SCUDDER
INVESTMENTS (SM)
[LOGO]
- ----------------------------------
BOND/TAX FREE
- ----------------------------------
Scudder Massachusetts
Tax Free Fund
Fund #012
Annual Report
March 31, 2000
The fund seeks income that is exempt from Massachusetts personal and regular
federal income taxes.
A no-load fund with no commissions to buy, sell, or exchange shares.
<PAGE>
Contents
- --------------------------------------------------------------------------------
4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
9 Portfolio Management Discussion
14 Glossary of Investment Terms
15 Investment Portfolio
22 Financial Statements
25 Financial Highlights
26 Notes to Financial Statements
29 Report of Independent Accountants
30 Tax Information
31 Officers and Trustees
32 Investment Products and Services
34 Scudder Solutions
2
<PAGE>
Scudder Massachusetts Tax Free Fund
- --------------------------------------------------------------------------------
ticker symbol SCMAX fund number 012
- --------------------------------------------------------------------------------
Date of Inception: o In a difficult environment for all fixed-income
5/28/87 instruments, Scudder Massachusetts Tax Free Fund posted
a total return of -0.13% for its most recent fiscal
year ended March 31, 2000, outpacing the -2.34% average
return of 56 similar funds tracked by Lipper Analytical
Services.
Total Net Assets as o The fund retained its #1 ranking for total return over
of 3/31/00: the ten-year period ended March 31, as rated by Lipper.
$375 million Please see page 9 for additional information on the
fund's rankings.
- --------------------------------------------------------------------------------
30-Day Yield on March 31, 2000
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
- --------------------------------------------------------------------------------
4.96% 8.73%
- --------------------------------------------------------------------------------
Taxable Yield
Scudder Massachusetts Needed to Equal
Tax Free Fund the Fund's Yield
o Scudder Massachusetts Tax Free Fund received a four-star
rating from Morningstar, reflecting "above average"
risk-adjusted performance through March 31, 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 1682, 1394, and 403 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
- --------------------------------------------------------------------------------
Dear Shareholders,
Municipal bonds endured a challenging investment environment during Scudder
Massachusetts Tax Free Fund's most recent fiscal year ended March 31, 2000. The
fund posted a -0.13% total return during the period, but outperformed the -2.34%
average performance of its peers as compiled by Lipper. To match the fund's
tax-free 4.96% 30-day SEC yield on March 31, a taxable investment would have had
to yield 8.73%. Over the period, municipal bonds were negatively affected by
significant interest rate increases across all fixed-income markets as the
Federal Reserve attempted to restrain surging U.S. economic growth and head off
a major increase in inflation by incrementally raising the federal funds rate to
6%.
Following this period of relative underperformance, we nevertheless believe the
municipal market offers attractive return potential: Adjusted for inflation,
municipal yields are high by historical standards and are attractive when
compared to yields of comparable Treasury bonds. As of March 31, yields of
10-year AAA-rated municipal bonds were 84% of comparable Treasuries. Second, a
recent reduction in the supply of municipal bonds should provide strong support
for bond prices. And third, fixed-income markets could be primed for a strong
rally once a
4
<PAGE>
consensus is reached that the Fed has completed its current cycle of interest
rate increases.
On a related note, we'd like to point out some of the advantages of owning a
municipal bond fund compared with holding individual municipal bonds. First and
foremost, municipal bond funds offer professional management: While many
investors believe that purchasing an individual bond is a relatively simple
process, knowing what price to pay for a municipal bond and what structure and
characteristics to seek can be confusing, and can make a dramatic difference in
how a bond will perform on a total return basis. Though investors understandably
value income and coupon level, they are not the only factors that determine
whether a bond will prove to be a worthwhile investment. Other important
advantages offered by municipal bond funds include portfolio diversification,
dividend reinvestment, and quarterly statements that display performance
information clearly and concisely.
Thank you for investing with Scudder 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
- --------------------------------------------------------------------------------
March 31, 2000
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
Scudder Massachusetts Tax Free Fund Lehman Brothers Municipal Bond Index*
'90 10000 10000
'91 10860 10922
'92 11997 12015
'93 13748 13520
'94 14212 13833
'95 15258 14861
'96 16521 16107
'97 17411 16985
'98 19121 18808
'99 20132 19974
'00 20106 19954
Yearly periods ended March 31
- --------------------------------------------------------------------------------
Fund Index Comparison
- --------------------------------------------------------------------------------
Total Return
Period ended 3/31/2000 Growth of Average
$10,000 Cumulative Annual
- --------------------------------------------------------------------------------
Scudder Massachusetts Tax Free Fund
- --------------------------------------------------------------------------------
1 year $ 9,987 -0.13% -0.13%
- --------------------------------------------------------------------------------
5 year $ 13,177 31.77% 5.67%
- --------------------------------------------------------------------------------
10 year $ 20,106 101.06% 7.23%
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index*
- --------------------------------------------------------------------------------
1 year $ 9,990 -0.10% -0.10%
- --------------------------------------------------------------------------------
5 year $ 13,427 34.27% 6.06%
- --------------------------------------------------------------------------------
10 year $ 19,954 99.54% 7.15%
- --------------------------------------------------------------------------------
* 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
<PAGE>
- --------------------------------------------------------------------------------
Returns and Per Share Information
- --------------------------------------------------------------------------------
Yearly periods ended March 31
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 (%)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Total
Return (%) 8.60 10.46 14.59 3.37 7.37 8.28 5.39 9.82 5.29 -0.13
- ------------------------------------------------------------------------------------
Index Total 9.22 10.02 12.52 2.32 7.43 8.38 5.45 10.73 6.20 -0.10
Return (%)
- ------------------------------------------------------------------------------------
Net Asset Value
($) 12.44 12.81 13.61 13.16 13.33 13.70 13.72 14.34 14.35 13.61
- ------------------------------------------------------------------------------------
Income
Dividends ($) .83 .81 .84 .81 .74 .72 .70 .70 .69 .69
- ------------------------------------------------------------------------------------
Capital Gains
Distributions
($) -- .09 .16 .12 .01 -- -- -- .05 .02
- ------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Portfolio Summary
- --------------------------------------------------------------------------------
March 31, 2000
- --------------------------------------------------------------------------------
Diversification
- --------------------------------------------------------------------------------
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.
Water/Sewer/Revenue 16%
Hospital/Health 15%
State General Obligations/
Lease 12%
Higher Education 10%
Housing Finance Authority 9%
Sales/Special Tax 6%
Electric Utility Revenue 5%
Other General Obligation/
Lease 5%
Port/Airport Revenue 3%
Resource Recovery 3%
Miscellaneous Municipal 16%
- ------------------------------------
100%
- ------------------------------------
- --------------------------------------------------------------------------------
Quality
- --------------------------------------------------------------------------------
Overall portfolio
quality remains high,
with 82% of portfolio
securities rated A or
better as of March 31.
A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
AAA* 41%
AA 23%
A 18%
BBB 10%
CCC+ 1%
Not Rated 7%
- ------------------------------------
100%
- ------------------------------------
Weighted average quality: AA
* Includes cash equivalents
- --------------------------------------------------------------------------------
Effective Maturity
- --------------------------------------------------------------------------------
In a rising interest
rate environment, we
emphasized
longer-maturity bonds
while the yield curve
remained steep and then
resumed our usual
strategy of
concentrating on
intermediate maturities
when the yield curve
flattened.
A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA POINTS IN THE TABLE BELOW.
Less than 1 year 3%
1-5 years 26%
5-10 years 26%
10-15 years 25%
15 years or greater 20%
- ------------------------------------
100%
- ------------------------------------
Weighted average effective
maturity: 9.5 years
For more complete details about the Fund's investment portfolio, see page 15. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8
<PAGE>
Portfolio Management Discussion
- --------------------------------------------------------------------------------
March 31, 2000
Dear Shareholders,
Municipal bonds faced a difficult environment during Scudder Massachusetts Tax
Free Fund's most recent fiscal year as the Federal Reserve repeatedly raised
interest rates in an attempt to forestall inflationary pressures arising from
the strong U.S. economy. The fund's total return for its most recent fiscal year
ended March 31, 2000, was -0.13%, outpacing the -2.34% average return of 56
similar funds as tracked by Lipper Analytical Services, Inc. The fund's 30-day
SEC yield as of March 31 was 4.96%, equivalent to an 8.73% taxable yield for
Massachusetts investors subject to the 43.19% combined federal and state income
tax rate.
Despite the negative posting over the most recent fiscal year, the fund's total
returns over three-, five-, and ten-year periods placed it in the top 9% of
similar Massachusetts tax-free funds, and the fund ranked number one in total
return compared with its peers for the ten-year period ended March 31, 2000.
Please see the table below for additional information concerning the fund's
returns.
Premium Bonds Aided Our
Defensive Posture
During the fund's most recent fiscal year, the U.S. Federal Reserve began to
raise interest rates to head off inflationary pressures as commodity prices
rebounded, the
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Scudder Massachusetts Tax Free Fund:
Consistent Top-Tier Performance
(Average annual returns for periods ended March 31, 2000)
- -------------------------------------------------------------------------------------
Scudder
Massachusetts
Tax Free Fund Lipper Rank Number of Percentile
Period Return Average Funds Tracked Rank
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year -0.13% -2.34% 1 of 56 Top 2%
3 Years 4.91% 4.05% 4 of 53 Top 8%
5 Years 5.67% 4.87% 4 of 46 Top 9%
10 Years 7.23% 6.53% 1 of 18 Top 6%
- -------------------------------------------------------------------------------------
</TABLE>
Past performance does not guarantee future results.
9
<PAGE>
nation's unemployment index reached 30-year lows, and consumer spending
proceeded at a brisk pace. The Fed's latest action, in March, raised its
short-term interest rate target to 6%. During the last 12 months, yields on
10-year Treasury bonds rose nearly 72 basis points and their prices declined
4.9%, while municipal bond yields rose 61 basis points and their prices also
declined 4.9%. Also during the period, the Treasury yield curve inverted,
causing short-term securities to yield more than longer-term securities. Our
strategy in light of these market conditions was to emphasize longer maturity
bonds because of the relative steepness of the municipal yield curve between 10
and 30 years, and sell intermediate and short maturities. As the yield curve
flattened, we resumed our usual strategy of concentrating on intermediate
maturities.
During the 12-month period, we also maintained three key elements of our
longer-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. Third, we sought
to avoid "market discount," a provision that can subject municipal bonds sold at
a discount to ordinary income tax. Key to this strategy was our emphasis on
purchasing premium bonds rather than par bonds (which can more easily decline to
a discount). The chart below illustrates this element of our strategy, showing
the difference in the performance over the previous 12-month period of a type of
premium bond we favored versus a type of par bond we avoided. In a difficult
municipal bond market the premium bond posted
10
<PAGE>
- --------------------------------------------------------------------------------
Premium Coupon Bonds Avoided "Market Discount"
(12-month returns as of March 31, 2000, following a 60 basis point
rise in interest rates)
- --------------------------------------------------------------------------------
Starting price Ending price Total
Type of Bond 3/31/99 3/31/00 Return
- --------------------------------------------------------------------------------
Premium bond with a
5.50% coupon due 2015 $105.92 $101.06 +0.68%
Par bond with a
5.0% coupon due 2020 $100.00 $91.92 -3.02%
- --------------------------------------------------------------------------------
Result: The premium bond outperformed the par bond by 3.70%.
positive performance, while the par bond posted negative performance because of
its exposure to the market discount tax.
In addition, over the period, credit spreads for higher yielding securities
widened to historically high levels. Because of this, we chose to selectively
add to credits which we deemed to be appropriate credit risks. The fund's
overall portfolio quality remains high, with over 80% 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 hospital/health, general
obligation, and water/sewer revenue bonds.zl
Massachusetts Update
Massachusetts continues 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 since 1989. At the root of
the Commonwealth's strong financial position is a strong job market. Job growth
in the services sector was the principal factor in bringing Massachusetts'
unemployment rate down to 3.1% in February 2000, compared with the national
average of 4.1%.
The Commonwealth's debt level is high, but manageable, given its high wealth
level. Future long-term debt issuance by Massachusetts had been set to level off
at $1 billion per year for the next five years. However, recent cost overruns in
the Central Artery Project have forced the
11
<PAGE>
Commonwealth to identify alternative financing sources. Over and above the $1
billion in scheduled financing, it is likely the Commonwealth will issue another
$600 million in government obligation bonds, secured by the automobile driver's
license registration fee that had been scheduled to terminate in May 2000.
Overall, funding for the Central Artery Project remains uncertain and will be a
credit issue to be monitored for the foreseeable future. We will also continue
to monitor the financial impact of the Governor's recent proposal for $2 billion
in tax cuts.
Outlook
Since it is widely expected that the Fed will continue to raise interest rates
into the summer, municipals will continue to face a challenging environment.
Still, we believe the municipal bond market represents attractive value, with
yields of longer maturity municipals approaching those of Treasury bonds, and
tax-equivalent yields near double-digit levels for investors in the highest tax
brackets (in January, municipal bond yields reached 6.35% on average*, the
highest level since August 1995). And the robust U.S. and Massachusetts
economies should continue to bolster the credit ratings of individual
Massachusetts bond issues.
In addition to the long-term strategy outlined above, we will seek to take
advantage of newly widened credit spreads (differences in yield between higher
and lower quality bonds). Wider credit spreads make it worthwhile to invest in
bonds with slightly lower credit ratings in an effort to boost the fund's yield.
We believe Scudder Massachusetts Tax Free Fund remains an attractive investment
option for investors 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
*Source: The Bond Buyer
12
<PAGE>
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, each of whom plays an important
role in the fund's management process. Team members work together to develop
investment strategies and select securities for the fund's portfolio. They are
supported by the Adviser's large staff of economists, research analysts,
traders, and other investment specialists who work in offices across the United
States and abroad. The Adviser believes that a team approach benefits fund
investors by bringing together many disciplines and leveraging the firm's
extensive resources.
Lead portfolio manager Philip G. Condon joined the Adviser in 1983 and has 22
years of experience in municipal investing and portfolio management. Mr. Condon
has had responsibility for the fund since 1989.
Portfolio manager Rebecca L. Wilson became a member of the team in 1999. Ms.
Wilson, who joined the Adviser in 1986, has 14 years of experience in municipal
investing.
13
<PAGE>
Glossary of Investment Terms
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 A municipal bond backed by the "full faith and credit"
Bond (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 The price per share of a mutual fund based on the sum of the
Value (NAV) 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 to
Equivalent provide to equal that of a tax-free municipal bond on an
Yield 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.
</TABLE>
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
14
<PAGE>
Investment Portfolio as of March 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Short-Term Municipal Investments 0.5%
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Massachusetts
Massachusetts Industrial Finance Agency, Health Care
Facility Revenue, Beverly Enterprises, Daily Demand
Note, 4%, 4/1/2009* .................................................... 1,050,000 1,050,000
Massachusetts State Health and Educational Facilities
Authority, Wellesley College, Series G, Daily Demand
Note, 3.75%, 7/1/2039* ................................................. 800,000 800,000
Total Short-Term Municipal Investments (Cost $1,850,000) ................... 1,850,000
- --------------------------------------------------------------------------------------------------------
Long-Term Municipal Investments 99.5%
- --------------------------------------------------------------------------------------------------------
Massachusetts
Boston, MA, General Obligation, Series 1992A, Prerefunded
7/1/2002, 6.5%, 7/1/2012** ............................................. 2,320,000 2,450,777
Boston, MA, Industrial Development Financing Authority:
Series 1998, 5.5%, 7/1/2008 ............................................ 1,020,000 951,221
Springhouse Project, Series 1995, Prerefunded 7/1/2005,
9.25%, 7/1/2025** .................................................... 2,000,000 2,408,520
Chicopee, MA, Electric System Revenue, Series 1978, ETM,
7.125%, 1/1/2017*** .................................................... 1,210,000 1,389,443
Haverhill, MA, Unlimited Tax, General Obligation,
Series 1992A, Prerefunded 6/15/2002,
7%, 6/15/2012 (b)** .................................................... 600,000 639,678
Holliston, MA, General Obligation, 5.5%, 12/1/2015 (b) .................... 1,660,000
1,678,393
Ipswich Mass, General Obligation, 5.25%, 11/15/2017 (b) ................... 2,325,000
2,234,441
Malden, MA, General Obligation, Series 1998,
4.5%, 10/1/2017 (b) .................................................... 5,135,000 4,407,216
Massachusetts Bay Transportation Authority:
Certificate of Participation, 7.75%, 1/15/2006 ......................... 1,000,000 1,090,440
General Transportation System, Series 1997C, 6.1%,
3/1/2013 ............................................................. 1,250,000 1,341,125
Series 1997B, 6.2%, 3/1/2016 ........................................... 3,100,000 3,358,943
Series 1999A, 5.25%, 3/1/2018 (b) ...................................... 6,870,000 6,577,407
Massachusetts College Building Authority Project, Revenue
Bond, 5.625%, 5/1/2016 ................................................. 2,690,000 2,715,259
Massachusetts General Obligation:
Consolidated Loan, Series 1991A, 7.5%, 6/1/2004 ........................ 12,400,000 13,335,208
Hynes Convention Center, Series 1992,
Zero Coupon, 9/1/2004 ................................................ 2,000,000 1,597,700
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Series 1992A, Prerefunded 6/1/2002, 6.5%, 6/1/2008** ................... 330,000 345,038
Series 1992B, 6.5%, 8/1/2008 ........................................... 5,400,000 5,913,810
Series 1996A, Inverse Floating Note, 7.78%,
6/28/2008**** ........................................................ 5,000,000 5,696,200
Inverse Floating Note, 11/1/2010**** ................................... 2,000,000 2,290,920
Massachusetts Housing Finance Agency:
Housing Project Refunding Revenue Bond:
Series 1993A, 6.3%, 10/1/2013 ........................................ 7,000,000 7,165,270
Series 1993A, 6.375%, 4/1/2021 ....................................... 3,905,000 3,937,333
Series 1994B, 6.05%, 12/1/2009 (b) ................................... 3,000,000 3,076,740
Residential Development, Series 1992C, 6.875%,
11/15/2011 ........................................................... 15,250,000 16,032,478
Single-Family Mortgage Revenue, Series 44, 5.9%,
12/1/2013 ............................................................ 2,135,000 2,132,822
Massachusetts Municipal Wholesale Electric Company,
Power Supply System Revenue:
Series 1992A, 6.75%, 7/1/2006 ........................................ 2,855,000 2,987,815
Series 1992B, 6.75%, 7/1/2008 ........................................ 9,000,000 9,418,680
Series 1992C, 6.625%, 7/1/2010 ....................................... 1,000,000 1,043,910
Series 1992C, 6.625%, 7/1/2010 (b) ................................... 3,500,000 3,688,825
Massachusetts Special Obligation, Series 1996A,
5.5%, 6/1/2011 (b) ..................................................... 5,000,000 5,108,400
Massachusetts State Development Financial Agency:
Health Care Facilities, Series 1999A,
7.1%, 7/1/2032 ....................................................... 4,000,000 3,741,800
Higher Education, Series 2000, 5.75%, 7/1/2012 ......................... 500,000 523,590
Higher Education, Series 2000, 5.75%, 7/1/2015 ......................... 1,265,000 1,299,699
Massachusetts State General Obligation:
Series 1990C, Zero Coupon, 12/1/2004 ................................... 910,000 719,082
Series 1990C, ETM, Zero Coupon, 12/1/2004*** ........................... 7,505,000 5,938,556
Series 1998B, 5%, 4/1/2016 (b) ......................................... 4,000,000 3,732,520
Series 1999B, 5%, 5/1/2019 ............................................. 3,000,000 2,725,020
Massachusetts State Grant Anticipation Revenue Note:
Series 1998A, 5.25%, 12/15/2012 ........................................ 7,050,000 7,042,950
Series 1998B, 5.125%, 12/15/2014 ....................................... 2,000,000 1,932,880
Massachusetts State Health and Educational Facilities
Authority:
Anna Jaques Hospital, Series 1992B, 6.875%,
10/1/2012 .......................................................... 2,000,000 2,007,260
Berkshire Health System, Series 1995D, 5.6%,
10/1/2008 (b) ...................................................... 1,760,000 1,799,970
Boston College Issue, Series 1998L, 5.25%, 6/1/2015 .................. 720,000 700,142
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Boston Medical Center, Series 1998A, 5.25%,
7/1/2013 (b) ....................................................... 4,575,000 4,434,502
Cape Cod Health Care, Series 1998B, 5.25%,
11/15/2013 ......................................................... 1,365,000 1,174,091
Caritas Christi Obligation, Series 1999A, 5.625%,
7/1/2020 ........................................................... 1,000,000 781,500
Community College Program, Series 1992A,
Prerefunded 10/1/2002, 6.5%, 10/1/2009** ........................... 1,000,000 1,060,170
Cooley Dickenson Hospital Inc.:
Series 1993A, Prerefunded 5/15/2003, 7.125%,
11/15/2018** ..................................................... 1,940,000 2,083,715
Series 1995B, 5.25%, 11/15/2010 (b) ................................ 2,005,000 1,993,592
Deaconess Hospital, Series 1992B, Prerefunded
4/1/2002, 6.625%, 4/1/2012 (b)* .................................... 2,000,000 2,109,520
Massachusetts General Hospital, Series 1992F, 6.25%,
7/1/2012 (b) ....................................................... 5,000,000 5,447,100
Medical Academic & Scientific, Series 1995A, 6.5%,
1/1/2009 ........................................................... 5,000,000 5,110,900
Medical Center of Central Massachusetts,
Series 1991A, 7%,7/1/2012 (b) ...................................... 3,600,000 3,783,204
Melrose-Wakefield, Series 1996C, Prerefunded
7/1/2006, 6%, 7/1/2012** ........................................... 1,000,000 1,070,500
Milford-Whitinsville Regional, Series 1998C, 5.75%,
7/15/2013 (b) ...................................................... 1,750,000 1,531,635
Newton-Wellesley Hospital:
Series 1995E, 5.9%, 7/1/2011 (b) ................................... 3,015,000 3,104,154
Series 1997G, 6%, 7/1/2012 (b) ..................................... 1,000,000 1,038,710
North Adams, Series 1996C, 6.625%, 7/1/2018 .......................... 1,560,000 1,437,571
Northeastern University:
Series 1992F, 6.4%, 10/1/2007 (b) .................................. 1,000,000 1,053,580
Series 1992E, 6.5%, 10/1/2012 (b) .................................. 450,000 473,963
Partners Healthcare System, Series 1997S, 5.25%,
7/1/2013 (b) ....................................................... 2,000,000 1,938,580
Prerefunded 7/1/2002, Series 1992D, 6.5%,
7/1/2010** ......................................................... 1,640,000 1,731,364
St. Luke's Hospital New Bedford, Series C,
Inverse Floating Note, 6.87%, 8/15/2010**** ........................ 3,400,000 3,489,250
Series 1992D, 6.5%, 7/1/2010 (b) ..................................... 860,000 900,368
Stonehill College:
Series 1992E, 6.55%, 7/1/2012 (b) .................................. 2,755,000 2,898,673
Series 1992E, Prerefunded 7/1/2002, 6.55%,
7/1/2012 (b)** ................................................... 2,245,000 2,373,930
Suffolk University, Series 1996C, 5.65%, 7/1/2011 (b) .............. 1,045,000 1,076,131
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Massachusetts State Industrial Finance Agency:
Assisted Living Facilities Revenue, TNG Marina Bay
LLC Project, Series 1997, AMT, 7.5%, 12/1/2027 ....................... 1,000,000 1,000,940
Babson College, Series 1997A, 5.375%, 10/1/2017 ........................ 1,700,000 1,606,959
Belmont, Series 1998, 5.625%, 9/1/2020 ................................. 1,265,000 1,210,947
Belmont Hill School, Series 1998, 5.15%, 9/1/2013 ...................... 1,000,000 939,920
College of the Holy Cross:
Series 1992II, Prerefunded 11/1/2002, 6.375%,
11/1/2009** ........................................................ 1,000,000 1,057,690
Series 1996, 5.5%, 3/1/2016 (b) ...................................... 5,000,000 4,984,000
Concord Academy, Series 1997, 5.45%, 9/1/2017 .......................... 1,205,000 1,122,843
Dana Hall School, Issue, Series 1997A, 5.7%, 7/1/2013 .................. 1,000,000 957,590
Deerfield Academy, Series 1997, 5.125%, 10/1/2017 ...................... 1,520,000 1,450,065
East Boston Neighborhood, Series 1996, 7.625%,
7/1/2026 ............................................................. 2,750,000 2,609,750
Edgewood Retirement Community, Series 1995A, 9%,
11/15/2025 ........................................................... 1,650,000 1,847,522
First Mortgage, Evanswood Bethzatha, Series
1994A, 7.875%, 1/15/2020 ............................................. 1,000,000 770,000
Massachusetts Biomedical Research Corp.:
Series 1989A, AMT, Zero Coupon, 8/1/2000 ............................. 2,860,000 2,818,530
Series 1989A, Zero Coupon, 8/1/2001 .................................. 3,650,000 3,426,985
Series 1989A, Zero Coupon, 8/1/2002 .................................. 3,650,000 3,246,091
Merrimack College, Series 1997, 5%, 7/1/2012 (b) ....................... 1,560,000 1,513,996
Nantucket Electric Co:
Series 1996A, AMT, 5.75%, 7/1/2009 (b) ............................... 1,000,000 1,026,310
Series 1996A, AMT, 5.875%, 7/1/2017 (b) .............................. 2,000,000 2,004,320
Pollution Control Revenue:
Boston Edison Company, Series 1994A, 5.75%,
2/1/2014 ........................................................... 2,000,000 1,947,760
Eastern Edison Company Project, Series 1993,
5.875%, 8/1/2008 ................................................... 4,750,000 4,621,655
Provider Lease Program, Certificate of Participation,
Series 1988A, 8.4%, 7/15/2008 ........................................ 1,035,000 1,039,606
Resource Recovery, North Andover Solid Waste,
Series 1993A, 6.3%, 7/1/2005 ......................................... 6,500,000 6,700,850
Solid Waste Disposal, Peabody Monofil Project,
Series 1994, 9%, 9/1/2005 (c) ........................................ 2,485,000 2,580,871
Sturdy Memorial Hospital, Series 1989,
7.9%, 6/1/2009 (b) ................................................... 1,545,000 1,580,025
The Tabor Academy, Series 1998, 5.4%, 12/1/2018 ........................ 1,000,000 900,920
Worcester Polytechnical University, Series 1997 II,
5.125%, 9/1/2016 (b) ................................................. 2,600,000 2,468,934
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Massachusetts State Port Authority, Revenue Bond:
Series 1999, Inverse Floating Note, 5.39%,
7/1/2011**** ........................................................... 4,195,000 4,195,000
Series 1999B, Inverse Floating Note, 5.39%,
7/1/2012**** ........................................................... 805,000 821,189
Series 1999D, AMT, Inverse Floating Note, 6.47%,
7/1/2013**** ........................................................... 930,000 1,040,279
Series 1999D, AMT, Inverse Floating Note, 6.47%,
7/1/2014**** ........................................................... 995,000 1,103,017
Series 1999D, AMT, Inverse Floating Note, 6.47%,
7/1/2015**** ........................................................... 1,065,000 1,168,241
Series 1999D, AMT, Inverse Floating Note, 6.68%,
7/1/2016**** ........................................................... 925,000 1,027,083
Series 1999D, AMT, Inverse Floating Note, 6.68%,
7/1/2017**** ........................................................... 775,000 854,120
Series 1999D, AMT, Inverse Floating Note,
5.39%, 7/1/2018**** .................................................... 1,310,000 1,247,867
Tax Exempt Receipts, Step-up Coupon, 0% to
7/1/2003, 13% to 7/1/2013 .............................................. 1,000,000 1,172,550
USAir Private Jet, Series 1996A, AMT, 5.75%,
9/1/2016 (b) ........................................................... 1,000,000 1,006,570
Massachusetts State, Revenue Bond, Federal Highway,
Series 1998A, Zero Coupon, 12/15/2014 .................................... 9,000,000 3,972,150
Massachusetts State Water Pollution Abatement Authority:
MWRA Loan Program, Series A, 6%, 8/1/2019 ................................ 4,000,000 4,231,000
Pooled Loan Program:
Series 4, 5.125%, 8/1/2013 ............................................. 2,000,000 1,965,000
Series 5, 5.5%, 8/1/2012 ............................................... 2,325,000 2,385,659
Series 5, 5.5%, 8/1/2014 ............................................... 3,500,000 3,549,315
Series 5, 5.375%, 8/1/2027 ............................................. 4,775,000 4,527,416
Series 1995, 5.7%, 2/1/2015 ............................................ 1,150,000 1,167,561
Series 1998A, 5.25%, 2/1/2013 .......................................... 1,000,000 998,080
Series 1998A, 5.25%, 8/1/2013 .......................................... 390,000 386,654
Series 1998A, EMT, 5.25%, 8/1/2013*** .................................. 3,110,000 3,092,086
Series 1999, Inverse Floating Note, 7.82%,
8/1/2011**** ......................................................... 5,500,000 6,210,435
Massachusetts State Water Resource Authority:
General Obligation, Series C, 5.25%, 12/1/2015 ........................... 4,030,000 3,945,491
General Obligation, Series 1998A, 5.5%, 8/1/2013 (b) ..................... 1,445,000 1,479,218
Series 1992A, 6.5%, 7/15/2009 ............................................ 15,000,000 16,536,900
Series 1992A, 6.5%, 7/15/2019 ............................................ 3,000,000 3,330,780
Series 1992B, 6%, 11/1/2008 .............................................. 5,785,000 6,004,656
Series 2000A, 6%, 8/1/2012 ............................................... 2,485,000 2,660,913
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Principal
Amount ($) Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Series 2000A, 6%, 8/1/2013 (b) ......................... 1,000,000 1,064,180
Series 2000A, 6%, 8/1/2014 ............................. 700,000 740,901
Middleborough, MA, General Obligation:
Series 1999A, 5.25%, 1/15/2017 (b) ..................... 1,525,000 1,467,264
Series 1992A, 5.25%, 1/15/2018 (b) ..................... 1,515,000 1,447,416
Series 1992A, 5.25%, 1/15/2019 (b) ..................... 1,470,000 1,395,809
Nantucket, MA, General Obligation:
Series 1991, 6.8%, 12/1/2011 ........................... 1,000,000 1,053,330
Series 1997, 5%, 7/15/2017 (b) ......................... 1,000,000 923,580
Norton, MA, General Obligation, Series 1998, 5%,
10/1/2012 (b) .......................................... 2,570,000 2,500,173
Rail Connections, Inc., MA, Route 128 Parking Garage:
Series 1999A, 5.4%, 7/1/2010 ........................... 1,000,000 963,940
Series 1999A, 6%, 7/1/2012 ............................. 250,000 250,378
Series 1999A, 6%, 7/1/2014 ............................. 250,000 246,680
Series 1999B, Zero Coupon, 7/1/2015 .................... 750,000 278,610
Series 1999B, Zero Coupon , 7/1/2016 ................... 1,025,000 353,482
Springfield, MA, General Obligation, Series 1999,
6%, 10/1/2014 (b) ...................................... 1,955,000 2,069,504
University of Massachusetts, Building Authority Revenue:
Series 1995B, 6.625%, 5/1/2009 ......................... 2,415,000 2,686,446
Series 1995B, 6.625%, 5/1/2010 ......................... 2,575,000 2,881,451
Series 1995B, 6.75%, 5/1/2011 .......................... 2,745,000 3,117,222
Series 1995B, 6.875%, 5/1/2014 ......................... 1,300,000 1,497,808
Worcester, MA, General Obligation:
Series 1991, Prerefunded 5/15/2002, 6.9%,
5/15/2005 (b)** ...................................... 1,850,000 1,965,847
Series 1991, Prerefunded 5/15/2002, 6.9%,
5/15/2006 (b)** ...................................... 1,500,000 1,593,930
Puerto Rico
Puerto Rico Highway and Transportation Authority,
Highway Revenue, Series 1996Y, 6.25%, 7/1/2014 ......... 2,000,000 2,171,440
- --------------------------------------------------------------------------------------------
Total Long-Term Municipal Investments (Cost $356,207,308) 365,457,884
- --------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $358,057,308) (a) 367,307,884
- --------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $358,057,308. At March 31,
2000, net unrealized appreciation for all securities based on tax cost was
$9,250,576. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$12,909,992 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $3,659,416.
(b) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC,
FSA or MBIA/BIG.
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
(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 March 31,
2000, amounted to $2,580,871 which represents 0.69% of net assets.
Information concerning such restricted securities at March 31, 2000 is as
follows:
Principal Acquisition
Security ($) 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
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand notes
are securities whose yields are periodically reset at levels that are
generally comparable to exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit from a major bank. These notes are carried,
for purposes of calculating average weighted maturity, at the longer of the
period remaining until the next rate change or to the extent of the demand
period.
** Prerefunded: Bonds which are prerefunded are collateralized by U.S.
Treasury securities which are held in escrow and are used to pay principal
and interest on the tax-exempt issue and to retire the bonds in full at the
earliest refunding date.
*** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.
**** Inverse floating rate notes are instruments whose yields 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 March 31, 2000.
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 March 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
- ----------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (cost $358,057,308) ................ $ 367,307,884
Cash ................................................................... 8,665,249
Interest receivable .................................................... 6,003,757
Receivable for Fund shares sold ........................................ 192,371
Other assets ........................................................... 1,678
-------------
Total assets ........................................................... 382,170,939
-------------
Liabilities
- ----------------------------------------------------------------------------------------
Payable for investments purchased ...................................... 6,142,784
Dividends payable ...................................................... 648,549
Payable for Fund shares redeemed ....................................... 156,646
Accrued management fee ................................................. 176,160
Other accrued expenses and payables .................................... 79,381
-------------
Total liabilities ...................................................... 7,203,520
Net assets, at value ................................................... $ 374,967,419
Net Assets
- ----------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation (depreciation) on investments .............. 9,250,576
Accumulated net realized gain (loss) ................................... (6,017,641)
Paid-in capital ........................................................ 371,734,484
Net assets, at value ................................................... $ 374,967,419
Net Asset Value
- ----------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share ($374,967,419 /
27,559,639 outstanding shares of beneficial interest, $.01 par value,
unlimited number of shares authorized) .............................. 13.61
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statement of Operations for the year ended March 31, 2000
- --------------------------------------------------------------------------------
Investment Income
- --------------------------------------------------------------------------------
Interest Income ............................................... $ 22,940,299
------------
Expenses:
Management fee ................................................ 2,372,716
Services to shareholders ...................................... 300,284
Custodian and accounting fees ................................. 97,348
Auditing ...................................................... 33,703
Legal ......................................................... 15,905
Trustees' fees and expenses ................................... 21,881
Reports to shareholders ....................................... 33,577
Registration fees ............................................. 24,684
Interest expense .............................................. 11,980
Other ......................................................... 34,218
------------
Total expenses, before expense reductions ..................... 2,946,296
Expense reductions ............................................ (14,308)
------------
Total expenses, after expense reductions ...................... 2,931,988
Net investment income ......................................... 20,008,311
Realized and unrealized gain (loss) on investment transactions
- --------------------------------------------------------------------------------
Net realized gain (loss) from investments ..................... (4,102,368)
Net unrealized appreciation (depreciation) during the period on
investments ................................................ (17,615,389)
- --------------------------------------------------------------------------------
Net gain (loss) on investment transactions (21,717,757)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (1,709,446)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) in Net Assets Years Ended March 31,
2000 1999
- ------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income (loss) ...................... $ 20,008,311 $ 18,874,635
Net realized gain (loss) on investment transactions (4,102,368) 1,904,413
Net unrealized appreciation (depreciation) on
investment transactions during the period ...... (17,615,389) (550,979)
------------- -------------
Net increase (decrease) in net assets resulting
from operations ................................ (1,709,446) 20,228,069
------------- -------------
Distributions to shareholders from:
Net investment income ............................. (20,008,311) (18,874,635)
------------- -------------
Net realized gains ................................ (487,459) (1,324,804)
------------- -------------
Fund share transactions:
Proceeds from shares sold ......................... 113,487,731 103,177,594
Reinvestment of distributions ..................... 13,175,774 12,867,811
Cost of shares redeemed ........................... (149,760,728) (69,710,003)
------------- -------------
Net increase (decrease) in net assets from Fund
share transactions ............................. (23,097,223) 46,335,402
------------- -------------
Increase (decrease) in net assets ................. (45,302,439) 46,364,032
Net assets at beginning of period ................. 420,269,858 373,905,826
Net assets at end of period ....................... $ 374,967,419 $ 420,269,858
Other Information
- ------------------------------------------------------------------------------------
Shares outstanding at beginning of period ......... 29,290,636 26,075,571
------------- -------------
Shares sold ....................................... 8,240,289 7,153,879
Shares issued to shareholders in reinvestment of
distributions .................................. 960,423 890,970
Shares redeemed ................................... (10,931,709) (4,829,784)
------------- -------------
Net increase (decrease) in Fund shares ............ (1,730,997) 3,215,065
Shares outstanding at end of period ............... 27,559,639 29,290,636
</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 1999 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.35 $14.34 $13.72 $13.70 $13.33
--------------------------------------------
- -------------------------------------------------------------------------------------
Income (loss) from investment operations:
- -------------------------------------------------------------------------------------
Net investment income .69 .69 .70 .70 .72
- -------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.72) .06 .62 .02 .37
--------------------------------------------
- -------------------------------------------------------------------------------------
Total from investment operations (.03) .75 1.32 .72 1.09
- -------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.69) (.69) (.70) (.70) (.72)
- -------------------------------------------------------------------------------------
Net realized gains on investment
transactions (.02) (.05) -- -- --
--------------------------------------------
- -------------------------------------------------------------------------------------
Total distributions (.71) (.74) (.70) (.70) (.72)
- -------------------------------------------------------------------------------------
Net asset value, end of period $13.61 $14.35 $14.34 $13.72 $13.70
--------------------------------------------
- -------------------------------------------------------------------------------------
Total Return (%) (a) (.13) 5.29 9.82 5.39 8.28(a)
- -------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- -------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 375 420 374 330 314
- -------------------------------------------------------------------------------------
Ratio of expenses before expense .74 .73 .76 .76 .76
reductions (%)
- -------------------------------------------------------------------------------------
Ratio of expenses after expense .74 .73 .76 .76 .75
reductions (%)
- -------------------------------------------------------------------------------------
Ratio of net investment income (%) 5.03 4.76 4.97 5.12 5.23
- -------------------------------------------------------------------------------------
Portfolio turnover rate (%) 39 11 8 12 21
- -------------------------------------------------------------------------------------
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
25
<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") 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.
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 purchased with an original
maturity greater than sixty days are valued by pricing agents approved by the
officers of the Trust, whose quotations reflect broker/dealer-supplied
valuations and electronic data processing techniques. If the pricing agents are
unable to provide such quotations, the most recent bid quotation supplied by a
bona fide market maker shall be used. Money market instruments purchased with an
original maturity of sixty days or less are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable and tax-exempt income
to its shareholders. Accordingly, the Fund paid no federal income taxes and no
federal income tax provision was required.
At 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.
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
26
<PAGE>
distributed, and, therefore, will be distributed to shareholders at least
annually.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from 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 year ended March 31, 2000, purchases and sales of municipal
securities (excluding short-term investments) aggregated $152,266,782 and
$168,242,307, respectively.
C. Related Parties
Under the Investment Management Agreement (the "Agreement") with Scudder Kemper
Investments, Inc. (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 approximately 0.60% on the first
$400,000,000 of the Fund's 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 year ended March 31, 2000, the fees pursuant to these
agreements amounted to $2,372,716, of which $176,160 was unpaid at year ended
March 31, 2000.
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, 2000, the amount charged to the Fund by SSC aggregated
$188,229, of which $30,289 was unpaid at year ended March 31, 2000.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and
27
<PAGE>
maintaining the portfolio and general accounting records of the Fund. For the
year ended March 31, 2000, the amount charged to the Fund by SFAC aggregated
$68,895, of which $5,579 was unpaid at March 31, 2000.
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, 2000,
Trustees' fees and expenses charged to the Fund aggregated $21,881.
D. Expense Off-Set Arrangements
The Fund has entered into arrangements with its custodian and transfer agent
whereby credits realized as a result of uninvested cash balances were used to
reduce a portion of the Fund's expenses. For the year ended March 31, 2000, the
Fund's custodian and transfer agent fees were reduced by $3,024 and $11,284,
respectively, under these arrangements.
E. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $1 billion
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated pro rata 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.
28
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of Scudder State Tax Free Trust and the Shareholders of Scudder
Massachusetts Tax Free Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Massachusetts Tax Free Fund
(the "Fund") at March 31, 2000, the results of its operations, the changes in
its net assets, and the financial highlights for each of the periods indicated
therein, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at March 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
May 23, 2000
29
<PAGE>
Tax Information
- --------------------------------------------------------------------------------
The Fund paid distributions of $0.016 per share from net long-term capital gains
during its year ended March 31, 2000, of which 100% represents 20% rate gains.
Of the dividends paid from net investment income for the taxable year ended
March 31, 2000, 100% are designated as exempt interest dividends for federal
income tax.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your account, please call 1-800-SCUDDER.
30
<PAGE>
Officers and Trustees
- --------------------------------------------------------------------------------
Linda C. Coughlin*
o President and Trustee
Henry P. Becton, Jr.
o Trustee; President and General
Manager, WGBH Educational
Foundation
Dawn-Marie Driscoll
o Trustee; President, Driscoll
Associates; Executive Fellow,
Bentley College
Peter B. Freeman
o Trustee; Corporate Director and
Trustee
George M. Lovejoy, Jr.
o Trustee; President and Director,
Fifty Associates
Wesley W. Marple, Jr.
o Trustee; Professor of Business
Administration, Northeastern
University, College of Business
Administration
Kathryn L. Quirk*
o Trustee, Vice President and
Assistant Secretary
Jean C. Tempel
o Trustee; Venture Partner, Internet
Capital Group
Eleanor R. Brennan*
o Vice President
Philip G. Condon*
o Vice President
Ashton P. Goodfield*
o Vice President
Ann M. McCreary*
o Vice President
Frank J. Rachwalski, Jr.*
o Vice President
Rebecca L. Wilson*
o Vice President
John Millette*
o Vice President and Secretary
John R. Hebble*
o Treasurer
Caroline Pearson*
o Assistant Secretary
*Scudder Kemper Investments, Inc.
31
<PAGE>
Investment Products and Services
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
<S> <C>
Money Market U.S. Growth and Income
Scudder U.S. Treasury Money Fund Scudder Balanced Fund
Scudder Cash Investment Trust Scudder Dividend & Growth Fund
Scudder Money Market Series -- Scudder Growth and Income Fund***
Prime Reserve Shares* Scudder Select 500 Fund
Premium Shares* Scudder S&P 500 Index Fund
Managed Shares* Scudder Real Estate Investment Fund
Scudder Government Money Market
Series -- Managed Shares* U.S. Growth
Value
Tax Free Money Market+ Scudder Large Company Value Fund
Scudder Tax Free Money Fund Scudder Value Fund***
Scudder Tax Free Money Market Scudder Small Company Value Fund
Series -- Managed Shares* Scudder Micro Cap Fund
Scudder California Tax Free Money Fund** Growth
Scudder New York Tax Free Money Fund** Scudder Classic Growth Fund***
Scudder Large Company Growth Fund***
Tax Free+ Scudder Select 1000 Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Medium Term Tax Free Fund Scudder 21st Century Growth Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund Global Equity
Scudder California Tax Free Fund** Worldwide
Scudder Massachusetts Limited Term Scudder Global Fund
Tax Free Fund** Scudder International Value Fund
Scudder Massachusetts Tax Free Fund** Scudder International Growth and
Scudder New York Tax Free Fund** Income Fund
Scudder Ohio Tax Free Fund** Scudder International Fund++
Scudder International Growth Fund
U.S. Income Scudder Global Discovery Fund***
Scudder Short Term Bond Fund Scudder Emerging Markets Growth Fund
Scudder GNMA Fund Scudder Gold Fund
Scudder Income Fund Regional
Scudder Corporate Bond Fund Scudder Greater Europe Growth Fund
Scudder High Yield Bond Fund Scudder Pacific Opportunities Fund
Scudder Latin America Fund
Global Income The Japan Fund, Inc.
Scudder Global Bond Fund
Scudder International Bond Fund Industry Sector Funds
Scudder Emerging Markets Income Fund Choice Series
Scudder Financial Services Fund
Asset Allocation Scudder Health Care Fund
Scudder Pathway Conservative Portfolio Scudder Technology Fund
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
- --------------------------------------------------------------------------------
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA IRA for Minors
Inherited IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**+++ +++
Scudder Horizon Advantage**+++ +++ +++
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Closed-End Funds#
- -----------------------------------------------------------------------------------------
<S> <C>
The Argentina Fund, Inc. Montgomery Street Income Securities, Inc.
The Brazil Fund, Inc. Scudder Global High Income Fund, Inc.
The Korea Fund, Inc. Scudder New Asia Fund, Inc.
</TABLE>
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
+++ Funds within categories are listed in order from expected least
risk to most risk. Certain Scudder funds or classes thereof may
not be available for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to
federal, state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family
of Funds.
++ Only the International Shares of the fund are part of the Scudder
Family of Funds.
+++ +++ A no-load variable annuity contract provided by Charter National
Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470.
+++ +++ +++ A no-load variable annuity contract issued by Glenbrook Life and
Annuity Company and underwritten by Allstate Financial Services,
Inc., sold by Scudder'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.
33
<PAGE>
Scudder Solutions
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly to
regularly purchase fund shares and "dollar cost average" --
buy more shares when the fund's price is lower and fewer
when it's higher, which can reduce your average purchase
price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to purchase
shares -- use distributions from one Scudder fund to
purchase shares in another, automatically (accounts with
identical registrations or the same social security or tax
identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of your
transactions is electronically debited from a previously
designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government checks
-- invested in up to four Scudder funds at one time.
* Dollar cost averaging involves continuous investment in
securities regardless of price fluctuations and does not
assure a profit or protect against loss in declining
markets. Investors should consider their ability to
continue such a plan through periods of low price
levels.
Around-the- Scudder Automated Information Line: SAIL(TM) --
clock electronic 1-800-343-2890
account
service and Personalized account information, the ability to exchange
information, or redeem shares, and information on other Scudder funds
including some and services via touchtone telephone.
transactions
Scudder's Web Site -- www.scudder.com
Personal Investment Organizer: Offering account information
and transactions, interactive worksheets, prospectuses and
applications for all Scudder funds, plus your current asset
allocation, whenever your need them. Scudder's site also
provides news about Scudder funds, retirement planning
information, and more.
34
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Retirees and Automatic Withdrawal Plan
those who depend
on investment You designate the bank account, determine the schedule (as
proceeds for frequently as once a month) and amount of the redemptions,
living expenses and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into the
automated bank account you designate within three business days after
withdrawal each distribution is paid.
programs
QuickSell
Provides speedy access to your money by electronically
crediting your redemption proceeds to the bank account you
previously designated.
For more Call a Scudder representative at
information about 1-800-SCUDDER
these services
Or visit our Web site at
www.scudder.com
Please address The Scudder Funds
all written PO Box 2291
correspondence Boston, Massachusetts
to 02107-2291
35
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
About the Fund's Adviser
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
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.
