SCUDDER
INVESTMENTS(SM)
[LOGO]
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BOND/TAX FREE
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Scudder
Massachusetts Limited
Term Tax Free Fund
Fund #041
Annual Report
March 31, 2000
The fund seeks income that is exempt from Massachusetts personal and regular
federal income taxes and is consistent with a high degree of price stability.
A no-load fund with no commissions to buy, sell, or exchange shares.
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Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
9 Portfolio Management Discussion
13 Investment Portfolio
17 Financial Statements
20 Financial Highlights
21 Notes to Financial Statements
25 Report of Independent Accountants
26 Tax Information
27 Officers and Trustees
28 Investment Products and Services
30 Scudder Solutions
2
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Scudder Massachusetts Limited Term Tax Free Fund
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ticker symbol SMLFX fund number 041
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Date of o In a difficult environment for all fixed-income
Inception: instruments, including municipal bonds, Scudder
2/15/94 Massachusetts Limited Term Tax Free Fund posted a total
return of 0.83% for its most recent fiscal year ended
March 31, 2000. The average return of 15 similar funds
Total Net tracked by Lipper Analytical Services was 0.19%.
Assets as
of 3/31/00:
$83.1 million
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30-Day Yield on March 31, 2000
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
4.19% 7.38%
Scudder Taxable Yield
Massachusetts Needed to Equal
Limited Term the Fund's Yield
Tax Free Fund
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o Scudder Massachusetts Limited Term Tax Free Fund
received a four-star Morningstar Rating(TM), 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 five stars
for the three-year period and four stars for the five-year period, and was
rated among 1682 and 1394 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
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Letter from the Fund's President
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Dear Shareholders,
Municipal bonds endured a challenging investment environment during Scudder
Massachusetts Limited Term Tax Free Fund's most recent fiscal year ended March
31, 2000. The fund managed to post a positive 0.83% total return during the
period, edging ahead of the 0.19% average performance of its peers as compiled
by Lipper. To match the fund's tax-free 4.19% 30-day SEC yield on March 31, a
taxable investment would have had to yield 7.38%. 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 gradually 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
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consensus is reached that the Federal Reserve has completed its current cycle of
interest rate increases.
We recently mailed you a proxy package asking you to vote on the proposed
combination of your fund into Scudder Massachusetts Tax Free Fund. This proposal
is part of a series of recent measures intended to restructure the Scudder
Family of Funds. Your fund's Board is recommending that shareholders vote in
favor of combining your fund into Scudder Massachusetts Tax Free Fund (a fund
that typically maintains a longer average maturity than your fund) for several
reasons. These include the fact that the combination may result in reduced gross
expenses for your fund over the long term, and that the larger combined fund
would likely have the ability to make portfolio transactions on more favorable
terms. Your vote is important, no matter the size of your account. If you
haven't already done so, please vote your proxy and return it to us today in the
postpaid envelope that was provided with the proxy statement.
Thank you for investing with Scudder Massachusetts Limited Term 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/Lin Coughlin
Linda C. Coughlin
President,
Scudder Massachusetts Limited Term Tax Free Fund
5
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Performance Update
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March 31, 2000
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Growth of a $10,000 Investment
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THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
Scudder Massachusetts Lehman Brothers Municipal
Limited Term Tax Free Fund Bond Index (3 year)*
2/94** 10000 10000
'94 9892 9880
'95 10366 10366
'96 10988 11038
'97 11392 11512
'98 12134 12220
'99 12675 12866
'00 12780 13109
Yearly periods ended March 31
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Fund Index Comparison
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Total Return
Growth of Average
Period ended 3/31/2000 $10,000 Cumulative Annual
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Scudder Massachusetts Limited Term Tax Free Fund
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1 year $ 10,083 .83% .83%
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5 year $ 12,329 23.29% 4.28%
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Life of Fund** $ 12,741 27.41% 4.03%
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Lehman Brothers Municipal Bond Index (3 year)*
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1 year $ 10,189 1.89% 1.89%
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5 year $ 12,646 26.46% 4.80%
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Life of Fund** $ 13,109 31.09% 4.54%
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* The 3-year Lehman Brothers Municipal Bond Index is an unmanaged,
market-value-weighted measure of the short-term municipal bond market and
includes bonds with maturities of two to three years. Index returns assume
reinvested dividends and, unlike Fund returns, do not reflect fees or
expenses.
** The Fund commenced operation on February 15, 1994. Index comparisons begin
February 28, 1994.
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
maintained the Fund's expenses, total returns for the Fund would have been
lower.
6
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Returns and Per Share Information
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
Yearly periods ended March 31
Scudder Massachusetts Lehman Brothers Municipal
Limited Term Tax Free Fund Bond Index (3 year)*
1994 0 -1.20
1995 4.79 4.92
1996 6.01 6.48
1997 3.67 4.29
1998 6.51 6.15
1999 4.46 5.29
2000 0.83 1.89
1994 1995 1996 1997 1998 1999 2000
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Fund Total
Return (%) -- 4.79 6.01 3.67 6.51 4.46 .83
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Index Total
Return (%) -1.20 4.92 6.48 4.29 6.15 5.29 1.89
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Net Asset
Value ($) 11.78 11.80 11.97 11.90 12.14 12.20 11.81
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Income
Dividends ($) .05 .53 .53 .50 .52 .47 .48
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7
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Portfolio Summary
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March 31, 2000
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Diversification
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Hospital/Health Revenue 15%
State General Obligation/
Lease 14%
Other General Obligation/
Lease 13%
Port Authority/Airport 9%
Transportation Revenue 8%
Sales/Special Tax 7%
Higher Education 5%
Resource Recovery 4%
Student Loans 4%
Electric Utility Revenue 2%
Water/Sewer Revenue 1%
Miscellaneous Municipal 18%
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100%
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The fund invests in a broad selection of Massachusetts municipal bonds.
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Quality
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
AAA* 64%
AA 20%
BBB 14%
CCC 1%
SKI** 1%
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100%
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Weighted average quality: AA
* Category includes cash equivalents
** Scudder Kemper Investments (SKI)
has determined these securities
to be of comparable quality to
rated eligible securities.
Overall portfolio quality remains high, with over 80% of portfolio securities
rated AAA or AA.
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Effective Maturity
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Less than 1 year 13%
1-5 years 47%
5-10 years 40%
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100%
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Weighted average effective
maturity: 4.12 years
The fund primarily invests in municipal bonds with effective maturities between
one and five years.
For more complete details about the Fund's investment portfolio, see page 13. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8
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Portfolio Management Discussion
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March 31, 2000
Dear Shareholders,
Municipal bonds faced a difficult environment during Scudder Massachusetts
Limited Term 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 0.83%, outpacing the 0.19%
average return of 15 similar funds as tracked by Lipper Analytical Services,
Inc.1 The fund's 30-day SEC yield as of September 30 was 4.19%, equivalent to a
7.38% taxable yield for Massachusetts investors subject to the 43.19% combined
federal and state income tax rate.
In addition, the fund's total returns over one- and five-year periods placed it
in the top 30% of similar short- to intermediate-term tax-free funds. Please see
the accompanying table for additional information concerning the fund's returns.
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
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Scudder Massachusetts Limited Term Tax Free Fund:
Competitive Performance
(Average annual returns for periods ended March 31, 2000)
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Scudder
Massachusetts
Limited Term Number of
Tax Free Fund Lipper Funds Percentile
Period Return Average Rank Tracked Rank
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1 Year 0.83% 0.19% 4 of 15 Top 27%
3 Years 3.91% 3.61% 5 of 12 Top 42%
5 Years 4.28% 3.99% 3 of 9 Top 33%
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Past performance does not guarantee future results.
^1 Lipper Analytical Services, Inc. is an independent analyst of investment
performance.
9
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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 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.
Emphasis on Premium Bonds
Over the fund's most recent fiscal year we continued to emphasize premium bonds
(91% of the fund's portfolio as of March 31), which generally exhibit less
interest rate sensitivity than bonds priced at par. In addition, the fund holds
a large percentage of pre-refunded bonds (18% as of September 30). Bonds are
pre-refunded when issuers sell new debt as lower prevailing rates and use the
proceeds to establish an escrow account of U.S. Treasury bonds designated to
retire the original municipal bonds on their future call dates. These bonds
offer the highest quality available in the municipal marketplace, yet are
typically priced lower than similar bonds of slightly lower quality. The fund's
overall credit quality remains high, with 84% of the bonds in the fund's
portfolio rated AAA or AA.
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
10
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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, 30-year municipal bond yields reached 6.35% on
average*, the highest level since August 1995). In addition, the robust U.S. and
Massachusetts economies should continue to bolster the credit ratings of
individual Massachusetts bond issues.
Thank you for investing with Scudder.
Sincerely,
Your Portfolio Management Team
/s/ Philip G. Condon /s/Rebecca L. Wilson
Philip G. Condon Rebecca L. Wilson
*Source: The Bond Buyer
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Scudder Massachusetts Limited Term
Tax Free Fund:
A Team Approach to Investing
Scudder Massachusetts Limited Term 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.
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<TABLE>
<CAPTION>
Investment Portfolio as of March 31, 2000
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Principal
Amount ($) Value ($)
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Short-Term Municipal Investments 0.1%
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Massachusetts
<S> <C> <C>
Massachusetts State Health and Educational Facilities
Authority, Wellesley College, Series G, Daily Demand
Note, 3.75%, 7/1/2039 (Cost $100,000) (b)* ................................. 100,000 100,000
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Intermediate-Term Municipal Investments 99.9%
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Massachusetts
Boston, MA, Industrial Development Finance Authority,
First Mortgage-Springhouse Inc.:
Series 1998, 4.5%, 7/1/2000 .............................................. 180,000 179,529
Series 1998, 4.75%, 7/1/2001 ............................................. 195,000 192,460
Series 1998, 4.875%, 7/1/2002 ............................................ 255,000 249,083
Lowell, MA, General Obligation:
Series 1991, Prerefunded 2/15/2001, 8.3%,
2/15/2005** .............................................................. 1,635,000 1,739,084
Series 1992, 6.375%, 8/15/2001 ............................................. 1,000,000 1,023,050
Series 1997, 6%, 12/15/2004 (b) ............................................ 2,025,000 2,125,238
Massachusetts General Obligation:
Series 1991A, Prerefunded 8/1/2001, 6.5%, 8/1/2011** ....................... 2,000,000 2,092,820
Series 1995A, 5.25%, 2/1/2001 (b) .......................................... 3,000,000 3,027,810
Series 1996A, 6%, 11/1/2006 ................................................ 1,250,000 1,325,075
Series 1999C, 5%, 9/1/2005 ................................................. 1,600,000 1,609,728
Massachusetts Grant Anticipation Notes:
Series 1998A, Revenue Bonds, 5%, 12/15/2005 ................................ 3,000,000 3,014,550
Series 1998A, 5.25%, 6/15/2008 ............................................. 5,000,000 5,076,200
Massachusetts Bay Transportation Authority
General Obligation, Series 1997C, 5%, 3/1/2004 ............................. 500,000 502,980
Massachusetts Educational Loan Authority, Issue E,
Series 1992A, AMT, 6.7%, 1/1/2002 (b) ...................................... 350,000 359,580
Massachusetts Health & Educational Facilities Authority:
Berkshire Health System:
Series1994C, 5.9%, 10/1/2011 ............................................. 900,000 837,783
Series1995D, 5.3%, 10/1/2003 (b) ......................................... 1,350,000 1,365,012
Caritas Christi, Series 1999A, 5.25%, 7/1/2004 ............................. 1,000,000 963,360
Central Massachusetts Medical Center, Series B, 6%,
7/1/2002 (b) ............................................................. 500,000 512,715
Daughters of Charity:
Series 1990C, Carney Hospital, Prerefunded
7/1/2000, 7.5%, 7/1/2005** ............................................. 1,000,000 1,028,050
Series 1994D, 4.9%, 7/1/2000 ............................................. 200,000 200,370
The accompanying notes are an integral part of the financial statements.
13
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Principal
Amount ($) Value ($)
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Fairview Extended Care, Series 1997B, 4.55%,
1/1/2021 (b) ........................................ 1,645,000 1,618,269
Hallmark Health System, Series 1997A, 5.25%,
7/1/2006 ............................................ 1,000,000 1,005,200
Massachusetts Eye and Ear Infirmary, Series 1991A, ETM
7%, 7/1/2001*** ..................................... 1,460,000 1,485,258
Medical, Academic & Scientific:
Series 1995A, 6%, 1/1/2001 .......................... 1,000,000 1,005,720
Series 1995A, 6.1%, 1/1/2002 ........................ 500,000 505,295
Newton-Wellesley Hospital, Series 1991D, Prerefunded
7/1/2001, 7%, 7/1/2015** ............................ 1,500,000 1,576,335
Valley Regional Health System, Series 1994C,
5.3%, 7/1/2000 ...................................... 1,500,000 1,503,945
Massachusetts Industrial Finance Agency:
Cape Cod Health Systems, Series 1990, Prerefunded
11/15/2000, 8.5%, 11/15/2020** ...................... 1,150,000 1,202,072
College of the Holy Cross, Series 1996, 5.5%,
3/1/2006 (b) ........................................ 1,000,000 1,028,380
East Boston Neighborhood Project, Series 1996, 7.25%,
7/1/2006 ............................................ 770,000 731,130
Merrimack College, Series 1997, 5.5%, 7/1/2006 (b) .... 1,055,000
1,085,205
Resource Recovery, North Andover Solid Waste:
Series 1993A, 6.15%, 7/1/2002 ....................... 750,000 761,378
Series 1993A, 6.3%, 7/1/2005 ........................ 2,750,000 2,834,975
Worcester Polytechnic, Series 1997II, 5.25%,
9/1/2004 (b) ........................................ 1,065,000 1,082,551
Massachusetts Municipal Wholesale Electric Company,
Power Supply System Revenue:
Series 1992B, 6.3%, 7/1/2000 ........................ 345,000 346,622
Series 1992B, 6.375%, 7/1/2001 ...................... 1,000,000 1,019,590
Series 1992B, Prerefunded 7/1/2002, 6.75%,
7/1/2017** ........................................ 1,720,000 1,826,038
Massachusetts Port Authority Revenue:
Series 1997A, 6%, 7/1/2004 ............................ 1,140,000 1,190,593
Series 1999B, AMT, 5.25%, 7/1/2008 (b) ................ 5,000,000 5,022,850
Special Facilities -- USAir Project, Series 1996A, AMT,
5.5%, 9/1/2006 (b) .................................. 640,000 654,182
Massachusetts Special Obligation:
Series 1994A, 5.2%, 6/1/2004 .......................... 1,000,000 1,013,750
Series 1997A, 5.5%, 6/1/2005 .......................... 1,000,000 1,027,480
Massachusetts State Water Pollution Abatement
Program, New Bedford Program, Series 1998A,
4%, 2/1/2004 .......................................... 450,000 429,921
The accompanying notes are an integral part of the financial statements.
14
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Principal
Amount ($) Value ($)
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Massachusetts Water Pollution Abatement Trust, Series
1996A Prefunded 2/1/2006, Series A, 5.6%, 2/1/2010** .. 1,750,000 1,823,658
Massachusetts Water Resource Authority:
Series 1991A, Prerefunded 12/1/2001, 6.875%,
12/1/2011** ......................................... 1,000,000 1,056,100
Series 1992A, Prerefunded 7/15/2002, 6.75%,
7/15/2012** ......................................... 1,000,000 1,062,310
Nantucket, MA, General Obligation, Prerefunded
12/1/2001, 6.25%, 12/1/2002** ......................... 250,000 259,588
New England Education Loan Marketing Corp.,
Massachusetts Student Loan Revenue Refunding,
Series 1992A, 5.8%, 3/1/2002 .......................... 3,150,000 3,208,370
North Attleboro, MA, General Obligation, Series 1997,
6%, 3/1/2007 (b) ...................................... 1,000,000 1,059,020
Rail Connections, Inc., Route 128 Parking Garage Project,
Series 1999A, 5.25%, 7/1/2008 ......................... 1,205,000 1,164,211
South Essex, MA, Sewer District, General Obligation,
Series 1994B, Prerefunded, 6/1/2004, 6.75%,
6/1/2013** ............................................ 1,000,000 1,087,990
Southeastern Massachusetts, University Building Authority,
Series 1995A, 5.5%, 5/1/2004 (b) ...................... 1,010,000 1,034,765
Springfield, MA, General Obligation:
Series 1996, 6.375%, 8/1/2003 (b) ..................... 2,035,000 2,136,628
Municipal Purpose Loan, Series 1996, 6.25%,
8/1/2006 (b) ........................................ 1,000,000 1,070,420
Worcester, MA, General Obligation:
Series 1995G, 6%, 7/1/2001 (b) ........................ 2,000,000 2,037,620
Series 1999A, 5.625%, 4/1/2008 (b) .................... 1,000,000 1,039,460
Puerto Rico
Puerto Rico Municipal Finance Agency, General
Obligation, Series 1999, 5.5%, 8/1/2007 ............... 1,000,000 1,041,520
Puerto Rico Public Building Authority, Government
Facilities, Series 1995A, 6.75%, 7/1/2004 (b) ......... 2,250,000 2,428,313
Virgin Islands
Virgin Islands Public Finance Authority, Revenue Bonds,
Series 1998C, 5.5%, 10/1/2004 ......................... 2,500,000 2,515,825
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Total Intermediate-Term Municipal Investments Total (Cost $81,809,484) 81,407,014
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Total Investment Portfolio -- 100.0% (Cost $81,909,484) (a) 81,507,014
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</TABLE>
(a) The cost for federal income tax purposes was $81,909,484. At March 31, 2000
net unrealized depreciation for all securities was $402,470. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost of $318,574 and aggregate gross
unrealized depreciation for all investment securities in which there was an
excess of tax cost over value of $721,044.
The accompanying notes are an integral part of the financial statements.
15
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(b) Bond is insured by one of these companies: AMBAC, Capital Guaranty, FGIC,
FSA or MBIA/BIG.
* Floating rate and monthly, weekly, or daily demand notes are securities
whose yields vary with a designated market index or market rate, such as
the coupon-equivalent of the Treasury bill rate. Variable rate demand notes
are securities whose yields are periodically reset at levels that are
generally comparable to tax-exempt commercial paper. These securities are
payable on demand within seven calendar days and normally incorporate an
irrevocable letter of credit or line 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 tax-exempt issues 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:
Alternative minimum tax
The accompanying notes are an integral part of the financial statements.
16
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Financial Statements
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Statement of Assets and Liabilities as of March 31, 2000
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Assets
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Investments in securities, at value (cost $81,909,484) .... $ 81,507,014
Cash ...................................................... 623,413
Interest receivable ....................................... 1,181,098
Receivable for Fund shares sold ........................... 10,689
Other assets .............................................. 15,466
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Total assets .............................................. 83,337,680
Liabilities
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Dividends payable ......................................... 94,469
Payable for Fund shares redeemed .......................... 9,081
Accrued management fee .................................... 117,713
Other accrued expenses and payables ....................... 61,356
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Total liabilities ......................................... 282,619
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Net assets, at value $ 83,055,061
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Net Assets
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Net assets consist of:
Net unrealized appreciation (depreciation) on investments.. (402,470)
Accumulated net realized gain (loss) ...................... (326,018)
Paid-in capital ........................................... 83,783,549
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Net assets, at value $ 83,055,061
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Net Asset Value
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NetAsset Value, offering and redemption price per
share ($83,055,061 / 7,031,192 outstanding shares
of beneficial interest, $.01 par value, unlimited
number of shares authorized) ........................... $ 11.81
The accompanying notes are an integral part of the financial statements.
17
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Statement of Operations for the year ended March 31, 2000
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Investment Income
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Interest ...................................................... $ 4,496,951
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Expenses:
Management fee ................................................ 562,214
Services to shareholders ...................................... 65,286
Custodian and accounting fees ................................. 51,431
Auditing ...................................................... 35,102
Legal ......................................................... 5,167
Trustees' fees and expenses ................................... 19,203
Reports to shareholders ....................................... 8,644
Registration fees ............................................. 7,509
Amorization of organization fees .............................. 5,162
Reorganization expense ........................................ 8,903
Other ......................................................... 9,817
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Total expenses, before expense reductions ..................... 778,438
Expense reductions ............................................ (66,612)
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Total expenses, after expense reductions ...................... 711,826
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Net investment income 3,785,125
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Realized and unrealized gain (loss) on investment transactions
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Net realized gain (loss) from investments ..................... (340,287)
Net unrealized appreciation (depreciation) during the period on
investments ................................................ (2,787,307)
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Net gain (loss) on investment transactions (3,127,594)
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Net increase (decrease) in net assets resulting from operations $ 657,531
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The accompanying notes are an integral part of the financial statements.
18
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<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Five Months Year Ended
Increase (Decrease) in Net Year Ended Ended October 31,
Assets March 31, 2000 March 31, 1999 1998
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Operations:
<S> <C> <C> <C>
Net investment income ............ $ 3,785,125 $ 1,542,263 $ 3,709,601
Net realized gain (loss) on
investment transactions ....... (340,287) 38,573 (17,874)
Net unrealized appreciation
(depreciation) on investment
transactions during the period. (2,787,307) (574,030) 1,231,974
------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations .................... 657,531 1,006,806 4,923,701
------------- ------------- -------------
Distributions to shareholders
from:
Net investment income ............ (3,800,627) (1,542,263) (3,708,899)
------------- ------------- -------------
Fund share transactions:
Proceeds from shares sold ........ 25,973,730 25,066,783 56,595,157
Reinvestment of distributions .... 2,661,446 1,107,758 2,586,470
Cost of shares redeemed .......... (46,839,170) (16,814,083) (44,345,935)
------------- ------------- -------------
Net increase (decrease) in net
assets from Fund share
transactions .................. (18,203,994) 9,360,458 14,835,692
------------- ------------- -------------
Increase (decrease) in net assets. (21,347,090) 8,825,001 16,050,494
Net assets at beginning of period. 104,402,151 95,577,150 79,526,656
Net assets at end of period ...... $ 83,055,061 $ 104,402,151 $ 95,577,150
Other Information
- ------------------------------------------------------------------------------------
Shares outstanding at beginning
of period ..................... 8,556,352 7,790,753 6,573,339
------------- ------------- -------------
Shares sold ...................... 2,176,604 2,048,497 4,651,211
Shares issued to shareholders in
reinvestment of distributions.. 222,955 90,456 212,502
Shares redeemed .................. (3,924,719) (1,373,354) (3,646,299)
------------- ------------- -------------
Net increase (decrease) in Fund
shares ........................ (1,525,160) 765,599 1,217,414
Shares outstanding at end
of period ..................... 7,031,192 8,556,352 7,790,753
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
- ---------------------------------------------------------------------------------------------
Years Ended October 31, 2000 1999(a) 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.20 $12.27 $12.10 $11.99 $12.02 $11.64
-------------------------------------------------
- ---------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income .48 .19 .49 .53 .50 .54
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investment transactions (.39) (.07) .17 .11 (.03) .38
-------------------------------------------------
- ---------------------------------------------------------------------------------------------
Total from investment operations .09 .12 .66 .64 .47 .92
- ---------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------
Net investment income (.48) (.19) (.49) (.53) (.50) (.54)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $11.81 $12.20 $12.27 $12.10 $11.99 $12.02
-------------------------------------------------
- ---------------------------------------------------------------------------------------------
Total Return (%) (c) .83 1.00** 5.59 5.44 3.98 8.08
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 83 104 96 80 66 55
- ---------------------------------------------------------------------------------------------
Ratio of expenses before expense
reductions (%) .83(d) .89* .84 .93 .90 .92
- ---------------------------------------------------------------------------------------------
Ratio of expenses after expense
reductions (%) .76(d) .75* .75 .75 .67 .24
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (%) 4.05 3.80* 4.05 4.40 4.16 4.56
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 25 8* 9 10 12 27
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) For the five months ended March 31, 1999. On August 10, 1998, the Board of
Trustees of the Fund changed the fiscal year end from October 31 to March
31.
(b) For the period February 15, 1994 (commencement of operations) to October
31, 1994.
(c) Total returns would have been lower had certain expenses not been reduced.
(d) The ratio of operating expenses excluding reorganization costs before and
after expense reductions was .82% and .75%, respectively.
* Annualized
** Not annualized
20
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
A. Description of the Fund
Scudder Massachusetts Limited 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.
B. Plan of Reorganization
On February 7, 2000, the Trustees of the Fund approved an Agreement and Plan of
Reorganization (the "Plan") between the Fund and the Scudder Massachusetts Tax
Free Fund, pursuant to which Scudder Massachusetts Tax Free Fund would acquire
all or substantially all of the assets and liabilities of the Fund in exchange
for shares of the Scudder Massachusetts Tax Free Fund. The proposed transaction
is part of Scudder Kemper Investment, Inc.'s initiative to restructure and
streamline the management and operations of the funds it advises. Costs incurred
in connection with this restructuring initiative are being borne jointly by
Scudder Kemper and certain funds and are included as reorganization expense in
the Statement of Operations of the Fund. These costs principally include
printing, proxy meeeting expenses and professional fees. All funds under the
Plan initiative are subject to an allocated charge of such costs except for
certain funds not expected to realize a reduction in their operating expense
ratio. The Plan can be consummated only if, among other things, it is approved
by a majority vote of the shareholders of the Fund. A special meeting (the
"Meeting") of the shareholders of the Fund to approve the Plan will be held on
or about July 13, 2000.
As a result of the Plan, each shareholder of the Scudder Massachusetts Limited
Term Tax Free Fund will become a shareholder of the shares of the Scudder
Massachusetts Tax Free Fund and would hold, immediately after the closing of the
Plan (the "Closing"), that number of full and fractional voting shares of the
shares of the Scudder Massachusetts Tax Free Fund having an aggregate net asset
value equal to the aggregate net asset value of such shareholder's shares held
in the Fund as of the close of business on the business day preceding the
Closing. The Closing is expected to take place during the third quarter of 2000.
In the event the shareholders of the Fund fail to approve the Plan, the Fund
will continue to operate and the Fund's Board may resubmit the Plan for
shareholder approval or consider other proposals.
21
<PAGE>
C. Significant Accounting Policies
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 $326,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until March 31,
2004 ($97,000), March 31, 2006 ($24,000), and March 31, 2008 ($205,000), the
respective expiration dates, whichever occurs first. In addition, from November
1, 1999 through March 31, 2000, the Fund incurred approximately $158,000 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 distributed, and, therefore,
will be distributed to shareholders at least annually.
22
<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.
D. Purchases and Sales of Securities
During the year ended March 31, 2000, purchases and sales of investments
(excluding short-term) aggregated $22,185,511 and $29,605,896, respectively.
E. 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 0.60%, computed and accrued daily and
payable monthly. The Adviser agreed to maintain the annualized expenses at 0.75%
of average daily net assets until July 31, 2000. For the year ended March 31,
2000, the Adviser did not impose a portion of its management fee amounting to
$61,712, and the amount imposed amounted to $500,502, of which $117,713 was
unpaid at March 31, 2000. Certain expenses such as Reorganization expenses are
excluded from the expense limitation.
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
$38,721, of which $5,042 was unpaid at 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 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 $36,000, of
which $3,000 was unpaid at March 31, 2000.
23
<PAGE>
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 aggregated $19,203.
F. 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 $2,258 and $2,642,
respectively, under these arrangements.
G. 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.
24
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of Scudder State Tax Free Trust and the Shareholders of Scudder
Massachusetts Limited Term Tax Free Fund:
In our opinion, the accompanying statements 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 Limited Term
Tax Free Fund (the "Fund") at March 31, 2000, the results of its operations, the
changes in its net assets and its 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, provide a reasonable basis for the opinion
expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
May 23, 2000
25
<PAGE>
Tax Information
- --------------------------------------------------------------------------------
Of the dividends paid by the Fund from net investment income for the year ended
March 31, 2000, 100% are designated as exempt interest dividends for regular
federal income tax purposes.
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.
26
<PAGE>
Officers and Trustees
- --------------------------------------------------------------------------------
Linda C. Coughlin* Eleanor R. Brennan*
o President and Trustee o Vice President
Henry P. Becton, Jr. Philip G. Condon*
o Trustee; President and General o Vice President
Manager, WGBH Educational
Foundation Ashton P. Goodfield*
o Vice President
Dawn-Marie Driscoll
o Trustee; President, Driscoll Ann M. McCreary*
Associates; Executive Fellow, o Vice President
Bentley College
Frank J. Rachwalski, Jr.*
Peter B. Freeman o Vice President
o Trustee; Corporate Director and
Trustee Rebecca L. Wilson*
o Vice President
George M. Lovejoy, Jr.
o Trustee; President and Director, John Millette*
Fifty Associates o Vice President and Secretary
Wesley W. Marple, Jr.
o Trustee; Professor of Business John R. Hebble*
Administration, Northeastern o Treasurer
University, College of Business
Administration
Caroline Pearson*
Kathryn L. Quirk* o Assistant Secretary
o Trustee, Vice President and
Assistant Secretary *Scudder Kemper Investments, Inc.
Jean C. Tempel
o Trustee; Venture Partner, Internet
Capital Group
27
<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>
28
<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.
29
<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.
30
<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
31
<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
