<PAGE>
ACTIVE ASSETS TAX-FREE TRUST Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS December 31, 1995
DEAR SHAREHOLDER:
The general direction of short-term municipal interest rates was lower during
1995. With economic indicators pointing toward modest growth and a lack of
inflationary pressures, the Federal Reserve Board acted twice during the
second half of the year to ease monetary policy. Yields for municipal
securities maturing in the six-month to one-year range declined in
conjunction with the Federal Reserve's easing moves. However, yields on money
market instruments with shorter maturities were more influenced by the
seasonal supply and demand pattern. At times, yields on variable-rate demand
obligations (VRDOs) and tax-exempt commercial paper with maturities under 30
days equaled or exceeded yields on securities with maturities longer than six
months.
Over the course of the year, The Bond Buyer One-Year Note Index, a widely
followed indicator of longer-term municipal money market rates, declined 135
basis points from 4.95 percent to 3.60 percent. At the end of 1995, the ratio
of the Index to the yield for one-year U.S. Treasury Bills was 69 percent,
unchanged from the end of 1994. A stable ratio means that this sector of the
municipal market performed equally with the taxable market for comparable
maturities.
At the short end of the tax-free money market maturity range, interest rates
remained sensitive to cash flows into and out of the market. Yields for
variable-rate demand obligations (VRDOs) with daily and weekly rate changes
were generous during periods of excess supply and relatively rich during
periods of unsatisfied demand. During the second half, weekly VRDO yields
moved between a low of 2.90 percent in early July when cash inflows were
strong and a high of 5.00 percent in December when cash outflows occurred.
PORTFOLIO MANAGEMENT AND PERFORMANCE
Active Assets Tax-Free Trust produced an annualized return of 3.47 percent
for the six-month period ended December 31, 1995. The Trust's net assets
totaled approximately $1.5 billion, with 80 percent of the Trust's portfolio
invested in VRDOs. Tax-exempt commercial paper and municipal
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
LETTER TO THE SHAREHOLDERS December 31, 1995, continued
notes, the two other types of securities utilized in the portfolio, comprised
11.6 percent and 8.4 percent of the portfolio, respectively. The Trust was
broadly diversified geographically with holdings in 41 states.
The Trust's weighted average maturity remained short to moderate with few
opportunities to pick up yield by extending maturity during the year. At the
same time, proposed changes in corporate treatment of tax-free debt made a
cautious approach desirable. At the end of December, the Trust's average
maturity was 39 days.
Portfolio holdings are continuously reviewed to maintain or improve
creditworthiness. During the past year, particular attention was devoted to
monitoring the credit quality of banks providing letters of credit and
liquidity facilities for our investments. Mounting concern about Japanese
banks prompted portfolio exposure to be virtually eliminated.
The Orange County, California, bankruptcy in December 1994, also influenced
investment selections. As a result, fewer commitments than in past years were
made during the summer to seasonal purchases of new one-year tax and revenue
anticipation notes (TRANs). Stringent credit criteria were applied to all
note purchases and detailed disclosure of municipal pool investment practices
was sought as part of the credit review process. Purchases of TRANs issued by
California municipalities were avoided in our national money funds.
LOOKING FORWARD
The slower pace of economic growth in 1995 and the Federal Reserve Board's
latest interest rate moves have improved market expectations. The outlook for
1996 points toward the possibility of further steps by the Federal Reserve to
ease monetary policy. If all other things were equal, the average maturity of
the Trust's investments might be extended in this economic environment.
However, tax reform proposals are likely to continue to receive publicity and
cloud the outlook for tax-exempt securities. In managing the Trust's
portfolio, we will maintain our emphasis on quality and liquidity in making
investment selections.
We appreciate your support of Active Assets Tax-Free 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
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1995 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------- ---------------------------------------------------------------- -------- ------------- ---------------
<C> <S> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (79.6%)
Alabama
$15,100 McIntosh Industrial Development Board, Ciba-Geigy Corp Ser 1986 5.90% 01/02/96 $ 15,100,000
Alaska
11,100 Valdez, Marine Terminal Exxon Pipeline Co Ser A ................ 5.90 01/02/96 11,100,000
Arizona
1,500 Maricopa County, Arizona Public Service Co Palo Verde 1994 Ser F 6.00 01/02/96 1,500,000
Arkansas
15,000 Arkansas Student Loan Authority, Ser 1993 B-1 (AMT) ............ 5.25 01/08/96 15,000,000
20,000 Crossett, Georgia Pacific Corp Ser 1984 ........................ 5.05 01/08/96 20,000,000
California
15,000 California Health Facilities Financing Authority, Memorial
Health Services Ser 1994 ..................................... 4.90 01/08/96 15,000,000
10,000 Foothill/Eastern Transportation Corridor Agency, Toll Road Ser
1995 C ........................................................ 4.80 01/08/96 10,000,000
Colorado
11,500 Colorado Health Facilities Authority, Kaiser Permanente 1994 Ser
A ............................................................. 5.15 01/08/96 11,500,000
Connecticut
38,000 Connecticut Development Authority, Connecticut Light & Power Co
1993 A Ser ................................................... 5.10 01/08/96 38,000,000
30,000 Connecticut Special Assessment, Unemployment Compensation 1993
Ser C (FGIC) ................................................. 3.90 07/01/96 30,000,000
Florida
15,000 Dade County, Water & Sewer System Ser 1994 (FGIC) .............. 4.90 01/08/96 15,000,000
1,400 Dade County Health Facilities Authority, Miami Childrens
Hospital Ser 1990 ............................................. 6.10 01/02/96 1,400,000
22,700 Dade County Industrial Development Authority, Dolphins Stadium
Ser 1985 B & C ............................................... 5.25 01/08/96 22,700,000
4,835 Gulf Breeze, Local Government Ser 1985 B (FGIC) ................ 5.00 01/08/96 4,835,000
32,800 Volusia County Health Facilities Authority, Pooled Ser 1985
(FGIC) ........................................................ 5.00 01/08/96 32,800,000
Georgia
10,000 Albany-Dougherty County Hospital Authority, Phoebe-Putney
Memorial Hospital Ser 1991 (AMBAC) ........................... 5.15 01/08/96 10,000,000
16,113 Georgia Municipal Association, Pool Ser 1990 COPs (MBIA) ....... 4.95 01/08/96 16,113,382
Hawaii
Hawaii Department of Budget & Finance,
5,000 Kaiser Permanente Semiannual Tender Ser 1984 B ................ 3.75 03/01/96 5,000,000
22,100 Queens Medical Center Ser 1985 B (FGIC) ....................... 5.15 01/08/96 22,100,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1995 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------- ---------------------------------------------------------------- -------- ------------- ---------------
<C> <S> <C> <C> <C>
Idaho
Idaho Health Facilities Authority,
$20,000 Pooled Ser 1985 ............................................... 5.00% 01/08/96 $ 20,000,000
12,910 St Luke's Regional Medical Center Ser 1995 .................... 5.95 01/02/96 12,910,000
Illinois
Chicago,
15,000 Chicago O'Hare Int'l Airport 2nd Lien 1994 Ser B (AMT) ........ 5.30 01/08/96 15,000,000
14,500 Chicago O'Hare Int'l Airport American Airlines Inc Ser 1983 A . 6.00 01/02/96 14,500,000
15,200 Tender Notes Ser 1995 B ....................................... 3.75 05/01/96 15,200,000
5,900 Illinois Development Finance Authority, Palos Community Hospital
Ser 1994 ...................................................... 5.20 01/08/96 5,900,000
Illinois Health Facilities Authority,
9,000 Gottlieb Health Resources Inc Ser 1990 ........................ 5.10 01/08/96 9,000,000
16,300 Highland Park Hospital Ser 1991 A (FGIC) ...................... 4.00 05/30/96 16,300,000
22,500 Lutheran General Health Care System Ser 1985 B ................ 3.75 01/08/96 22,500,000
12,000 Northwestern Memorial Hospital Ser 1995 ....................... 6.05 01/02/96 12,000,000
10,000 Parkside Development Corp Ser 1991 ............................ 5.20 01/08/96 10,000,000
5,000 Illinois Housing Development Authority, Homeowner Mortgage 1995
Subser E-2 (AMT) ............................................. 3.75 09/03/96 5,000,000
Indiana
13,300 Indiana Hospital Equipment Financing Authority, Ser 1985 (MBIA) 5.60 01/08/96 13,300,000
Petersburg, Indianapolis Power & Light Co,
8,400 Ser 1995 B (AMBAC) ............................................ 5.00 01/08/96 8,400,000
5,000 Ser 1994 A (AMT) .............................................. 5.10 01/08/96 5,000,000
5,000 Purdue University, Student Fee Ser 1995 K ...................... 5.00 01/08/96 5,000,000
Kentucky
7,000 Jamestown, Union Underwear Co .................................. 5.25 01/08/96 7,000,000
Louisiana
10,000 East Baton Rouge Parish, Exxon Corp Ser 1993 ................... 6.00 01/02/96 10,000,000
Louisiana Offshore Terminal Authority, LOOP Inc,
30,000 1991 Ser A .................................................... 5.10 01/08/96 30,000,000
8,100 1992 Ser A .................................................... 5.90 01/02/96 8,100,000
100 Louisiana Recovery District, Sales Tax Ser 1988 (FGIC) ......... 6.00 01/02/96 100,000
20,000 New Orleans Aviation Board, Ser 1993 B (MBIA) .................. 4.95 01/08/96 20,000,000
Maine
8,600 Biddeford, Maine Energy Recovery Co Ser 1985 ................... 3.90 01/08/96 8,600,000
Massachusetts
15,000 Massachusetts Bay Transportation Authority, 1984 Ser A ......... 3.75 03/01/96 15,000,000
30,300 Massachusetts Health & Educational Facilities Authority, Harvard
University Ser 1985 I ........................................ 4.75 01/08/96 30,300,000
6,100 Massachusetts Municipal Wholesale Electric Company, Power Supply
System 1994 Ser C ............................................ 4.80 01/08/96 6,100,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1995 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------- ---------------------------------------------------------------- -------- ------------- ---------------
<C> <S> <C> <C> <C>
Michigan
$ 3,000 Delta County Economic Development Corporation, Mead-Escanaba
Paper Co Ser 1985 E .......................................... 6.10% 01/02/96 $ 3,000,000
17,800 University of Michigan, Hospital Ser 1995 A .................... 5.90 01/02/96 17,800,000
Minnesota
3,100 Beltrami County, Environmental Northwood Panelboard Co Ser 1991 5.90 01/02/96 3,100,000
8,500 Minneapolis & St Paul Housing & Redevelopment Authority,
Childrens' Health Care Ser 1995 B (CGIC) ..................... 6.05 01/02/96 8,500,000
10,000 St Cloud, St Cloud Hospital Ser 1990 A ......................... 5.15 01/08/96 10,000,000
10,500 University of Minnesota Regents, Ser 1985 F .................... 3.65 02/01/96 10,500,000
Missouri
10,000 Missouri Health & Educational Facilities Authority, Sisters of
Mercy Health System St Louis Inc Ser 1989 A .................. 5.10 01/08/96 10,000,000
Nebraska
Nebraska Higher Education Loan Program Inc,
10,000 1985 Ser E (MBIA) ............................................. 4.90 01/08/96 10,000,000
8,600 1986 Ser C (AMT) .............................................. 5.10 01/08/96 8,600,000
New Hampshire
2,500 New Hampshire Higher Educational & Health Facilities Authority,
Dartmouth Education Loan Corp Ser 1993 (AMT) ................. 4.20 06/01/96 2,500,000
New Jersey
3,500 New Jersey Economic Development Authority, N J Natural Gas Co.
Ser 1995 A (AMBAC) ........................................... 5.75 01/02/96 3,500,000
8,000 New Jersey Turnpike Authority, Ser 1991 D (FGIC) ............... 4.80 01/08/96 8,000,000
New Mexico
39,200 Albuquerque, Airport Sub Lien Ser 1995 (AMBAC) ................. 5.05 01/08/96 39,200,000
New York
3,200 New York State Dormitory Authority, Cornell University Ser 1990
B ............................................................. 5.90 01/02/96 3,200,000
1,200 New York State Energy Research & Development Authority,
Central Hudson Gas & Electric Corp Ser 1987 A (AMT) .......... 5.00 01/08/96 1,200,000
10,000 New York State Power Authority, Tender Notes ................... 3.85 03/01/96 10,000,000
1,000 St Lawrence County Industrial Development Agency, Reynolds
Metals Co Ser 1995 (AMT) ..................................... 5.00 01/08/96 1,000,000
North Carolina
9,400 Craven County Industrial Facilities & Pollution Control
Financing Authority, Craven County Wood Energy Ltd 1989 Ser C
(AMT) ......................................................... 6.15 01/02/96 9,400,000
9,800 Durham, Ser 1993 A COPs ........................................ 4.90 01/08/96 9,800,000
26,985 North Carolina Medical Care Commission, Duke University Hospital
Ser 1985 B & C ............................................... 4.95 01/08/96 26,985,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1995 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------- ---------------------------------------------------------------- -------- ------------- ---------------
<C> <S> <C> <C> <C>
$21,700 Person County Industrial Facilities & Pollution Control
Financing Authority,
Carolina Power & Light Co Ser 1992 A ......................... 5.20% 01/08/96 $ 21,700,000
Ohio
12,100 Ohio Air Quality Development Authority, Sohio Air-British
Petroleum Co Ser 1995 ........................................ 6.00 01/02/96 12,100,000
Oklahoma
15,000 Oklahoma Water Resources Board, State Loan Prog Ser 1994 A ..... 3.95 03/01/96 15,000,000
Oregon
10,000 Klamath Falls, Electric Ser B .................................. 4.40 05/01/96 10,000,000
Pennsylvania
10,000 Allegheny County Hospital Development Authority, Health
Education & Research Corp Ser 1988 B ......................... 5.00 01/08/96 10,000,000
10,000 Beaver County Industrial Development Authority, Toledo Edison Co
1992 Ser E .................................................... 3.85 03/06/96 10,000,000
7,100 Delaware County Industrial Development Authority, UPS Ser 1995 . 5.90 01/02/96 7,100,000
10,500 Pennsylvania Energy Development Authority, Clarion Co Piney
Creek
Ser A (AMT) .................................................. 5.10 01/02/96 10,500,000
7,000 Pennsylvania Higher Education Facilities Authority, Temple
University
Ser 1984-1 ................................................... 5.90 01/08/96 7,000,000
8,300 Washington County Authority, Pooled Ser 1985 A-1 Subser B ...... 5.30 01/08/96 8,300,000
South Carolina
5,905 York County, Saluda River Electric Coop Inc Ser 1984 E-2
(NRU-CFC Gtd) ................................................. 3.80 02/15/96 5,905,000
Tennessee
7,704 Clarksville Public Building Authority, Ser 1990 (MBIA) ......... 5.05 01/08/96 7,704,000
20,000 Tennessee, Ser 1995 A BANs ..................................... 5.15 01/08/96 20,000,000
31,400 Volunteer State Student Funding, Ser A-3 (AMT) ................. 5.20 01/08/96 31,400,000
Texas
8,000 Guadalupe-Blanco River Authority, Refg Central Power & Light Co
Ser 1995 ...................................................... 5.90 01/02/96 8,000,000
28,000 Harris County, Toll Road Unlimited Tax Sub Lien Ser 1994 B & C . 4.95 01/08/96 28,000,000
25,000 Harris County Health Facilities Development Corporation,
Methodist Hospital Ser 1994 .................................. 6.00 01/02/96 25,000,000
15,000 Texas, Veterans' Housing Assistance Prog Fund I Ser 1995 ....... 5.05 01/08/96 15,000,000
Utah
25,000 Intermountain Power Agency, 1985 Ser E ......................... 3.75 03/15/96 25,000,000
Virginia
24,660 Richmond Redevelopment & Housing Authority, Tobacco Row 1989
Ser B-4, Ser B-7 & Ser B-10 (AMT) ............................ 5.35 01/08/96 24,660,000
Washington
5,800 Seattle, Municipal Light & Power Ser 1993 ...................... 5.00 01/08/96 5,800,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1995 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------- ---------------------------------------------------------------- -------- ------------- ---------------
<C> <S> <C> <C> <C>
Wisconsin
$ 9,500 Brokaw Wausau Paper Mills Co Ser 1995 (AMT) .................... 5.30% 01/08/96 $ 9,500,000
10,000 Wisconsin Health Facilities Authority, Franciscan Health Care
Inc Ser 1985 A-1 . ............................................ 5.50 01/08/96 10,000,000
Wyoming
Lincoln County, Exxon Corp
5,800 Ser 1984 C .................................................... 5.90 01/02/96 5,800,000
4,200 Ser 1987 A (AMT) .............................................. 6.00 01/02/96 4,200,000
8,250 Sublette County, Exxon Corp Ser 1987 A (AMT) ................... 6.00 01/02/96 8,250,000
---------------
Total Short-Term Variable Rate Municipal Obligations
(Amortized Cost $1,164,562,382) ....................................................... 1,164,562,382
---------------
</TABLE>
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY ON
AMOUNT IN COUPON MATURITY DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ----------- ---------------------------------------------------------------- -------- ---------- ------------ --------------
<C> <S> <C> <C> <C> <C>
TAX-EXEMPT COMMERCIAL PAPER (11.5%)
Arizona
$10,000 Salt River Project Agricultural Improvement & Power District, .. 3.65% 03/13/96 3.65% $ 10,000,000
Florida
9,200 Jacksonville Electric Authority, ............................... 3.40 02/28/96 3.40 9,200,000
Georgia
7,900 Burke County Development Authority, Oglethorpe Power Corp
Ser 1992 A ................................................... 3.80 02/21/96 3.80 7,900,000
Kansas
7,000 Burlington, Kansas City Power & Light Co Ser 1987 B ............ 3.75 02/23/96 3.75 7,000,000
Maryland
15,000 Baltimore County, Baltimore Gas & Electric Co Ser 1985 ......... 3.45 02/26/96 3.45 15,000,000
Massachusetts
10,000 Massachusetts Health & Educational Facilities Authority, Boston
University Ser H .............................................. 3.85 02/07/96 3.85 10,000,000
10,000 Massachusetts Water Resources Authority, Ser 1994 .............. 3.75 02/20/96 3.75 10,000,000
Minnesota
10,000 Southern Minnesota Municipal Power Agency, Ser B ............... 3.80 01/30/96 3.80 10,000,000
New Hampshire
10,000 New Hampshire Business Finance Authority, New England Power Co
1990 Ser A (AMT) .............................................. 4.00 02/12/96 4.00 10,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1995 (unaudited) continued
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY ON
AMOUNT IN COUPON MATURITY DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ----------- ---------------------------------------------------------------- -------- ---------- ------------ --------------
<C> <S> <C> <C> <C> <C>
New Jersey
$10,000 New Jersey, Ser 1996 A TANs .................................... 3.30 % 02/16/96 3.30% $ 10,000,000
North Carolina
12,000 North Carolina Municipal Power Agency, 1 Catawba Elec .......... 3.60 03/19/96 3.60 12,000,000
South Carolina
10,000 South Carolina Public Service Authority ........................ 3.60 03/12/96 3.60 10,000,000
Texas
10,000 Brazos River Authority, Texas Utilities Electric Co Ser 1994 B
(AMT) ........................................................ 3.90 02/12/96 3.90 10,000,000
11,000 Houston, 1993 Ser A ............................................ 3.35 03/28/96 3.35 11,000,000
5,000 Houston, Water & Sewer Ser A ................................... 3.85 02/13/96 3.85 5,000,000
7,000 Lower Colorado River Authority, Ser D .......................... 3.75 02/14/96 3.75 7,000,000
Washington
6,750 Seattle Municipal Light & Power Ser 1990 ....................... 3.625 03/07/96 3.625 6,750,000
Wyoming
7,500 Converse County, PacifiCorp Ser 1992 ........................... 3.75 02/29/96 3.75 7,500,000
--------------
TOTAL TAX-EXEMPT COMMERCIAL PAPER
(Amortized Cost $168,350,000) .................................................................. 168,350,000
--------------
SHORT-TERM MUNICIPAL NOTES (8.4%)
Idaho
18,000 Idaho, Ser 1995 TANs, dtd 07/06/95 ............................. 4.50 06/27/96 3.80 18,059,718
Illinois
Illinois Revenue Anticipation Certificates, Ser 1995
10,000 dtd 08/10/95 .................................................. 4.50 04/12/96 3.70 10,022,153
10,000 dtd 08/10/95 .................................................. 4.50 05/10/96 3.80 10,024,569
Indiana
7,850 Indianapolis, Local Public Improvement Bond Bank Ser 1995 B
Notes, dtd 06/15/95 .......................................... 4.25 01/11/96 3.50 7,851,893
Iowa
24,000 Iowa School Corporations, Warrant Certificates Ser A 1995-6
(CGIC), dtd 06/28/95 ......................................... 4.75 06/28/96 3.85 24,102,784
Maine
20,000 Maine, GO TANs, dtd 07/20/95 ................................... 4.50 06/28/96 3.75 20,071,558
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1995 (unaudited) continued
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY ON
AMOUNT IN COUPON MATURITY DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ----------- ---------------------------------------------------------------- -------- ---------- ------------ --------------
<C> <S> <C> <C> <C> <C>
Michigan
$23,000 Michigan Municipal Bond Authority, Ser 1995 B Notes,
dtd 07/03/95 ................................................. 4.50% 07/03/96 3.80% $ 23,078,781
Texas
10,000 Texas, Ser 1995 A TRANs, dtd 09/01/95 .......................... 4.75 08/30/96 4.06 10,044,309
--------------
TOTAL SHORT-TERM MUNICIPAL NOTES
(Amortized Cost $123,255,765) .................................................................. 123,255,765
--------------
TOTAL INVESTMENTS
(Amortized Cost $1,456,168,147) (a) ............................................... 99.5% 1,456,168,147
OTHER ASSETS IN EXCESS OF LIABILITIES .............................................. 0.5 6,544,121
------ --------------
NET ASSETS ......................................................................... 100.0% $1,462,712,268
====== ==============
</TABLE>
- ------------
AMT Alternative Minimum Tax.
BANs Bond Anticipation Notes.
COPs Certificates of Participation.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
+ Rate shown is rate in effect at December 31, 1995.
* Date in which the principal amount can be recovered through demand.
(a) Cost is the same for federal income tax purposes.
Bond Insurance:
- --------------
AMBAC AMBAC Indemnity Corporation.
CGIC Capital Guaranty Insurance Company.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value (amortized
cost $1,456,168,147) ......................... $1,456,168,147
Receivable for:
Interest .................................... 8,876,722
Shares of beneficial interest sold ......... 78,801
Prepaid expenses .............................. 93,534
--------------
Total Assets ................................ 1,465,217,204
--------------
LIABILITIES:
Payable for:
Investment management fee ................... 521,930
Plan of distribution fee .................... 127,071
Payable to bank ............................... 1,726,060
Accrued expenses .............................. 129,875
--------------
Total Liabilities ........................... 2,504,936
--------------
NET ASSETS:
Paid-in-capital ............................... 1,462,738,954
Accumulated undistributed net investment
income ....................................... 985
Accumulated net realized loss ................. (27,671)
--------------
Net Assets .................................. $1,462,712,268
==============
Net Asset Value Per Share
1,462,738,954 shares outstanding (unlimited
shares authorized of $.01 par value) ........ $ 1.00
===============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
Interest income .................. $29,981,830
-------------
Expenses
Investment management fee ........ 3,239,867
Plan of distribution fee ......... 786,449
Transfer agent fees and expenses 175,131
Registration fees ................ 59,016
Custodian fees ................... 47,448
Shareholder reports and notices . 38,386
Professional fees ................ 33,888
Trustees' fees and expenses ..... 8,651
Other ............................ 11,491
-------------
Total Expenses before Expense
Offset .......................... 4,400,327
Less: Expense Offset ........... (47,121)
-------------
Total Expenses after Expense
Offset .......................... 4,353,206
-------------
Net Investment Income .......... 25,628,624
NET REALIZED GAIN .............. 41,910
-------------
Net Increase ..................... $25,670,534
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1995
- ------------------------------------------------------ ------------------ ---------------
<S> <C> <C>
(unaudited)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 25,628,624 $ 45,957,679
Net realized gain ..................................... 41,910 --
------------------ ---------------
Net increase ........................................ 25,670,534 45,957,679
------------------ ---------------
Dividends from net investment income .................. (25,628,764) (45,956,910)
Net increase (decrease) from transactions in shares of
beneficial interest .................................. (36,660,390) 83,029,307
------------------ ---------------
Total increase (decrease) ........................... (36,618,620) 83,030,076
NET ASSETS:
Beginning of period ................................... 1,499,330,888 1,416,300,812
------------------ ---------------
End of period
(Including undistributed net investment income of
$985 and $1,125, respectively) ....................... $1,462,712,268 $1,499,330,888
================== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1995 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Active Assets Tax-Free Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end
management investment company. The Trust was organized as a Massachusetts
business trust on March 30, 1981 and commenced operations on
July 7, 1981.
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 Trust 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 Trust'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 Trust 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 Dean Witter InterCapital
Inc. (the "Investment Manager"), the Trust pays a management fee, accrued
daily and payable monthly, by applying the following annual rates to the net
assets of the Trust determined as of the close of each business day: 0.50% to
the portion of the average daily net assets not exceeding $500 million;
0.425% to the portion of the average daily net assets exceeding $500 million
but not exceeding $750 million; 0.375% to the portion of the average daily
net assets exceeding $750 million but not exceeding $1 billion; 0.35% to the
portion of the average daily net assets exceeding $1 billion but not
exceeding $1.5 billion; 0.325% to the portion of the average daily net assets
exceeding $1.5 billion but not exceeding $2 billion; 0.30% to the portion of
the average daily net assets exceeding $2 billion but not exceeding $2.5
billion; 0.275% to the portion of the average daily net assets exceeding $2.5
billion but not exceeding $3 billion; and 0.25% to the portion of the average
daily net assets exceeding $3 billion.
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1995 (unaudited) continued
Under the terms of the Agreement, in addition to managing the Trust's
investments, the Investment Manager maintains certain of the Trust'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 Trust 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
Trust.
3. PLAN OF DISTRIBUTION
Dean Witter Distributors Inc. (the "Distributor"), an affiliate of the
Investment Manager, is the distributor of the Trust'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 Trust, 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, the
Distributor and other broker-dealers; (2) sales incentives and bonuses to
sales representatives and to marketing personnel in connection with promoting
sales of the Trust's shares; (3) expenses incurred in connection with promoting
sales of the Trust'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 Trust is authorized to reimburse the Distributor for specific expenses
the Distributor incurs or plans to incur in promoting the distribution of the
Trust'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
Trust's average daily net assets. For the six months ended December 31, 1995,
the distribution fee was accrued at the annual rate of 0.10%.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/maturities of portfolio
securities for the six months ended December 31, 1995 aggregated
$1,342,301,600 and $1,440,416,400, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Trust's transfer agent. At December 31, 1995, the Trust
had transfer agent fees and expenses payable of approximately $26,000.
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1995 (unaudited) continued
The Trust has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Trust 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 six
months ended December 31, 1995, included in Trustees' fees and expenses in
the Statement of Operations amounted to $765. At December 31, 1995, the Trust
had an accrued pension liability of $50,287 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 SIX MONTHS FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1995
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
Shares sold ................................... 2,703,509,053 5,690,475,533
Shares issued in reinvestment of dividends ... 25,628,764 45,956,910
------------------ ---------------
2,729,137,817 5,736,432,443
Shares repurchased ............................ (2,765,798,207) (5,653,403,136)
------------------ ---------------
Net increase (decrease) in shares outstanding (36,660,390) 83,029,307
================== ===============
</TABLE>
6. FEDERAL INCOME TAX STATUS
At June 30, 1995, the Trust had a net capital loss carryover of approximately
$59,000 of which $47,000 will be available through June 30, 2000 and $12,000
will be available through June 30, 2003 to offset future capital gains to the
extent provided by regulations.
<PAGE>
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED JUNE 30
MONTHS ENDED --------------------------------------------------
DECEMBER 31, 1995 1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------------- --------- --------- --------- --------- ---------
Net investment income ..................... 0.016 0.030 0.020 0.021 0.033 0.047
Less dividends from net investment income (0.016) (0.030) (0.020) (0.021) (0.033) (0.047)
----------------- --------- --------- --------- --------- ---------
Net asset value, end of period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================= ========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN ................... 1.64%(1) 3.09% 2.01% 2.15% 3.38% 4.84%
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................. 0.56%(2)(3) 0.56% 0.56% 0.57% 0.59% 0.60%
Net investment income ..................... 3.25%(2) 3.05% 1.98% 2.13% 3.30% 4.71%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions ... $1,463 $ 1,499 $ 1,416 $ 1,355 $ 1,304 $ 1,342
</TABLE>
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(1) Not annualized.
(2) Annualized.
(3) The above annualized expense ratio would have been 0.55% which
reflects 0.01% effect for custody cash credits.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
TRUSTEES
- ------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- ------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
Katherine H. Stromberg
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- ------------------------------------------
Dean Witter Trust Company
Harborside Financial Center--Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ------------------------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- ------------------------------------------
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from
the records of the Trust without examination by the independent accountants
and accordingly they do not express an opinion thereon.
This report is submitted for the general information of shareholders of
the Trust. For more detailed information about the Trust, its officers and
trustees, fees, expenses and other pertinent information, please see
the prospectus of the Trust.
This report is not authorized for distribution to prospective investors
in the Trust unless preceded or accompanied by an effective prospectus.
A C T I V E
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A S S E T S (REGISTERED TRADEMARK)
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A C C O U N T
Active Assets
Tax-Free Trust
Semiannual Report
December 31, 1995
