SCUDDER
INVESTMENTS (SM)
[LOGO]
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BOND/TAX FREE
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Scudder Massachusetts
Tax Free Fund
Semiannual Report
September 30, 2000
The fund seeks income that is exempt from Massachusetts personal and regular
federal income taxes.
<PAGE>
Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
9 Portfolio Management Discussion
13 Glossary of Investment Terms
14 Investment Portfolio
22 Financial Statements
25 Financial Highlights
26 Notes to Financial Statements
32 Shareholder Meeting Results
33 Officers and Trustees
34 Investment Products and Services
36 Account Management Resources
2
<PAGE>
Scudder Massachusetts Tax Free Fund
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ticker symbol SCMAX fund number 012
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Date of Inception: o Scudder Massachusetts Tax Free Fund posted a total
5/28/87 return of 3.39% for its most recent semiannual period
ended September 30, 2000. The average return of 57
similar funds tracked by Lipper Analytical Services was
3.46%.
Total Net Assets as o As of September 30, 2000, Scudder Massachusetts Tax
of 9/30/00: Free Fund's 30-day net annualized SEC yield was 4.62%,
$460 million equivalent to an 8.12% taxable yield for Massachusetts
investors subject to the 43.13% combined federal and
state income tax rate.
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30-Day Yield on September 30, 2000
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
4.62% 8.12%
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Scudder Taxable Yield
Massachusetts Needed to Equal
Tax Free Fund the Fund's Yield
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o Scudder Massachusetts Tax Free Fund received a
four-star rating from Morningstar(TM), reflecting
"above average" risk-adjusted performance through
September 30, 2000.*
* 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, five stars for five-year
performance, and four stars for 10-year performance, and was rated among
1720, 1472, and 424 municipal funds for the respective periods. Of the
funds rated, the top 10% received five stars, and the next 22.5% received
four stars. Past performance does not guarantee future returns.
3
<PAGE>
Letter from the Fund's President
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Dear Shareholders,
We are pleased to report to you on Scudder Massachusetts Tax Free Fund's most
recent semiannual period ended September 30, 2000. The fund posted a 3.39% total
return for the period, and remains the number one Massachusetts tax-exempt fund
for total return over the ten-year period ended September 30. The fund has also
posted impressive returns over one-, three-, and five-year periods, within the
top 20% of similar funds according to Lipper Analytical Services.
Scudder Massachusetts Tax Free Fund seeks income exempt from Massachusetts
personal and regular federal income taxes. It does this by investing most of its
assets in a broadly diversified portfolio of Massachusetts municipal bonds that
finance public transportation, road and bridge construction, state colleges and
universities, hospitals, and other projects or entities. The fund's managers
look for securities that appear to offer the best total return potential, and
normally prefer those that cannot be called in before maturity. In making
decisions, the managers weigh a number of factors against each other, from
national and state economic outlooks to supply and demand within the municipal
market. Please see the Portfolio Management Discussion beginning on page 9 for
additional information on the fund's performance, strategy, and outlook.
4
<PAGE>
In closing, we thought you'd like to know that municipal bonds currently
represent attractive value when compared with U.S. government securities: Yields
of 10-year municipal bonds were 82.8% as high as yields of comparable Treasuries
as of September 30. This means that -- on an after-tax basis -- an individual in
an income tax bracket higher than 17% would be better off owning municipal
securities over Treasuries. Of course, Treasury securities are backed by the
full faith and credit of the U.S. government, but municipal bonds are considered
"next in line" in terms of creditworthiness. And with their superior liquidity
and diversification compared with the holding of individual bonds, municipal
bond funds represent a convenient way to seek attractive yields and steady total
returns.
Thank you for investing with Scudder Massachusetts Tax Free Fund. If you have
any questions regarding the fund, please call 1-800-SCUDDER, or visit Scudder's
Web site at www.scudder.com.
Sincerely,
/s/Linda C. Coughlin
Linda C. Coughlin
President
Scudder Massachusetts Tax Free Fund
5
<PAGE>
Performance Update
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September 30, 2000
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Growth of a $10,000 Investment
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THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
LINE CHART DATA:
Scudder Massachusetts Lehman Brothers
Tax Free Fund Municipal Bond Index*
'90 10000 10000
'91 11335 11318
'92 12705 12503
'93 14676 14096
'94 14183 13752
'95 15761 15291
'96 16741 16213
'97 18144 17679
'98 19674 19220
'99 19390 19085
'00 20452 20259
Yearly periods ended September 30
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Fund Index Comparison
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Total Return
Growth of Average
Period ended 9/30/2000 $10,000 Cumulative Annual
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Scudder Massachusetts Tax Free Fund
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1 year $ 10,548 5.48% 5.48%
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5 year $ 12,977 29.77% 5.35%
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10 year $ 20,452 104.52% 7.42%
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Lehman Brothers Municipal Bond Index*
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1 year $ 10,616 6.16% 6.16%
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5 year $ 13,249 32.49% 5.78%
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10 year $ 20,259 102.59% 7.31%
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* The unmanaged Lehman Brothers Municipal Bond Index is a market
value-weighted measure of municipal bonds issued across the United States.
Index issues have a credit rating of at least Baa and a maturity of at
least two years. Index returns assume reinvestment of dividends and, unlike
Fund returns, do not reflect any fees or expenses.
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 the ten year periods would have been lower.
6
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Returns and Per Share Information
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Yearly periods ended September 30
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE ILLUSTRATING THE SCUDDER
MASSACHUSETTS TAX FREE FUND TOTAL RETURN (%) AND LEHMAN BROTHERS MUNICIPAL BOND
INDEX TOTAL RETURN (%)
BAR CHART DATA:
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Total
Return (%) 13.35 12.09 15.51 -3.36 11.12 6.22 8.38 8.44 -1.45 5.48
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Index Total
Return (%) 13.19 10.45 12.74 -2.44 11.18 6.04 9.04 8.72 -.70 6.16
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Net Asset
Value ($) 12.74 13.28 14.24 12.95 13.63 13.75 14.17 14.64 13.71 13.72
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Income
Dividends ($) .82 .83 .84 .78 .72 .71 .70 .70 .68 .70
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Capital Gains
Distributions
($) .04 .12 .18 .04 -- -- -- -- .05 .02
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</TABLE>
7
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Portfolio Summary
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September 30, 2000
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Diversification
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The fund invests in a
broad selection of
Massachusetts
municipal bonds.
A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
State General Obligations/
Lease 18%
Water/Sewer Revenue 14%
Hospital/Health 12%
Other General Obligation 8%
Higher Education 7%
Housing Finance Authority 7%
Sales/Special Tax 6%
Electric Utility Revenue 4%
Port/Airport Revenue 4%
Resource Recovery 3%
Other Municipal 17%
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100%
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Quality
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Overall portfolio
quality remains high,
with 82% of portfolio
securities rated A or
better as of
September 30.
A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
AAA 45%
AA 23%
A 14%
BBB 11%
CCC+ 1%
Not Rated 6%
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100%
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Weighted average quality: AA
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Effective Maturity
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A comparatively
high percentage of bonds
with maturities between
8 and 14 years produced
a positive total return
for the fund.
A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
Less than 1 year 3%
1-5 years 31%
5-10 years 28%
10-15 years 21%
15 years or greater 17%
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100%
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Weighted average effective
maturity: 9.2 years
For more complete details about the Fund's investment portfolio, see page 14. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8
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Portfolio Management Discussion
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September 30, 2000
Dear Shareholders,
The municipal bond market recorded respectable gains during Scudder
Massachusetts Tax Free Fund's most recent semiannual period. The fund's total
return for the six months ended September 30, 2000, was 3.39%, compared with the
3.46% average return of 57 similar funds as tracked by Lipper Analytical
Services, Inc. The fund's 30-day SEC yield as of September 30 was 4.62%,
equivalent to an 8.12% taxable yield for Massachusetts investors subject to the
43.13% combined federal and state income tax rate.
Though the fund slightly underperformed its peer group during the six-month
period, it ranked in the top 20% of similar Massachusetts tax-free funds over
the one-, three-, five-, and ten-year periods ended September 30, 2000. The fund
also continues to be ranked number one in total return for the ten-year period
ended September 30. Please see the accompanying table for additional information
concerning the fund's returns.
Massachusetts Update
Massachusetts is continuing to benefit from the strong local and national
economy. The Commonwealth's economic indicators are positive, revenues continue
to exceed projections, and unemployment is at its lowest level in more than 20
years. At the root of the Commonwealth's sound financial position is a strong
job market. Job growth
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Scudder Massachusetts Tax Free Fund:
Consistent Long-Term Performance
(Average annual returns for periods ended September 30, 2000)
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<TABLE>
<CAPTION>
Scudder
Massachusetts
Tax Free Fund Lipper Number of Percentile
Period Return Average Rank Funds Tracked Rank
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<S> <C> <C> <C> <C> <C>
1 Year 5.48% 4.79% 11 of 57 Top 19%
3 Years 4.07% 3.15% 3 of 53 Top 6%
5 Years 5.34% 4.69% 6 of 48 Top 13%
10 Years 7.41% 6.76% 1 of 18 Top 6%
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Past performance does not guarantee future results.
</TABLE>
9
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in the construction, services, and finance/insurance/real estate sectors was the
principal factor in bringing Massachusetts' average unemployment rate in 1999
down to 3.2% from 3.3% in 1998. High-tech services dominate service sector
growth and have made the Commonwealth third in the country in the percentage of
its work force employed in the information technology industry, with Boston the
top metropolitan area in the United States in this field. Such jobs are highly
paid and propelled personal income growth of 7.3% in 1999, almost two points
higher than the national average.
The Commonwealth's debt levels are high, but sustainable, given high wealth
levels. Although we believe the Commonwealth is in a solid financial position,
the recently passed reduction in the state's income tax, if not offset by
expenditure controls, could place a strain on finances. So, too, could any
unexpected downturn in the national or regional economy. Massachusetts' credit
trend remains stable, though we will be increasingly watchful for any sign of
unexpected economic decline.
Market Environment
During the six-month period the municipal yield curve, which began 2000
unusually flat, steepened. Yields declined across the maturity spectrum during
the period, but yields of short-term bonds declined the most (29 basis points);
yields of 30-year bonds dropped by 8 basis points. The gradual steepening of the
yield curve and reductions in yields (bond yields and prices move in opposite
directions) brought about higher prices and positive total returns for most
municipal bonds during the period. In addition, municipal bonds slightly
underperformed Treasuries over the six months ended in September: While yields
of 10-year AAA-rated municipals declined 20 basis points and their prices rose
1.5%, yields of 10-year Treasury bonds declined 27 basis points and their prices
rose 2.0%. At the close of the period municipal bonds represented attractive
value compared with Treasuries as the average yield of 10-year municipal bonds
was 82.8% of the average yield of comparable Treasury bonds.
10
<PAGE>
Portfolio Strategy
Because of the unusual flatness of the municipal yield curve -- and because a
flat yield curve will more often tend to steepen, leading to higher relative
yields and weaker price performance -- the fund assumed a relatively defensive
posture during the period, emphasizing bonds with short and intermediate
maturities. As of September 30, the fund held a relatively large percentage
(54%) of its portfolio in bonds with maturities between 8 and 14 years. Because
the yield curve between 10 and 20 years steepened by 12 basis points during the
period, this portfolio structure produced a positive total return for the fund.
By contrast, the fund's small representation in market discount bonds^1 (some of
the top performers during the period) compared with other similar funds hindered
the fund's competitive performance. It should be noted, however, that the fund's
limited exposure to market discount bonds during its previous fiscal year (when
market discount bonds were the worst performers) boosted its longer-term
performance.
We also continued to emphasize bond "structure" during the period, retaining two
important elements of our long-term strategy: First, we focused on premium
"cushion" bonds -- high coupon bonds trading at a premium to face value that can
be redeemed prior to maturity. We believe that the extra yield provided by
cushion bonds adequately compensates the fund for the call feature in the
current environment. Second, we continued the fund's strong emphasis on call
protection -- generally, a bond is called in by its issuer so that it can be
refinanced at a lower prevailing rate. Our call-protection strategy provides a
more reliable income stream for the fund than would exist if the portfolio held
a significant proportion of bonds that could be called in before their stated
maturities. Though "structured" bonds -- premium bonds as well as noncallable
bonds -- are more popular
^1 "Market discount" is a provision that can subject municipal bonds sold at a
discount to ordinary income tax.
11
<PAGE>
than ever within our industry (and therefore slightly more expensive than in the
past), we feel that their long-term return potential more than justifies their
cost.
In addition, credit spreads -- the difference in yield between higher- and
lower-rated bonds -- remained at wide levels. Because of this, we continued to
selectively add to credits which we deemed to be appropriate risks. The fund's
overall portfolio quality remains high, with over 82% of portfolio securities
rated A or better at the close of the period. We continue to invest in a broad
selection of Massachusetts tax-exempt issues, including state general obligation
bonds, water and sewer revenue bonds, and hospital revenue bonds.
Outlook
Because of the relative economic balance between the tight U.S. labor market on
one hand and evidence of a slowing economy on the other, we do not expect the
Federal Reserve to adjust short-term interest rates for the remainder of 2000.
Thus the prospects for additional steepening of the yield curve seem guarded for
the moment. Bond markets are likely to be relatively static until they see signs
that the Fed's next move will be to cut interest rates. We believe the
likelihood of such a reduction -- leading to higher bond prices -- will increase
in early 2001. In terms of fund strategy, we will continue to search for
attractively valued -- and structured -- intermediate-term municipal bonds. We
will also continue to selectively invest in bonds with slightly lower ratings to
boost the fund's yield. We believe Scudder Massachusetts Tax Free Fund remains
an attractive investment for those seeking a high level of income free from
federal and Massachusetts income taxes.
Sincerely,
Your Portfolio Management Team
/s/Philip G. Condon /s/Rebecca L. Wilson
Philip G. Condon Rebecca L. Wilson
12
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Glossary of Investment Terms
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Bond An interest-bearing security issued by the federal, state,
or local government or a corporation that obligates the
issuer to pay the bondholder a specified amount of
interest for a stated period -- usually a number of years
-- and to repay the face amount of the bond at its
maturity date.
General A municipal bond backed by the "full faith and credit"
Obligation (including the taxing and further borrowing power) of
Bond 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 The price per share of a mutual fund based on the sum of
Value (NAV) the market value of all the securities owned by the fund
divided by the number of outstanding shares.
Taxable The level of yield a fully taxable instrument would have
Equivalent to provide to equal that of a tax-free municipal bond on
Yield an after-tax basis.
30-Day SEC The standard yield reference for bond funds,
Yield 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.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
13
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Investment Portfolio as of September 30, 2000 (Unaudited)
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Principal
Amount ($) Value ($)
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Long-Term Municipal Investments 100.0%
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Massachusetts
Boston, MA, General Obligation, Series 1992A,
Prerefunded 7/1/2002, 6.5%, 7/1/2012** .............. 2,320,000 2,443,424
Boston, MA, Industrial Development Financing
Authority:
First Mortgage-Springhouse Project,
4.75%, 7/1/2001 ................................... 195,000 193,452
4.875%, 7/1/2002 .................................. 255,000 250,354
Series 1998, 5.5%, 7/1/2008 ....................... 1,020,000 947,070
Series 1995, Prerefunded 7/1/2005,
9.25%, 7/1/2025** ............................... 2,000,000 2,410,540
Chicopee, MA, Electric System Revenue,
Series 1978, ETM, 7.125%, 1/1/2017*** ............... 1,210,000 1,403,322
Haverhill, MA, Unlimited Tax, General Obligation,
Series 1992A, Prerefunded 6/15/2002, 7%,
6/15/2012 (b)** ..................................... 600,000 636,222
Holliston, MA, General Obligation, 5.5%, 12/1/2015 (b) . 1,660,000 1,686,195
Ipswich MA, General Obligation, 5.25%, 11/15/2017 (b) .. 2,325,000 2,270,967
Malden, MA, General Obligation, Series 1998, 4.5%,
10/1/2017 (b) ....................................... 5,135,000 4,424,316
Massachusetts Bay Transportation Authority:
Certificate of Participation, 7.75%, 1/15/2006 ...... 1,000,000 1,084,520
General Transportation System:
Series 1997B, 6.2%, 3/1/2016 ...................... 3,100,000 3,381,015
Series 1997C, 6.1%, 3/1/2013 ...................... 1,250,000 1,356,088
Massachusetts Revenue, Special Assessment:
Series A, 5.75%, 7/1/2011 ......................... 4,250,000 4,510,185
Series A, 5.75%, 7/1/2015 ......................... 6,405,000 6,621,745
Series 1999A, 5.25%, 3/1/2018 (b) ................... 6,870,000 6,686,228
Massachusetts Educational Loan Authority, Education Loan
Revenue, Revenue Bond, Issue E, Series A, 6.7%,
1/1/2002 (b) ........................................ 340,000 347,674
Massachusetts Health & Educational Facilities Authority:
Berkshire Health System:
Series 1994C, 5.9%, 10/1/2011 ..................... 900,000 839,925
Series 1995D, 5.3%, 10/1/2003 (b) ................. 1,350,000 1,376,244
Boston College Issue, Series 1998L, 5.25%,
6/1/2015 .......................................... 720,000 706,954
Boston Medical Center, Series 1998A, 5.25%,
7/1/2013 (b) ...................................... 4,575,000 4,545,217
14
<PAGE>
The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
<S> <C> <C>
Cape Cod Health Care, Series 1998B, 5.25%,
11/15/2013 ......................................... 1,365,000 1,195,576
Community College Program, Series 1992A,
Prerefunded 10/1/2002, 6.5%, 10/1/2009** ........... 1,000,000 1,057,820
Cooley Dickson Hospital Inc., Prerefunded 5/15/2003,
7.125%, 11/15/2018** ............................... 1,940,000 2,076,770
Deaconess Hospital, Series 1992B, Prerefunded
4/1/2002, 6.625%, 4/1/2012 (b)** ................... 2,000,000 2,100,400
Fairview Extended Care, Series 1997B, 4.55%,
1/1/2021 (b) ....................................... 1,645,000 1,634,554
Massachusetts Eye and Ear Infirmary, Series 1991A,
ETM, 7%, 7/1/2001*** ............................... 755,000 766,763
Massachusetts General Hospital, Series 1992F,
6.25%, 7/1/2012 (b) ................................ 5,000,000 5,521,900
Medical, Academic & Scientific:
Series 1995A, 6%, 1/1/2001 ......................... 1,000,000 1,002,290
Series 1995A, 6.1%, 1/1/2002 ....................... 500,000 504,945
Series 1995B, 6.5%, 1/1/2009 ....................... 5,000,000 5,159,200
Medical Center of Central Massachusetts, Series 1991A,
7%, 7/1/2012 (b) ................................... 3,600,000 3,738,960
Melrose-Wakefield, Series 1996C, Prerefunded
7/1/2006, 6%, 7/1/2012** ........................... 1,000,000 1,084,340
Milford-Whitinsville Regional, Series 1998C, 5.75%,
7/15/2013 (b) ...................................... 1,750,000 1,525,370
Newton-Wellesley Hospital, Series 1997G, 6%,
7/1/2012 (b) ....................................... 1,000,000 1,056,320
North Adams, Series 1996C, 6.625%, 7/1/2018 .......... 1,560,000 1,441,346
Northeastern University, Series E, 6.4%,
10/1/2007 (b) ..................................... 1,000,000 1,050,200
Partners Healthcare System, Series 1997A, 5.25%,
7/1/2013 (b) ....................................... 2,000,000 1,986,980
St. Luke's Hospital, New Bedford, Series C, Inverse
Healthcare Floating Note, 7.27%, 8/15/2010* ........ 3,400,000 3,570,000
Suffolk University, Series 1996C, 5.65%,
7/1/2011 (b) ....................................... 1,045,000 1,083,508
Massachusetts Housing Finance Agency:
Housing Project Refunding Revenue:
Series 1993A, 6.3%, 10/1/2013 ...................... 7,000,000 7,159,250
Series 1993A, 6.375%, 4/1/2021 ..................... 3,905,000 3,958,967
Series 1994B, 6.05%, 12/1/2009 (b) ................. 3,000,000 3,095,910
Residential Development, Series 1992C,
6.875%, 11/15/2011 ................................. 15,250,000 15,959,735
Single-Family Mortgage Revenue, Series 44,
5.9%, 12/1/2013 .................................... 2,010,000 2,014,201
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
------------------------------------------------------------------------------------
<S> <C> <C>
Massachusetts Industrial Finance Agency:
Assisted Living Facilities Revenue TNG Marina Bay
LLC Project, Series 1997, AMT, 7.5%, 12/1/2027 ...... 1,000,000 989,550
Babson College, Series 1997A, 5.375%, 10/1/2017 ....... 1,700,000 1,638,545
College of the Holy Cross:
Series 1992, Issue II, Prerefunded 11/1/2002, 6.375%,
11/1/2009** ....................................... 1,000,000 1,056,390
Series 1996, 5.5%, 3/1/2006 (b) ..................... 1,000,000 1,040,290
Dana Hall School Issue, Series 1997 A, 5.7%,
7/1/2013 ............................................ 1,000,000 978,820
Deerfield Academy, Series 1997, 5.125%, 10/1/2017 ..... 1,520,000 1,460,948
East Boston Neighborhood, Series 1996, 7.625%,
7/1/2026 ............................................ 2,750,000 2,637,965
East Boston Neighborhood Project, Series 1996, 7.25%,
7/1/2006 ............................................ 680,000 645,966
Edgewood Retirement Community, Series 1995 A, 9%,
11/15/2025 .......................................... 1,650,000 1,987,425
First Mortgage, Evanswood Bethzatha, Series 1994A,
7.875%, 1/15/2020 ................................... 1,000,000 560,000
Massachusetts Biomedical Research Corp.:
Series 1989 A, Zero Coupon, 8/1/2001 ................ 3,650,000 3,507,541
Series 1989 A, Zero Coupon, 8/1/2002 ................ 3,650,000 3,342,123
Merrimack College, Series 1997, 5%, 7/1/2012 (b) ...... 1,560,000 1,536,725
Pollution Control Revenue, Boston Edison Company,
Series 1994 A, 5.75%, 2/1/2014 ...................... 2,000,000 1,959,740
Pollution Control Revenue, Eastern Edison Company
Project, Series 1993, 5.875%, 8/1/2008 .............. 4,750,000 4,760,450
Resource Recovery, North Andover Solid Waste:
Series 1993 A, 6.15%, 7/1/2002 ...................... 750,000 762,615
Series 1993 A, 6.3%, 7/1/2005 ....................... 9,250,000 9,657,093
Solid Waste Disposal, Peabody Monofil Project,
Series 1994, 9%, 9/1/2005 (c) ....................... 2,485,000 2,579,828
The Tabor Academy, Series 1998, 5.4%, 12/1/2018 ....... 1,000,000 919,960
Worcester Polytechnical University, Series 1997 II,
5.125%, 9/1/2016 (b) ................................ 2,600,000 2,495,194
Massachusetts Municipal Wholesale Electric Company,
Power Supply System Revenue:
Series 1992B, 6.375%, 7/1/2001 ...................... 1,000,000 1,012,790
Series 1992A, 6.75%, 7/1/2006 ....................... 2,855,000 2,982,676
Series 1992B, 6.75%, 7/1/2008 ....................... 9,000,000 9,402,480
Series 1992C, 6.625%, 7/1/2010 ...................... 1,000,000 1,042,650
Series 1992C, 6.625%, 7/1/2010 (b) .................. 3,500,000 3,677,065
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------
Massachusetts Port Authority Revenue:
Series A, 5.75%, 7/1/2011 .......................... 2,000,000 2,130,300
Series 1998D, 5%, 7/1/2028 ......................... 3,000,000 2,675,490
Series 1999A, Inverse Floating Note,
5.39%, 7/1/2011* ................................. 4,195,000 4,195,000
Series 1999B, Inverse Floating Note, 5.39%,
7/1/2012* ........................................ 805,000 824,248
Series 1999D, AMT, Inverse Floating Note, 6.47%,
7/1/2013* ........................................ 930,000 1,062,190
Series 1999D, AMT, Inverse Floating Note, 6.47%,
7/1/2014* ........................................ 995,000 1,120,171
Series 1999D, AMT, Inverse Floating Note, 6.47%,
7/1/2015* ........................................ 1,065,000 1,181,745
Series 1999D, AMT, Inverse Floating Note, 6.68%,
7/1/2016* ........................................ 925,000 1,036,934
Series 1999D, AMT, Inverse Floating Note, 6.68%,
7/1/2017* ........................................ 775,000 862,544
Series 1999D, AMT, Inverse Floating Note, 5.39%,
7/1/2018* ........................................ 1,310,000 1,254,574
Special Facilities-USAir Project, AMT, Series 1996A,
5.5%, 9/1/2006 (b) ............................... 640,000 662,496
Tax Exempt Receipts, Step-up Coupon, 0% to 7/1/2003,
13% to 7/1/2013 .................................. 1,000,000 1,226,900
USAir Private Jet, Series 1996 A, AMT, 5.75%,
9/1/2016 ......................................... 1,000,000 1,005,630
Massachusetts Special Obligation:
Series 1996A, 5.5%, 6/1/2011 (b) ................... 5,000,000 5,160,500
Series 1994A, 5.2%, 6/1/2004 ....................... 1,000,000 1,021,690
Massachusetts State, Grant Anticipation Notes:
Series A, 5.5%, 6/15/2014 .......................... 5,000,000 5,065,850
Series B, 5.125%, 12/15/2014 ....................... 2,000,000 1,947,680
Massachusetts State Grant Anticipation Revenue Note,
Series 1998A, 5.25%, 12/15/2012 .................... 7,050,000 7,157,513
Massachusetts State Development Agency Revenue,
Massachusetts Biomedical Research:
Series C, 6.25%, 8/1/2013 ........................ 2,180,000 2,259,178
Series C, 6.375%, 8/1/2014 ....................... 1,000,000 1,036,510
Massachusetts State Development Financial Agency:
Health Care Facilities, Series 1999A, 7.1%,
7/1/2032 ......................................... 3,990,000 3,678,022
Higher Education:
Series 2000, 5.75%, 7/1/2012 ..................... 500,000 529,155
Series 2000, 5.75%, 7/1/2015 ..................... 1,265,000 1,311,097
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------
Massachusetts State General Obligations:
5.599%, 6/1/2009 ................................. 5,000,000 5,659,400
5.602%, 6/1/2011 ................................. 10,620,000 11,861,690
5.961%, 11/1/2010 ................................ 2,000,000 2,353,400
Consolidated Loan, Series 1991A, 7.5%, 6/1/2004 .. 12,400,000 13,233,025
Hynes Convention Center, Series 1992A, Zero
Coupon, 9/1/2004 ............................... 2,000,000 1,656,660
Series C, 6%, 8/1/2009 (b) ....................... 2,000,000 2,169,580
Series A, 5.25%, 2/1/2001 (b) .................... 3,000,000 3,008,460
Series C, Zero Coupon, 12/1/2004 ................. 910,000 746,000
Series 1990C, ETM, Zero Coupon, 12/1/2004*** ..... 7,505,000 6,160,029
Series 1992A, Prerefunded 6/1/2002, 6.5%,
6/1/2008** ..................................... 330,000 343,880
Series 1992B, 6.5%, 8/1/2008 ..................... 5,400,000 5,982,282
Series 1996A, Inverse Floating Note, 7.78%,
6/28/2008* ..................................... 5,000,000 5,824,900
Series 1998B, 5%, 4/1/2016 (b) ................... 4,000,000 3,789,120
Series 1999B, 5%, 5/1/2019 ....................... 3,000,000 2,770,740
Massachusetts State Health and Educational Facilities
Authority:
Caritas Christi:
Obligation, Series 1999A, 5.625%, 7/1/2020 ..... 4,000,000 3,271,960
Series 1999A, 5.25%, 7/1/2004 .................. 1,000,000 962,300
Prerefunded, 7/1/2002, Series 1992D, 6.5%,
7/1/2010** ..................................... 1,640,000 1,726,674
Revenue, Winchester Hospital, Series E, 6.75%,
7/1/2030 ....................................... 2,000,000 1,962,020
Revenue Bond, Series 1992D, 6.5%, 7/1/2010 (b) ... 860,000 898,743
Stonehill College:
Series 1992E, 6.55%, 7/1/2012 (b) .............. 2,755,000 2,888,783
Series 1992E Prerefunded 7/1/2002, 6.55%,
7/1/2012 (b)** ............................... 2,245,000 2,366,320
Massachusetts State Industrial Finance Agency:
Belmont, Series 1998, 5.625%, 9/1/2020 ......... 1,265,000 1,228,808
Belmont Hill School, Series 1998, 5.15%,
9/1/2013 ..................................... 1,000,000 958,960
Concord Academy, Series 1997, 5.45%, 9/1/2017 .. 1,205,000 1,157,595
Massachusetts State Turnpike Authority MET Highway
Systems Revenue, SR-Series A, 5.125%,
1/1/2023 (b) ................................... 5,000,000 4,593,550
Massachusetts Water Pollution Abatement Trust:
MWRA Loan Program, Series A, 6%, 8/1/2019 ........ 4,000,000 4,256,720
Pooled Loan Program, Series 5, 5.5%, 8/1/2012 .... 2,325,000 2,410,653
Pooled Loan Program, Series 1995, 5.7%,
2/1/2015 ....................................... 1,150,000 1,173,414
Prerefunded, Series 1998A, ETM, 5.25%,
8/1/2013*** .................................... 3,110,000 3,138,736
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------
Series 4, 5.125%, 8/1/2013 ....................... 2,000,000 1,995,200
Series 5, 5.375%, 8/1/2027 ....................... 4,775,000 4,596,845
Series 1998A, 5.25%, 2/1/2013 .................... 1,000,000 1,009,890
Series 1998A, 5.25%, 8/1/2013 .................... 390,000 390,862
Series 1999, Inverse Floating Note, 7.82%,
8/1/2011* ...................................... 5,500,000 6,346,120
Massachusetts Water Resource Authority:
General Obligation, Series C, 5.25%, 12/1/2015 ... 4,030,000 4,004,692
General Obligation, Series 1998A, 5.5%,
8/1/2013 (b) ................................... 1,445,000 1,494,722
Series 1992B, 6%, 11/1/2008 ...................... 5,785,000 6,029,416
Series 1992A, 6.5%, 7/15/2009 .................... 15,000,000 16,753,500
Series 1992A, 6.5%, 7/15/2019 .................... 3,000,000 3,363,480
Series 2000A, 6%, 8/1/2012 ....................... 2,485,000 2,683,303
Series 2000A, 6%, 8/1/2013 (b) ................... 1,000,000 1,073,360
Series 2000A, 6%, 8/1/2014 ....................... 700,000 746,872
5.25%, 12/1/2015 (b) ............................. 6,050,000 6,030,761
Middleborough, MA, General Obligation:
Series 1992A, 5.25%, 1/15/2018 (b) ............... 1,515,000 1,471,307
Series 1992A, 5.25%, 1/15/2019 (b) ............... 1,470,000 1,417,962
Series 1999A, 5.25%, 1/15/2017 (b) ............... 1,525,000 1,490,596
Nantucket, MA, General Obligation:
Prerefunded 12/1/2001, 6.25%, 12/1/2002** ........ 250,000 258,990
Series 1991, 6.8%, 12/1/2011 ..................... 1,000,000 1,045,960
Series 1997, 5%, 7/15/2017 (b) ................... 1,000,000 938,260
Narragansett, MA, Regional School District,
General Obligation, 6.5%, 6/1/2012 (b) ........... 1,145,000 1,281,518
New England Education Loan Marketing Corp.,
Massachusetts Student Loan Revenue Refunding,
Series 1992A, 5.8%, 3/1/2002 ..................... 3,150,000 3,200,022
Rail Connections, Inc., Route 128 Parking Garage:
Series 1999A, 5.25%, 7/1/2008 .................... 705,000 696,117
Series 1999A, 5.4%, 7/1/2010 ..................... 1,000,000 987,980
Series 1999A, 6%, 7/1/2012 ....................... 250,000 255,338
Series 1999A, 6%, 7/1/2014 ....................... 250,000 251,548
Series 1999B, Zero Coupon, 7/1/2015 .............. 750,000 296,895
Series 1999B, Zero Coupon, 7/1/2016 .............. 1,025,000 375,857
Route 3 North Transportation Improvement Association:
Massachusetts Lease, Revenue Bond:
5.75%, 6/15/2012 (b) ........................... 1,105,000 1,164,571
5.75%, 6/15/2013 (b) ........................... 2,500,000 2,615,225
5.75%, 6/15/2016 (b) ........................... 4,910,000 5,053,077
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Principal
Amount ($) Value ($)
--------------------------------------------------------------------------------
South Essex, MA, Sewer District, General Obligation,
Series 1994B, Prerefunded 6/1/2004, 6.75%,
6/1/2013** .......................................... 1,000,000 1,091,930
Southeastern Massachusets University Building Authority,
Series 1995A, 5.5%, 5/1/2004 (b) .................... 1,010,000 1,041,401
Springfield, MA, General Obligation, Series 1999, 6%,
10/1/2014 (b) ....................................... 1,955,000 2,082,994
Springfield, MA, Municipal Purpose Loan, General
Obligation, Series 1996, 6.25%, 8/1/2006 (b) ........ 1,000,000 1,081,980
State of Massachusetts, Revenue Bond, Federal Highway,
Series 1998A, Zero Coupon, 12/15/2014 ............... 9,000,000 4,134,060
Tantasqua, MA, Regional School District:
General Obligation:
5.625%, 8/15/2012 (b) ............................. 2,580,000 2,716,043
5.625%, 8/15/2013 (b) ............................. 2,575,000 2,689,485
5.625%, 8/15/2014 (b) ............................. 2,575,000 2,666,284
University of Massachusetts, Building Authority Revenue:
Series 1995B, 6.625%, 5/1/2009 ...................... 2,415,000 2,714,871
Series 1995B, 6.625%, 5/1/2010 ...................... 2,575,000 2,913,587
Series 1995B, 6.75%, 5/1/2011 ....................... 2,745,000 3,143,382
Series 1995B, 6.875%, 5/1/2014 ...................... 1,300,000 1,509,534
Westfield, MA, General Obligations, 6.5%,
5/1/2013 (b) ........................................ 1,170,000 1,303,930
Westford, MA, General Obligations, 5.75%,
4/1/2012 (b) ........................................ 1,140,000 1,207,636
Worcester, MA, General Obligation:
5.625%, 8/15/2012 (b) ............................... 2,560,000 2,694,989
5.625%, 8/15/2013 (b) ............................... 2,625,000 2,741,708
Prerefunded 5/15/2002, 6.9%, 5/15/2005 (b)** ........ 1,850,000 1,955,450
Series 1991, Prerefunded 5/15/2002, 6.9%,
5/15/2006 (b)** ................................... 1,500,000 1,585,500
Puerto Rico
Puerto Rico Highway and Transportation Authority,
Highway Revenue, Series 1996Y, 6.25%, 7/1/2014 ...... 2,000,000 2,223,100
Puerto Rico Public Building Authority, Government
Facilities, Series 1995A, 6.75%, 7/1/2004 (b) ....... 2,250,000 2,441,543
Virgin Islands
Virgin Islands Public Finance Authority Revenue Bonds,
Series 1998C, 5.5%, 10/1/2004 ....................... 2,000,000 2,027,920
--------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $439,863,823) 452,749,183
--------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $439,863,823) (a) 452,749,183
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
--------------------------------------------------------------------------------
(a)The cost for federal income tax purposes was $439,863,823. At September 30,
2000, net unrealized appreciation for all securities based on tax cost was
$12,885,360. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$16,228,865 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $3,343,505.
(b) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC,
FSA or MBIA/BIG.
(c) Restricted Securities are securities which have not been registered with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The aggregate fair value of restricted securities at September 30,
2000, amounted to $2,579,828 which represents 0.56% of net assets.
Information concerning such restricted securities at September 30, 2000 is
as follows:
Principal Acquisition
Security ($) Date Cost ($)
------------------------------------ ----------- ------------ ------------
Massachusetts Industrial Finance
Agency, Solid Waste Disposal,
Peabody Monofil Project,
Series 1994, 9%, 9/1/2005 ....... 2,485,000 12/30/1994 2,485,000
* Inverse floating rate notes are instruments whose yields may change based
on the change in the relationship between long-term and short-term interest
rates and which exhibit added interest rate sensitivity compared to other
bonds with a similar maturity. These securities are shown at their rate as
of September 30, 2000.
** 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.
AMT: Subject to alternative minimum tax
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
Financial Statements
--------------------------------------------------------------------------------
Statement of Assets and Liabilities as of September 30, 2000 (Unaudited)
--------------------------------------------------------------------------------
Assets
--------------------------------------------------------------------------------
Investments in securities, at value (cost $439,863,823) . $ 452,749,183
Receivable for investments sold ......................... 4,397,581
Interest receivable ..................................... 7,055,429
Receivable for Fund shares sold ......................... 708
Due from Adviser ........................................ 17,925
Other assets ............................................ 2,098
--------------
Total assets ............................................ 464,222,924
Liabilities
--------------------------------------------------------------------------------
Due to custodian bank ................................... 3,222,249
Dividends payable ....................................... 792,882
Payable for Fund shares redeemed ........................ 34,124
Accrued management fee .................................. 238,784
Accrued Trustees' fees and expenses ..................... 44,058
Other accrued expenses and payables ..................... 145,391
--------------
Total liabilities ....................................... 4,477,488
--------------------------------------------------------------------------------
Net assets, at value $ 459,745,436
--------------------------------------------------------------------------------
Net Assets
--------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation (depreciation) on
investments .......................................... 12,885,360
Accumulated net realized gain (loss) .................... (5,985,832)
Paid-in capital ......................................... 452,845,908
--------------------------------------------------------------------------------
Net assets, at value $ 459,745,436
--------------------------------------------------------------------------------
Net Asset Value
--------------------------------------------------------------------------------
Net Asset Value, offering and redemption price
per share ($459,745,436 / 33,505,691 outstanding
shares of beneficial interest, $.01 par value, --------------
unlimited number of shares authorized) ................ $ 13.72
--------------
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations for the six months ended September 30, 2000
(Unaudited)
--------------------------------------------------------------------------------
Investment Income
--------------------------------------------------------------------------------
Income:
Interest ...................................................... $ 11,825,027
------------
Expenses:
Management fee ................................................ 1,212,616
Administrative fee ............................................ 118,216
Services to shareholders ...................................... 67,364
Custodian and accounting fees ................................. 27,168
Auditing ...................................................... 12,135
Legal ......................................................... 12,114
Trustees' fees and expenses ................................... 54,132
Reports to shareholders ....................................... 6,779
Registration fees ............................................. 5,826
Other ......................................................... 49,297
------------
Total expenses, before expense reductions ..................... 1,565,647
Expense reductions ............................................ (25,102)
------------
Total expenses, after expense reductions ...................... 1,540,545
--------------------------------------------------------------------------------
Net investment income 10,284,482
--------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
--------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments ................................................... (186,741)
Futures ....................................................... 218,550
------------
31,809
------------
Net unrealized appreciation (depreciation) during the
period on investments 3,253,712
--------------------------------------------------------------------------------
Net gain (loss) on investment transactions 3,285,521
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations $ 13,570,003
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Statements of Changes in Net Assets
-------------------------------------------------------------------------------------
Six Months
Ended September Year Ended
30, March 31,
Increase (Decrease) in Net Assets 2000 (Unaudited) 2000
-------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................. $ 10,284,482 $ 20,008,311
Net realized gain (loss) on investment transactions 31,809 (4,102,368)
Net unrealized appreciation (depreciation) on
investment transactions during the period ...... 3,253,712 (17,615,389)
------------- -------------
Net increase (decrease) in net assets resulting
from operations ................................ 13,570,003 (1,709,446)
------------- -------------
Distributions to shareholders from:
Net investment income ............................. (10,284,482) (20,008,311)
------------- -------------
Net realized gains ................................ -- (487,459)
------------- -------------
Fund share transactions:
Proceeds from shares sold ......................... 60,320,532 113,487,731
Net assets acquired in tax-free reorganization .... 73,134,503 --
Reinvestment of distributions ..................... 6,137,219 13,175,774
Cost of shares redeemed ........................... (58,099,758) (149,760,728)
------------- -------------
Net increase (decrease) in net assets from Fund
share transactions ............................. 81,492,496 (23,097,223)
------------- -------------
Increase (decrease) in net assets ................. 84,778,017 (45,302,439)
Net assets at beginning of period ................. 374,967,419 420,269,858
------------- -------------
Net assets at end of period ....................... $ 459,745,436 $ 374,967,419
------------- -------------
Other Information
-------------------------------------------------------------------------------------
Shares outstanding at beginning of period ......... 27,559,639 29,290,636
------------- -------------
Shares sold ....................................... 4,425,204 8,240,289
Shares issued in tax-free reorganization .......... 5,330,504 --
Shares issued to shareholders in reinvestment of
distributions .................................. 450,506 960,423
Shares redeemed ................................... (4,260,162) (10,931,709)
------------- -------------
Net increase (decrease) in Fund shares ............ 5,946,052 (1,730,997)
------------- -------------
Shares outstanding at end of period ............... 33,505,691 27,559,639
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<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, 2000(b) 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $13.61 $14.35 $14.34 $13.72 $13.70 $13.33
------------------------------------------------------
-------------------------------------------------------------------------------------
Income (loss) from investment operations:
-------------------------------------------------------------------------------------
Net investment income .35 .69 .69 .70 .70 .72
-------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions .11 (.72) .06 .62 .02 .37
------------------------------------------------------
-------------------------------------------------------------------------------------
Total from investment
operations .46 (.03) .75 1.32 .72 1.09
-------------------------------------------------------------------------------------
Less distributions from:
-------------------------------------------------------------------------------------
Net investment income (.35) (.69) (.69) (.70) (.70) (.72)
-------------------------------------------------------------------------------------
Net realized gains on
investment transactions -- (.02) (.05) -- -- --
------------------------------------------------------
-------------------------------------------------------------------------------------
Total distributions (.35) (.71) (.74) (.70) (.70) (.72)
-------------------------------------------------------------------------------------
Net asset value, end of period $13.72 $13.61 $14.35 $14.34 $13.72 $13.70
------------------------------------------------------
-------------------------------------------------------------------------------------
Total Return (%) 3.39(a)** (.13) 5.29 9.82 5.39 8.28(a)
-------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 460 375 420 374 330 314
-------------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) .76(c)* .74 .73 .76 .76 .76
-------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .76(c)* .74 .73 .76 .76 .75
-------------------------------------------------------------------------------------
Ratio of net investment income
(%) 5.07* 5.03 4.76 4.97 5.12 5.23
-------------------------------------------------------------------------------------
Portfolio turnover rate (%) 41* 39 11 8 12 21
-------------------------------------------------------------------------------------
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
(b) For the six months ended September 30, 2000 (Unaudited).
(c) The ratios of operating expenses excluding costs incurred in connection
with the reorganization before and after expense reductions were .75% and
.75%, respectively (see Notes to Financial Statements).
* Annualized
** Not annualized
25
<PAGE>
Notes to Financial Statements (Unaudited)
--------------------------------------------------------------------------------
A. Significant Accounting Policies
Scudder Massachusetts Tax Free Fund (the "Fund") is a non-diversified series of
Scudder State Tax Free Trust (the "Trust") which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company organized as a Massachusetts business trust.
On July 28, 2000, existing shares of the Fund were redesignated as Class S
shares. In addition, all of the net assets acquired from the merger with Scudder
Massachusetts Limited Term Tax Free Fund (see Note G) were designated as Class S
shares. Effective October 2, 2000, the Fund will commence offering Class AARP
shares, shares specifically designed for members of AARP.
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
use of management estimates. The policies described below are followed
consistently by the Fund in the preparation of its financial statements.
Security Valuation. Portfolio debt securities purchased with an original
maturity greater than sixty days are valued by pricing agents approved by the
officers of the Trust, whose quotations reflect broker/dealer-supplied
valuations and electronic data processing techniques. If the pricing agents are
unable to provide such quotations, the most recent bid quotation supplied by a
bona fide market maker shall be used. Money market instruments purchased with an
original maturity of sixty days or less are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of a financial
instrument at a specified price on a specific date (settlement date). During the
period, the Fund purchased index futures to manage the duration of the
portfolio.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund depending upon
the daily fluctuations in the value of the underlying security and are recorded
for financial reporting purposes as unrealized gains or losses by the
26
<PAGE>
Fund. When entering into a closing transaction, the Fund will realize a gain or
loss equal to the difference between the value of the futures contract to sell
and the futures contract to buy. Futures contracts are valued at the most recent
settlement price.
Certain risks may arise upon entering into futures contracts, including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with the changes in the value of
the securities or currencies hedged. When utilizing futures contracts to hedge,
the Fund gives up the opportunity to profit from favorable price movements in
the hedged positions during the term of the contract.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable and tax-exempt income
to its shareholders. Accordingly, the Fund paid no federal income taxes and no
federal income tax provision was required.
At March 31, 2000, the Fund had a net tax basis capital loss carryforward of
approximately $3,506,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until March 31,
2008, the expiration date, whichever occurs first. In addition, from November 1,
1999 through March 31, 2000, the Fund incurred approximately $960,000 of net
realized capital losses. As permitted by tax regulations, the Fund intends to
elect to defer these losses and treat them as arising in the fiscal year ended
March 31, 2001.
In addition, the Fund inherited approximately $617,000 of capital losses from
its merger (see Note G) with Scudder Massachusetts Limited Term Tax Free Fund,
which may be applied against any realized net taxable capital gains in future
years, subject to certain limitations imposed by Section 832 of the Internal
Revenue Code.
Distribution of Income and Gains. All of the net investment income of the Fund
is declared as a daily dividend and is distributed to shareholders monthly. Net
realized gains from investment transactions, in excess of available capital loss
carryforwards, would be taxable to the Fund if not distributed, and, therefore,
will be distributed to shareholders at least annually.
27
<PAGE>
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.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Realized gains and losses from investment transactions are recorded on an
identified cost basis. All premiums and original issue discounts are
amortized/accreted for both tax and financial reporting purposes.
B. Purchases and Sales of Securities
During the six months ended September 30, 2000, purchases and sales of municipal
securities (excluding short-term investments) aggregated $99,356,549 and
$82,259,181, respectively.
C. Related Parties
As described in Note F, Scudder Kemper Investments, Inc. has initiated a
restructuring program for most of its Scudder no-load, open-end funds. As part
of this reorganization, the Fund adopted a new Investment Management Agreement
and entered into an Administrative Agreement. Both of these agreements were
effective July 31, 2000. The terms of the newly adopted and the pre-existing
agreements are set out below.
Management Agreement. Under the Investment Management Agreement (the
"Agreement") with Scudder Kemper Investments, Inc. ("Scudder Kemper" or the
"Adviser"), the Adviser directs the investments of the Fund in accordance with
its investment objectives, policies and restrictions. The Adviser determines the
securities, instruments and other contracts relating to investments to be
purchased, sold or entered into by the Fund. In addition to portfolio management
services, the Adviser provides certain administrative services in accordance
with the Agreement. The management fee payable under the Agreement is equal to
an annual rate of 0.60% on the first
28
<PAGE>
$400,000,000 of average daily net assets and 0.525% of such net assets in excess
of $400,000,000, computed and accrued daily and payable monthly.
Effective July 31, 2000, the Fund, as approved by the Fund's Board of Trustees,
adopted a new Investment Management Agreement (the "Management Agreement") with
Scudder Kemper. The Management Agreement is identical to the pre-existing
Agreement, except for the dates of execution and termination. The management fee
payable under the Management Agreement is equal to an annual rate of 0.60% on
the first $400,000,000 of average daily net assets and 0.525% of such net assets
in excess of $400,000,000, computed and accrued daily and payable monthly.
For the six months ended September 30, 2000 the fees pursuant to these
agreements amounted to $1,212,616, of which $201,463 was unpaid at September 30,
2000. The management fee imposed was equivalent to an annualized effective rate
of 0.60% of the Fund's average daily net assets.
Administrative Fee. Effective July 31, 2000, the Fund, as approved by the Fund's
Board of Trustees, adopted an Administrative Agreement (the "Administrative
Agreement") with Scudder Kemper. Under the Administrative Agreement the Adviser
provides or pays others to provide substantially all of the administrative
services required by the Fund (other than those provided by Scudder Kemper under
its Management Agreement with the Fund, as described above) in exchange for the
payment by the Fund of an administrative services fee (the "Administrative Fee")
of 0.15% of average daily net assets. As of the effective date of the
Administrative Agreement, each service provider will continue to provide the
services that it currently provides to the Fund (i.e., fund accounting,
shareholder services, custody, audit and legal), under the current arrangements,
except that Scudder Kemper will pay these entities for the provision of their
services to the Fund and will pay most other Fund expenses, including insurance,
registration, printing and postage fees. Certain expenses of the Fund would not
be borne by Scudder Kemper under the Administrative Agreement, such as taxes,
brokerage, interest and extraordinary expenses, and the fees and expenses of the
Independent Trustees (including the fees and expenses of their independent
counsel). For the period from July 31, 2000 to September 30, 2000, the
Administrative Agreement expense charged to the Fund amounted to $118,216, all
of which was unpaid at September 30, 2000.
Other Fees. Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is
the transfer, dividend paying and shareholder service agent for the Fund. Prior
to July 31, 2000, the amount charged to the Fund by SSC aggregated $63,293.
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. Prior to July 31,
2000, the amount charged to the Fund by SFAC aggregated $18,603, of which $6,095
is unpaid at September 30, 2000.
29
<PAGE>
Effective July 31, 2000, the above fees will be paid by the Adviser in
accordance with the Administrative Agreement.
Trustee Fees and Expenses. The Fund pays each Trustee not affiliated with the
Adviser an annual retainer plus specified amounts for attended board and
committee meetings. For the six months ended September 30, 2000, Trustees' fees
and expenses aggregated $18,283. In addition, a one-time fee of $35,849 was
accrued for payment to those Trustees not affiliated with the Adviser who did
not stand for re-election under the reorganization discussed in Note F. Inasmuch
as the Adviser will also benefit from administrative efficiencies of a
consolidated Board, the Adviser has agreed to bear $17,925 of such costs.
D. Expense Off-Set Arrangements
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances were used to reduce a portion
of the Fund's expenses. For the six months ended September 30, 2000, the Fund's
custodian fee was reduced by $7,177 under this arrangement.
E. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $1 billion
revolving credit facility with Chase Manhattan Bank for temporary or emergency
purposes, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. The Participants are charged an
annual commitment fee which is allocated, pro rata based upon net assets, among
each of the Participants. Interest is calculated based on the market rates at
the time of the borrowing. The Fund may borrow up to a maximum of 33 percent of
its net assets under the agreement.
F. Reorganization
In early 2000, Scudder Kemper initiated a restructuring program for most of its
Scudder no-load open-end funds in response to changing industry conditions and
investor needs. The program proposes to streamline the management and operations
of most of the no-load open-end funds Scudder Kemper advises principally through
the liquidation of several small funds, mergers of certain funds with similar
investment objectives, the creation of one Board of Directors/Trustees and the
adoption of an administrative fee covering the provision of most of the services
currently paid for by the affected funds. Costs incurred in connection with this
restructuring initiative are being borne jointly by Scudder Kemper and certain
of the affected funds.
30
<PAGE>
G. Acquisition of Assets
On July 28, 2000, the Fund acquired all the net assets of Scudder Massachusetts
Limited Term Tax Free Fund pursuant to a plan of reorganization approved by
shareholders on July 13, 2000. The acquisition was accomplished by a tax-free
exchange of 5,330,504 shares of the Fund for 6,136,017 shares of Scudder
Massachusetts Limited Term Tax Free Fund outstanding on July 28, 2000. Scudder
Massachusetts Limited Term Tax Free Fund's net assets at that date
($73,134,503), including $381,072 of unrealized appreciation, were combined with
those of the Fund. The aggregate net assets of the Fund immediately before the
acquisition were $389,897,734. The combined net assets of the Fund immediately
following the acquisition were $463,032,237.
31
<PAGE>
Shareholder Meeting Results (Unaudited)
--------------------------------------------------------------------------------
A Special Meeting of Shareholders (the "Meeting") of Scudder Massachusetts Tax
Free Fund (the "fund"), a series of Scudder State Tax Free Trust, was held on
July 13, 2000, at the office of Scudder Kemper Investments, Inc., Two
International Place, Boston, Massachusetts 02110. At the Meeting the following
matters were voted upon by the shareholders (the resulting votes for each matter
are presented below).
1. To elect Trustees of Scudder State Tax Free Trust.
Number of Votes:
Trustee For Withheld
--------------------------------------------------------------------------------
Henry P. Becton, Jr. 16,501,155 411,807
Linda C. Coughlin 16,562,261 350,701
Dawn-Marie Driscoll 16,581,081 331,881
Edgar R. Fiedler 16,573,048 339,913
Keith R. Fox 16,587,443 325,519
Joan E. Spero 16,566,107 346,855
Jean Gleason Stromberg 16,597,403 315,559
Jean C. Tempel 16,597,705 315,257
Steven Zaleznick 16,573,532 339,430
--------------------------------------------------------------------------------
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent
accountants for the fund for the fiscal year ending March 31, 2001.
Number of Votes:
Broker
For Against Abstain Non-Votes*
--------------------------------------------------------------------------------
16,542,363 157,128 213,471 0
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
* 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.
32
<PAGE>
Officers and Trustees
--------------------------------------------------------------------------------
Linda C. Coughlin*
o President and Trustee
Henry P. Becton, Jr.
o Trustee; President, WGBH
Educational Foundation
Dawn-Marie Driscoll
o Trustee; President, Driscoll
Associates; Executive Fellow,
Center for Business Ethics, Bentley
College
Edgar R. Fiedler
o Trustee; Senior Fellow and
Economic Counsellor, The
Conference Board, Inc.
Keith R. Fox
o Trustee; General Partner,
The Exeter Group of Funds
Joan E. Spero
o Trustee; President, The Doris
Duke Charitable Foundation
Jean Gleason Stromberg
o Trustee; Consultant
Jean C. Tempel
o Trustee; Managing Director,
First Light Capital, LLC
Steven Zaleznick
o Trustee; President and
Chief Executive Officer,
AARP Services, Inc.
Eleanor R. Brennan*
o Vice President
Thomas V. Bruns*
o Vice President
Philip G. Condon*
o Vice President
William F. Glavin*
o Vice President
Ashton P. Goodfield*
o Vice President
James E. Masur*
o Vice President
Ann M. McCreary*
o Vice President
Howard S. Schneider*
o Vice President
Rebecca L. Wilson*
o Vice President
John Millette*
o Vice President and Secretary
Kathryn L. Quirk*
o Vice President and Assistant Secretary
John R. Hebble*
o Treasurer
Brenda Lyons*
o Assistant Treasurer
Caroline Pearson*
o Assistant Secretary
*Scudder Kemper Investments, Inc.
33
<PAGE>
Investment Products and Services
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Scudder Funds
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Money Market U.S. Growth
Scudder U.S. Treasury Money Fund Value
Scudder Cash Investment Trust Scudder Large Company Value Fund
Scudder Money Market Series -- Scudder Value Fund
Prime Reserve Shares Scudder Small Company Value Fund
Premium Shares
Managed Shares Growth
Scudder Tax Free Money Fund Scudder Classic Growth Fund
Scudder Capital Growth Fund
Tax Free Scudder Large Company Growth Fund
Scudder Medium Term Tax Free Fund Scudder Select 1000 Growth Fund
Scudder Managed Municipal Bonds Scudder Development Fund
Scudder High Yield Tax Free Fund Scudder Small Company Stock Fund
Scudder California Tax Free Fund Scudder 21st Century Growth Fund
Scudder Massachusetts Tax Free Fund
Scudder New York Tax Free Fund Global Equity
Worldwide
U.S. Income Scudder Global Fund
Scudder Short Term Bond Fund Scudder International Fund
Scudder GNMA Fund Scudder Global Discovery Fund
Scudder Income Fund Scudder Emerging Markets Growth Fund
Scudder Corporate Bond Fund Scudder Gold Fund
Scudder High Yield Bond Fund
Regional
Global Income Scudder Greater Europe Growth Fund
Scudder Global Bond Fund Scudder Pacific Opportunities Fund
Scudder Emerging Markets Income Fund Scudder Latin America Fund
The Japan Fund, Inc.
Asset Allocation
Scudder Pathway Conservative Portfolio Industry Sector Funds
Scudder Pathway Balanced Portfolio Scudder Health Care Fund
Scudder Pathway Growth Portfolio Scudder Technology Fund
U.S. Growth and Income
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder Select 500 Fund
Scudder S&P 500 Index Fund
34
<PAGE>
--------------------------------------------------------------------------------
Retirement Programs and Education Accounts
--------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA IRA for Minors
Inherited IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
--------------------------------------------------------------------------------
Closed-End Funds
--------------------------------------------------------------------------------
The Argentina Fund, Inc. Montgomery Street Income Securities, Inc.
The Brazil Fund, Inc. Scudder Global High Income Fund, Inc.
The Korea Fund, Inc. Scudder New Asia Fund, Inc.
</TABLE>
Scudder funds are offered by prospectus only. For more complete information on
any fund or variable annuity registered in your state, including information
about a fund's objectives, strategies, risks, advisory fees, distribution
charges, and other expenses, please order a free prospectus. Read the prospectus
before investing in any fund to ensure the fund is appropriate for your goals
and risk tolerance. There is no assurance that the objective of any fund will be
achieved, and fund returns and net asset values fluctuate. Shares are redeemable
at current net asset value, which may be more or less than their original cost.
A money market mutual fund investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although a
money market mutual fund seeks to preserve the value of your investment at $1
per share, it is possible to lose money by investing in such a fund.
The services and products described should not be considered a solicitation to
buy or an offer to sell a security to any person in any jurisdiction where such
offer, solicitation, purchase, or sale would be unlawful under the securities
laws of such jurisdiction.
Scudder Investor Services, Inc.
35
<PAGE>
Account Management Resources
--------------------------------------------------------------------------------
For shareholders of Scudder funds including those in the AARP Investment Program
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly
to regularly purchase fund shares and "dollar cost
average" -- buy more shares when the fund's price is
lower and fewer when it's higher, which can reduce
your average purchase price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to
purchase shares -- use distributions from one Scudder
fund to purchase shares in another, automatically
(accounts with identical registrations or the same
social security or tax identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of
your transactions is electronically debited from a
previously designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government
checks -- invested in up to four Scudder funds at one
time.
* Dollar cost averaging involves continuous
investment in securities regardless of price
fluctuations and does not assure a profit or
protect against loss in declining markets.
Investors should consider their ability to
continue such a plan through periods of low
price levels.
Around-the- Automated Information Lines
clock electronic
account Scudder Class S Shareholders:
service and Call SAIL(TM) -- 1-800-343-2890
information,
including some AARP Investment Program Shareholders:
transactions Call Easy-Access Line -- 1-800-631-4636
Personalized account information, the ability to
exchange or redeem shares, and information on other
Scudder funds and services via touchtone telephone.
Web Site
Scudder Class S Shareholders --
www.scudder.com
AARP Investment Program Shareholders --
aarp.scudder.com
Personal Investment Organizer: Offering account
information and transactions, interactive worksheets,
prospectuses and applications for all Scudder funds,
plus your current asset allocation, whenever you need
them. Scudder's site also provides news about Scudder
funds, retirement planning information, and more.
36
<PAGE>
--------------------------------------------------------------------------------
Those who Automatic Withdrawal Plan
depend on
investment You designate the bank account, determine the
proceeds for schedule (as frequently as once a month) and amount
living expenses of the redemptions, and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into
automated the bank account you designate within three business
withdrawal days after each distribution is paid.
programs
QuickSell
Provides speedy access to your money by
electronically crediting your redemption proceeds to
the bank account you previously designated.
For more Scudder Class S Shareholders:
information
about these Call a Scudder representative at
services 1-800-SCUDDER
AARP Investment Program Shareholders:
Call an AARP Investment Program representative at
1-800-253-2277
Please address For Scudder Class S Shareholders:
all written
correspondence The Scudder Funds
to PO Box 2291
Boston, Massachusetts
02107-2291
For AARP Investment Program Shareholders:
AARP Investment Program from Scudder
PO Box 2540
Boston, Massachusetts
02208-2540
37
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $290 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded over 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich
Kemper Investments, Inc., with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in New York, Scudder Kemper
Investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies. With its global investment resources and
perspective, the firm seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Financial Services Group. The Zurich Financial Services Group is
an internationally recognized leader in financial services, including
property/casualty and life insurance, reinsurance, and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
INVESTMENTS (SM)
[LOGO]
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
A member of the [LOGO] Zurich Financial Services Group
