<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST Two World Trade Center,
LETTER TO THE SHAREHOLDERS December 31, 1998 New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of Morgan Stanley
Dean Witter Tax-Free Daily Income Trust for the fiscal year ended December 31,
1998.
The defining event for the municipal money market in 1998 was the decision in
late September by the Federal Reserve Board to begin easing monetary policy.
The change in policy came in the face of international financial turmoil and
took the form of three separate rate cuts. Aided by the Fed's move, tax-free
money market yields trended lower. Healthy municipal government finances also
contributed to the decline in short-term municipal yields as increased tax
revenues and rising budget surpluses resulted in a diminished need for
borrowing against cash flow. Improving municipal balance sheets had the added
benefit of reducing credit quality concerns.
Within the municipal money market sector, securities with the longest
maturities were the primary beneficiaries of the reduced cost of borrowing. The
Bond Buyer One Year Note Index, the benchmark indicator for the long end of the
tax-free money market, registered a net decline of 53 basis points (hundredths
of a percent) by the end of the third quarter as investor demand outstripped
the lighter supply of newly issued notes. The Fed's actions during the closing
months of the year helped to bring the Index lower by an additional 20 basis
points. Over the course of the full year, the Index declined by 73 basis points
to 3.04 percent.
At the short end of the tax-free money market, yields for variable rate demand
obligations (VRDOs) with daily and weekly rate changes were only about 25 basis
points lower, on average, during the second half of 1998 than they were during
the second half of 1997. However, seasonal imbalances in supply and demand were
the cause for pronounced swings in the yields for daily and weekly VRDOs.
Yields for weekly VRDOs ranged from a low of 2.75 percent in early September to
a high of 4.00 percent in both late September and late December.
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
LETTER TO THE SHAREHOLDERS December 31, 1998, continued
PORTFOLIO MANAGEMENT AND PERFORMANCE
Morgan Stanley Dean Witter Tax-Free Daily Income Trust's net investment income
(ratio to average net assets) was 2.75 percent for the fiscal year ended
December 31, 1998. The Fund's thirty-day moving average yield was 2.53 percent
as of December 31, 1998.
On December 31, the Fund's net assets totaled $498.1 million with 56 percent of
the Fund's portfolio invested in VRDOs. Tax-exempt commercial paper and
municipal notes, the two other types of securities utilized in the portfolio,
comprised approximately 32 percent and 12 percent of the portfolio,
respectively. The Fund was broadly diversified geographically with holdings in
32 states and the District of Columbia.
Portfolio holdings are continuously reviewed to maintain or improve
creditworthiness. In addition to evaluating the issuer's credit, particular
attention is devoted to monitoring the credit quality of institutions which
provide enhancement and/or liquidity facilities. The Fund has had no exposure
to Asian bank letters of credit or liquidity facilities for over two years.
The Fund's weighted average maturity reached a high for the year of 69 days in
early July. The extension of maturity at mid-year followed a typical seasonal
pattern resulting from the purchase of newly issued one-year tax and revenue
anticipation notes (TRANs). These instruments come to market in large supply
each year between mid-June and early July in conjunction with the start of the
new fiscal year for most municipal governments. Investments in longer
fixed-rate securities offset some of the yield volatility associated with daily
and weekly VRDOs. With the absence of a fresh supply of longer-term paper, the
Fund's weighted average maturity gradually shortened over the balance of the
year. At the end of December, the Fund's average maturity was 47 days.
LOOKING FORWARD
Global economic conditions seem likely to keep inflationary pressures under
control and have contributed to lower interest rates. The fixed income markets
appear concerned about the risk of renewed inflation as countries seek to
stimulate economic growth. However, the ability of the Fed to maintain
stability by responding with an appropriate monetary policy is encouraging.
With the unlikely prospects for a near-term rise in municipal money market
interest rates, the weighted average maturity of the Fund's portfolio is
expected to remain in its current range of approximately 30 to 60 days until
newly issued one-year TRANs become available in larger supply.
2
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
LETTER TO THE SHAREHOLDERS December 31, 1998, continued
We appreciate your support of Morgan Stanley Dean Witter Tax-Free Daily Income
Trust and look forward to continuing to serve your investment needs and
objectives.
Very truly yours,
/s/ Charles A. Fiumefreddo
- --------------------------------
CHARLES A. FIUMEFREDDO
Chairman of the Board
3
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN CURRENT DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (56.0%)
ALABAMA
$5,000 Birmingham Medical Clinic Board, University of Alabama Health
Services Foundation Ser 1991 .................................. 3.85% 01/08/99 $5,000,000
ARIZONA
5,000 Maricopa County, Arizona Public Service Co Palo Verde 1994 Ser C. 5.00 01/04/99 5,000,000
3,900 Tempe, Excise Tax Ser 1998 ...................................... 5.00 01/04/99 3,900,000
CALIFORNIA
8,000 California Public Capital Improvements Financing Authority,
Pooled
Ser 1988 C ..................................................... 3.10 03/15/99 8,000,000
6,000 Newport Beach, Hoag Memorial Hospital/Presbyterian Ser 1992 &
1996 Ser A ..................................................... 5.10 01/04/99 6,000,000
CONNECTICUT
2,500 Connecticut Health & Educational Facilities Authority, Yale
University Ser T ............................................... 3.75 01/08/99 2,500,000
6,000 Connecticut Special Assessment, Unemployment Compensation 1993
Ser C (FGIC) ................................................... 3.60 07/01/99 6,000,000
DISTRICT OF COLUMBIA
4,800 District of Columbia, The American University Ser 1985 .......... 4.00 01/08/99 4,800,000
FLORIDA
9,800 Dade County, Water & Sewer Ser 1994 (FGIC) ...................... 3.40 01/08/99 9,800,000
17,400 Dade County Industrial Development Authority, Dolphins Stadium
Ser 1985 A ..................................................... 3.90 01/08/99 17,400,000
2,000 Escambia County, Gulf Power Co Ser 1997 ......................... 5.10 01/04/99 2,000,000
GEORGIA
9,500 Hapeville Development Authority, Hapeville Hotel Ltd Ser 1985 ... 5.05 01/04/99 9,500,000
HAWAII
5,000 Hawaii Department of Budget & Finance, Kaiser Permanente
Semiannual Tender Ser 1984 B ................................... 3.80 03/01/99 5,000,000
ILLINOIS
10,000 Illinois Educational Facilities Authority, Northwestern
University Ser 1988 ............................................ 4.15 01/08/99 10,000,000
10,000 Oak Forest, Homewood South Suburban Mayors & Managers Assn Ser
1989 ........................................................... 4.10 01/08/99 10,000,000
INDIANA
10,200 Indiana Health Facilities Authority, Charity Obligated Group
Daughters of Charity National Health System Ser 1997 E ......... 3.90 01/08/99 10,200,000
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
PRINCIPAL
AMOUNT IN CURRENT DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
KENTUCKY
$8,700 Mason County, East Kentucky Power Co-op Inc Ser 1984 (NRU-CFC
Gtd) ........................................................... 4.05% 01/08/99 $8,700,000
LOUISIANA
5,000 New Orleans Aviation Board, Ser 1993 B (MBIA) ................... 4.05 01/08/99 5,000,000
MARYLAND
5,000 Washington Suburban Sanitary District, 1998 Ser BANs ............ 4.05 01/08/99 5,000,000
MASSACHUSETTS
5,000 Massachusetts, Refg 1998 Ser A .................................. 3.90 01/08/99 5,000,000
5,000 Massachusetts Bay Transportation Authority, 1984 Ser A .......... 3.50 03/01/99 5,000,000
Massachusetts Health & Educational Facilities Authority,
5,500 Amherst College Ser F .......................................... 3.90 01/08/99 5,500,000
9,330 Harvard University Ser 1985 I .................................. 3.95 01/08/99 9,330,000
MINNESOTA
300 Beltrami County, Environmental Northwood Panelboard Co Ser 1991 . 5.05 01/04/99 300,000
MISSOURI
7,400 Missouri Health & Educational Facilities Authority, Cox Health
Systems
Ser 1997 (MBIA) ................................................ 5.00 01/04/99 7,400,000
NEW HAMPSHIRE
5,000 New Hampshire Higher Educational & Health Facilities Authority,
St Paul's School Ser 1998 ...................................... 4.00 01/08/99 5,000,000
NEW JERSEY
4,000 Gloucester County, Mobil Oil Refining Corp Ser 1993 A ........... 3.70 01/08/99 4,000,000
NEW YORK
7,000 Port Authority of New York & New Jersey, Ser 2 .................. 5.05 01/04/99 7,000,000
NORTH CAROLINA
3,400 Asheville, Ser 1993 A COPs ...................................... 4.00 01/08/99 3,400,000
5,000 North Carolina Medical Care Commission, Duke University Hospital
Ser 1985 B ..................................................... 3.95 01/08/99 5,000,000
OHIO
9,400 Columbus, Unlimited Tax Ser 1995-1 .............................. 3.85 01/08/99 9,400,000
10,000 Cuyahoga County, Cleveland Clinic Health System Obligated Group
Ser 1998A ...................................................... 4.10 01/08/99 10,000,000
1,000 Ohio Air Quality Development Authority, Mead Co 1986 Ser A ...... 4.90 01/04/99 1,000,000
OKLAHOMA
11,465 Oklahoma Water Resources Board, State Loan Ser 1994A & Ser 1995 . 3.50 03/01/99 11,465,000
OREGON
5,000 Oregon, Veterans' Ser 73 E ...................................... 4.00 01/08/99 5,000,000
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
PRINCIPAL
AMOUNT IN CURRENT DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
$2,100 Delaware County Industrial Development Authority, United Parcel
Service of America Ser 1985 .................................... 4.90% 01/04/99 $2,100,000
5,000 York General Authority, Pooled Ser 1996 ......................... 4.10 01/08/99 5,000,000
SOUTH CAROLINA
York County,
7,600 North Carolina Electric Membership Corp, Ser 1984 N-5 (NRU-CFC
Gtd) ........................................................... 3.30 03/15/99 7,600,000
8,410 Saluda River Electric Co-op Inc Ser 1984 E-1 & E-2 (NRU-CFC
Gtd) ........................................................... 3.45 02/16/99 8,410,000
TEXAS
4,700 Lower Neches Valley Authority, Chevron USA Inc Ser 1987 ......... 3.45 02/16/99 4,700,000
UTAH
10,000 Intermountain Power Agency, 1985 Ser F .......................... 3.45 03/15/99 10,000,000
WASHINGTON
8,500 Washington, Ser 1996 A .......................................... 3.90 01/08/99 8,500,000
WEST VIRGINIA
5,000 Pleasants County Commission, American Cyanamid Co Ser 1985 ...... 4.30 01/08/99 5,000,000
--------------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (Amortized Cost $278,905,000) ... 278,905,000
--------------
</TABLE>
<TABLE>
<CAPTION>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
-------- ---------- ------------
<S> <C> <C> <C> <C> <C>
TAX-EXEMPT COMMERCIAL PAPER (31.6%)
COLORADO
7,800 Platte River Power Authority, Electric Sub Lien S-1 ............. 3.10% 02/10/99 3.10% 7,800,000
GEORGIA
10,000 Georgia Municipal Gas Authority, Southern Portfolio I Ser D ..... 3.00 02/04/99 3.00 10,000,000
HAWAII
6,200 Hawaii Department of Budget & Finance, Citizens Utilities Co Ser
1985 ........................................................... 3.20 01/19/99 3.20 6,200,000
LOUISIANA
4,250 Louisiana, Ser 1991-A ........................................... 3.10 02/17/99 3.10 4,250,000
Plaquemines Port Harbor & Terminal District,
10,000 Electric-Coal Transfer Co Ser 1985 D .......................... 3.00 02/17/99 3.00 10,000,000
4,200 Electric-Coal Transfer Co Ser 1985 D .......................... 2.90 02/18/99 2.90 4,200,000
MARYLAND
Baltimore County,
5,000 Metro District Ser 1995 BANs ................................... 2.95 02/09/99 2.95 5,000,000
5,000 Metro District Ser 1995 BANs ................................... 2.90 03/04/99 2.90 5,000,000
5,000 Montgomery County, 1995 Ser BANs ................................ 3.15 02/10/99 3.15 5,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ----------- ---------------------------------------------------------------- -------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
NEW JERSEY
$5,000 New Jersey, Ser Fiscal 1999 A TRANs ............................. 3.00% 01/28/99 3.00% $5,000,000
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency,
5,000 Ser 1988 B ..................................................... 3.00 01/26/99 3.00 5,000,000
7,200 Ser 1996 ....................................................... 2.95 02/23/99 2.95 7,200,000
7,900 Ser 1996 ....................................................... 2.90 02/24/99 2.90 7,900,000
OHIO
5,500 Ohio Air Quality Development Authority, Cleveland Electric
Illuminating Co 1988 Ser B (FGIC) .............................. 3.05 02/08/99 3.05 5,500,000
OKLAHOMA
5,000 Oklahoma City Industrial & Cultural Facilities Trust, SSM Health
Care Ser 1998 B (MBIA) ......................................... 2.90 03/09/99 2.90 5,000,000
SOUTH CAROLINA
5,000 South Carolina Public Service Authority, Santee Cooper Ser 1998 . 2.95 02/25/99 2.95 5,000,000
TEXAS
2,000 Dallas Area Rapid Transit, Sales Tax Ser B ..................... 3.10 02/11/99 3.10 2,000,000
Houston,
5,100 Water & Sewer 1994 Ser A ....................................... 3.10 01/27/99 3.10 5,100,000
7,000 Water & Sewer 1994 Ser A ....................................... 2.90 03/04/99 2.90 7,000,000
8,000 Water & Sewer 1994 Ser A ....................................... 3.55 03/10/99 3.55 8,000,000
5,000 Texas, Ser 1997B TRANs .......................................... 2.90 04/28/99 2.90 5,000,000
WASHINGTON
Seattle,
5,000 Municipal Light & Power Ser 1990 ............................... 3.05 01/21/99 3.05 5,000,000
11,300 Municipal Light & Power Ser 1991 B ............................ 2.95 03/11/99 2.95 11,300,000
6,000 Municipal Light & Power Ser 1991 B ............................. 3.00 04/07/99 3.00 6,000,000
WISCONSIN
10,090 Wisconsin, Transportation Notes 1997 Ser A ...................... 3.10 02/09/99 3.10 10,090,000
--------------
TOTAL TAX-EXEMPT COMMERCIAL PAPER (Amortized Cost $157,540,000) ................................. 157,540,000
--------------
SHORT-TERM MUNICIPAL NOTES (12.5%)
INDIANA
Indianapolis Local Improvement Bond Bank,
6,750 Ser 1998 D Notes, dtd 06/18/98 ................................. 4.25 01/11/99 3.65 6,751,086
3,450 Ser 1998 E Notes, dtd 12/17/98 ................................. 3.50 07/12/99 2.95 3,459,792
IOWA
11,000 Iowa School Corporations, Warrant Certificates 1998-99 Ser A
(FSA), dtd 06/25/98 ............................................ 4.50 06/25/99 3.65 11,043,246
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998, continued
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ----------- ---------------------------------------------------------------- -------- ---------- ------------ --------------
KENTUCKY
$5,000 Kentucky Asset/Liability Commission, 1998 Ser A TRANs,
dtd 07/01/98 ................................................... 4.50% 06/25/99 3.57% $5,021,522
NEW MEXICO
New Mexico,
10,000 Ser 1998 TRANs, dtd 07/02/98 ................................... 4.25 06/30/99 3.60 10,030,942
5,000 Ser 1998A TRANs, dtd 12/10/98 .................................. 3.75 06/30/99 2.98 5,018,713
PENNSYLVANIA
6,000 Temple University, Ser 1998 B, dtd 05/15/98 ..................... 4.50 05/14/99 3.75 6,015,784
TEXAS
5,000 Harris County, Ser 1998 TANs, dtd 08/06/98 ...................... 4.25 02/26/99 3.55 5,005,257
WISCONSIN
10,000 Wisconsin, Operating Notes of 1998, dtd 07/01/98 ................ 4.50 06/15/99 3.55 10,041,463
--------------
TOTAL SHORT-TERM MUNICIPAL NOTES (Amortized Cost $62,387,805) ................................... 62,387,805
--------------
TOTAL INVESTMENTS (Amortized Cost $498,832,805) (a) ................................ 100.1 % 498,832,805
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS ..................................... (0.1) (760,677)
------------ --------------
NET ASSETS ......................................................................... 100.0 % $498,072,128
============ ==============
</TABLE>
- ------------
BANs Bond Anticipation Notes.
COPs Certificates of Participation.
NRU-CFC National Rural Utilities -Cooperative Finance Corporation.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
+ Rate shown is the rate in effect at December 31, 1998.
* Date on which the principal amount can be recovered through
demand.
(a) Cost is the same for federal income tax purposes.
Bond Insurance:
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(amortized cost $498,832,805)............ $498,832,805
Cash...................................... 767,181
Receivable for:
Interest................................. 3,333,344
Shares of beneficial interest sold ...... 5,603
Prepaid expenses and other assets ........ 65,333
--------------
TOTAL ASSETS ........................... 503,004,266
--------------
LIABILITIES:
Payable for:
Shares of beneficial interest
repurchased............................. 4,549,952
Investment management fee ............... 226,539
Plan of distribution fee................. 45,809
Accrued expenses ......................... 109,838
--------------
TOTAL LIABILITIES ....................... 4,932,138
--------------
NET ASSETS............................... $498,072,128
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital........................... $498,071,908
Accumulated undistributed net investment
income................................... 575
Accumulated net realized loss............. (355)
--------------
NET ASSETS............................... $498,072,128
==============
NET ASSET VALUE PER SHARE,
498,071,908 shares outstanding
(unlimited shares authorized of $.01 par
value)................................... $ 1.00
==============
</TABLE>
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ................. $18,523,307
-------------
EXPENSES
Investment management fee........ 2,647,549
Plan of distribution fee......... 516,046
Transfer agent fees and
expenses........................ 428,002
Registration fees ............... 76,315
Shareholder reports and notices 58,179
Professional fees ............... 44,255
Custodian fees................... 26,348
Trustees' fees and expenses ..... 18,919
Other............................ 13,347
-------------
TOTAL EXPENSES ................ 3,828,960
Less: expense offset ............ (26,245)
-------------
NET EXPENSES................... 3,802,715
-------------
NET INVESTMENT INCOME.......... 14,720,592
NET REALIZED GAIN ............. 2,153
-------------
NET INCREASE..................... $14,722,745
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
- ------------------------------------------------------ ----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 14,720,592 $ 16,002,243
Net realized gain...................................... 2,153 --
----------------- -----------------
NET INCREASE ........................................ 14,722,745 16,002,243
Dividends to shareholders from net investment income . (14,720,472) (16,002,394)
Net decrease from transactions in shares of beneficial
interest.............................................. (19,368,358) (4,440,989)
----------------- -----------------
NET DECREASE......................................... (19,366,085) (4,441,140)
NET ASSETS:
Beginning of period.................................... 517,438,213 521,879,353
----------------- -----------------
END OF PERIOD
(Including undistributed net investment income of
$575 and $455, respectively)......................... $498,072,128 $517,438,213
================= =================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Tax-Free Daily Income Trust (the "Fund"), formerly
Dean Witter Tax-Free Daily Income Trust, is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Fund's investment objective is to provide a
high level of daily income which is exempt from federal income tax, consistent
with stability of principal and liquidity. The Fund was incorporated in
Maryland on March 24, 1980, commenced operations on February 20, 1981 and
reorganized as a Massachusetts business trust on April 30, 1987.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- Portfolio securities are valued at amortized
cost, which approximates market value.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Fund amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends
and distributions to shareholders as of the close of each business day.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), formerly Dean Witter InterCapital
Inc., the Fund pays the Investment Manager a management fee, accrued daily and
payable monthly, by applying the following annual rates to the net assets of
the Fund determined as of the close of each business day: 0.50% to the portion
of the daily net assets not exceeding $500 million; 0.425% to the portion of
the daily net assets exceeding $500 million but not exceeding $750 million;
0.375% to the portion of the daily net assets exceeding $750 million but not
11
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
exceeding $1 billion; 0.35% to the portion of the daily net assets exceeding $1
billion but not exceeding $1.5 billion; 0.325% to the portion of the daily net
assets exceeding $1.5 billion but not exceeding $2 billion; 0.30% to the
portion of the daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.275% to the portion of the daily net assets exceeding $2.5 billion
but not exceeding $3 billion; and 0.25% to the portion of the daily net assets
exceeding $3 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services,
heat, light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Morgan Stanley Dean Witter Distributors Inc. (the "Distributor"), an affiliate
of the Investment Manager, is the distributor of the Fund's shares and, in
accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act, finances certain expenses in connection therewith.
Under the Plan, the Distributor bears the expense of all promotional and
distribution related activities on behalf of the Fund, except for expenses that
the Trustees determine to reimburse, as described below. The following
activities and services may be provided by the Distributor and other
broker-dealers under the Plan: (1) compensation to, and expenses of, Morgan
Stanley Dean Witter Financial Advisors and other selected broker-dealers; (2)
sales incentives and bonuses to sales representatives and to marketing
personnel in connection with promoting sales of the Fund's shares; (3) expenses
incurred in connection with promoting sales of the Fund's shares; (4) preparing
and distributing sales literature; and (5) providing advertising and
promotional activities, including direct mail solicitation and television,
radio, newspaper, magazine and other media advertisements.
The Fund is authorized to reimburse the Distributor for specific expenses the
Distributor incurs or plans to incur in promoting the distribution of the
Fund's shares. The amount of each monthly reimbursement payment may in no event
exceed an amount equal to a payment at the annual rate of 0.15% of the Fund's
average daily net assets. For the year ended December 31, 1998, the
distribution fee was accrued at the annual rate of 0.10%.
12
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998, continued
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities of portfolio
securities for the year ended December 31, 1998 aggregated $1,104,511,283 and
$1,123,641,322, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager
and Distributor, is the Fund's transfer agent. At December 31, 1998, the Fund
had transfer agent fees and expenses payable of approximately $25,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended December 31, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,981. At December 31, 1998, the Fund had an accrued pension liability of
$51,037 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------
<S> <C> <C>
Shares sold ........................................ 1,102,902,492 1,145,733,981
Shares issued in reinvestment of dividends ......... 14,720,472 16,002,394
------------- -------------
1,117,622,964 1,161,736,375
Shares repurchased ................................. (1,136,991,322) (1,166,177,364)
-------------- --------------
Net decrease in shares outstanding ................. (19,368,358) (4,440,989)
============== ==============
</TABLE>
6. FEDERAL INCOME TAX STATUS
During the year ended December 31, 1998, the Trust utilized approximately
$2,100 of its capital loss carryover. At December 31, 1998 the Fund had a net
capital loss carryover of approximately $400, which will be available through
December 31, 2002 to offset future capital gains to the extent provided by
regulations.
13
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA :
Net asset value, beginning of period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- ------- -------
Net investment income ............................. 0.028 0.029 0.028 0.032 0.022
Less dividends from net investment income ......... (0.028) (0.029) (0.028) (0.032) (0.022)
--------- --------- -------- -------- --------
Net asset value, end of period .................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ======== ======== ========
TOTAL RETURN ...................................... 2.80% 2.98% 2.83% 3.22% 2.25%
RATIOS TO AVERAGE NET ASSETS:
Expenses .......................................... 0.72%(1) 0.72%(1) 0.71% 0.72% 0.71%
Net investment income ............................. 2.75% 2.93% 2.76% 3.16% 2.22%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions ............ $ 498 $ 517 $ 522 $ 522 $ 544
</TABLE>
- -------------
(1) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER TAX-FREE DAILY INCOME TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Morgan Stanley Dean Witter
Tax-Free Daily Income Trust (the "Fund"), formerly Dean Witter Tax-Free Daily
Income Trust, at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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 December 31, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 5, 1999
1998 FEDERAL TAX NOTICE (unaudited)
For the year ended December 31, 1998, all of the Fund's dividends from
net investment income were exempt interest dividends, excludable from
gross income for Federal income tax purposes.
15
<PAGE>
MORGAN STANLEY
DEAN WITTER
TAX-FREE DAILY
INCOME TRUST
BOARD OF DIRECTORS
- --------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- --------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Katherine H. Stromberg
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- --------------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- --------------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders
of the Fund. For more detailed information about the Fund, its
officers and trustees, fees, expenses and other pertinent information,
please see the prospectus of the Fund.
This report is not authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an effective prospectus.
ANNUAL REPORT
DECEMBER 31, 1998
