. 48,212
----------------
2,673,009
-------------------------------------------------------------------------------------------
Net investment income 17,463,904
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ....................................................... 1,468,337
Futures ........................................................... (29,483)
----------------
1,438,854
----------------
Net unrealized appreciation (depreciation) during the period on:
Investments ....................................................... 13,674,586
Futures ........................................................... 48,023
----------------
13,722,609
-------------------------------------------------------------------------------------------
Net gain (loss) on investments transactions 15,161,463
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 32,625,367
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Massachusetts 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 ...................................... $ 17,463,904 $ 16,486,395
Net realized gain (loss) from investment transactions ...... 1,438,854 66,607
Net unrealized appreciation (depreciation) on investment
transactions during the period ........................... 13,722,609 213,202
---------------- ---------------
Net increase (decrease) in net assets resulting from
operations ............................................... 32,625,367 16,766,204
---------------- ---------------
Distributions to shareholders from net investment income ... (17,463,904) (16,486,395)
---------------- ---------------
Fund share transactions:
Proceeds from shares sold .................................. 80,795,273 61,413,587
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................ 10,415,340 9,637,952
Cost of shares redeemed .................................... (62,308,419) (55,774,105)
---------------- ---------------
Net increase (decrease) in net assets from Fund share
transactions ............................................. 28,902,194 15,277,434
---------------- ---------------
Increase (decrease) in net assets .......................... 44,063,657 15,557,243
Net assets at beginning of period .......................... 329,842,169 314,284,926
---------------- ---------------
Net assets at end of period ................................ $373,905,826 $329,842,169
---------------- ---------------
Other Information
---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .................. 24,047,228 22,942,284
---------------- ---------------
Shares sold ................................................ 5,700,172 4,465,949
Shares issued to shareholders in reinvestment of
distributions ............................................ 735,264 700,390
Shares redeemed ............................................ (4,407,093) (4,061,395)
---------------- ---------------
Net increase (decrease) in Fund shares ..................... 2,028,343 1,104,944
---------------- ---------------
Shares outstanding at end of period ........................ 26,075,571 24,047,228
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder Massachusetts Tax Free Fund
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of ---------------------------------------------------
period ......................... $ 13.72 $ 13.70 $ 13.33 $ 13.16 $ 13.61
---------------------------------------------------
Income from investment operations:
Net investment income ............. .70 .70 .72 .74 .81
Net realized and unrealized gain
(loss) on investment
transactions ................... .62 .02 .37 .18 (.33)
---------------------------------------------------
Total from investment operations .. 1.32 .72 1.09 .92 .48
---------------------------------------------------
Less distributions:
From net investment income ........ (.70) (.70) (.72) (.74) (.81)
From net realized gains on
investment transactions ........ -- -- -- -- (.08)
In excess of net realized gains ... -- -- -- (.01) (.04)
---------------------------------------------------
Total distributions ............... (.70) (.70) (.72) (.75) (.93)
---------------------------------------------------
Net asset value, end of ---------------------------------------------------
period ......................... $ 14.34 $ 13.72 $ 13.70 $ 13.33 $ 13.16
- -----------------------------------------------------------------------------------------
Total Return (%) (b) .............. 9.82 5.39 8.28 7.37 3.37
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 374 330 314 296 332
Ratio of operating expenses, net to
average daily net assets (%) ... .76 .76 .75 .47 .07
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... .76 .76 .76 .77 .77
Ratio of net investment income to
average daily net assets (%) .. 4.97 5.12 5.23 5.73 5.80
Portfolio turnover rate (%) ....... 8.4 11.5 20.9 10.2 17.0
<CAPTION>
Years Ended March 31,
1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of ----------------------------------------------------
period ......................... $ 12.81 $ 12.44 $ 12.25 $ 12.23 $ 12.28
----------------------------------------------------
Income from investment operations:
Net investment income ............. .84 .81 .83 .82 .81
Net realized and unrealized gain
(loss) on investment
transactions ................... .96 .46 .19 .13 .22
----------------------------------------------------
Total from investment operations .. 1.80 1.27 1.02 .95 1.03
----------------------------------------------------
Less distributions:
From net investment income ........ (.84) (.81) (.83) (.82) (.88)
From net realized gains on
investment transactions ........ (.16) (.09) -- (.11)(a) (.20)
In excess of net realized gains ... -- -- -- -- --
----------------------------------------------------
Total distributions ............... (1.00) (.90) (.83) (.93) (1.08)
----------------------------------------------------
Net asset value, end of ----------------------------------------------------
period ......................... $ 13.61 $ 12.81 $ 12.44 $ 12.25 $ 12.23
- ------------------------------------------------------------------------------------------
Total Return (%) (b) .............. 14.59 10.46 8.60 7.89 9.50
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 267 120 67 46 31
Ratio of operating expenses, net to
average daily net assets (%) ... -- .48 .60 .60 .51
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... .83 .93 1.05 1.16 1.20
Ratio of net investment income to
average daily net assets (%) .. 6.36 6.38 6.72 6.60 7.23
Portfolio turnover rate (%) ....... 29.6 23.2 27.1 45.5 110.5
</TABLE>
(a) Includes $.01 per share distributions in excess of realized gains pursuant
to Internal Revenue Code Section 4982.
(b) Total returns would have been lower had certain expenses not been reduced
through March 31, 1996.
19 - Scudder Massachusetts Tax Free Fund
<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 other than money market securities
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.
Money market instruments purchased with an original maturity of sixty days or
less are valued at amortized cost.
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).
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, 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.
At March 31, 1998, the Fund had a net tax basis capital loss carryforward of
approximately $66,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until March 31,
2005, the expiration date.
20 - Scudder Massachusetts Tax Free Fund
<PAGE>
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, 1998, purchases and sales of municipal
securities (excluding short-term investments) aggregated $60,276,400 and
$29,046,068, respectively.
The aggregate face value of future contracts closed during the year ended March
31, 1998 was $3,396,773.
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. For the year ended March
31, 1998, the fees pursuant to these agreements amounted to $2,110,713, of which
$186,239 was unpaid at March 31, 1998.
21 - Scudder Massachusetts Tax Free Fund
<PAGE>
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend-paying and shareholder service agent for the Fund. For the
year ended March 31, 1998, the amount charged to the Fund by SSC aggregated
$194,865, of which $16,255 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 $63,206, of
which $5,531 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 $24,368.
22 - Scudder Massachusetts Tax Free Fund
<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,
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 Massachusetts 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
23 - Scudder Massachusetts Tax Free Fund
<PAGE>
Tax Information
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 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 - Scudder Massachusetts Tax Free Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Massachusetts 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*
--- ------- ------- -----------------
17,061,825 645,121 506,611 0
2. To elect Trustees.
Number of Votes:
----------------
Trustee For Withheld
------- --- --------
Henry P. Becton, Jr. 17,581,462 632,095
Dawn-Marie Driscoll 17,623,454 590,104
Peter B. Freeman 17,589,052 624,506
George M. Lovejoy, Jr. 17,611,240 602,318
Wesley W. Marple, Jr. 17,620,566 592,992
Daniel Pierce 17,602,883 610,675
Kathryn L. Quirk 17,598,178 615,380
Jean C. Tempel 17,628,187 585,371
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*
--- ------- ------- -----------------
15,370,943 1,093,227 883,130 866,257
25 - Scudder Massachusetts 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*
--- ------- ------- -----------------
15,873,763 809,014 880,687 766,530
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 15,671,815 777,498 897,987 866,257
5.2 Borrowing 15,614,909 830,202 902,188 866,257
5.3 Senior securities 15,654,296 791,276 901,728 866,257
5.4 Concentration 15,651,955 793,617 901,728 866,257
5.5 Loans 15,649,449 796,123 901,728 866,257
5.6 Underwriting of securities 15,665,478 780,094 901,728 866,257
5.7 Investment in real estate 15,643,074 802,498 901,728 866,257
5.8 Purchase of physical 15,648,938 800,375 897,987 866,257
commodities
5.9 Investment in Massachusetts 15,677,580 768,216 901,504 866,257
municipal securities
5.10 Tax diversification 15,678,257 763,798 905,245 866,257
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's independent
accountants.
Number of Votes:
----------------
For Against Abstain
--- ------- -------
17,319,602 383,796 510,159
* 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.
26 - Scudder Massachusetts Tax Free Fund
<PAGE>
This Page
intentionally
left blank.
27 - Scudder Massachusetts 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;
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.
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.
28 - Scudder Massachusetts 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.
29 - Scudder Massachusetts 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
- ------------------------------------------------------------------------------------------------------------------------------
30 - Scudder Massachusetts 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>
31 - Scudder Massachusetts 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
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