<PAGE> 1
ACTIVE ASSETS TAX-FREE TRUST Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS December 31, 1996
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Active
Assets Tax-Free Trust for the six-month period ended December 31, 1996.
Tax-free money market interest rates edged lower during the second half of 1996,
but there was little change in yields for the calendar year. Following its
modest quarter-point nudge toward lower rates in late January, the Federal
Reserve Board remained on the sidelines for the balance of 1996. There appeared
to be little need to change monetary policy given the sporadic nature of
economic growth and the moderate rate of inflation. Fluctuations in municipal
money market rates stemmed largely from changes in supply and demand arising
from money fund cash flows.
The Bond Buyer One-Year Note Index, a benchmark indicator of long municipal
money market yields, declined 37 basis points from 3.88 percent at the end of
June to 3.51 percent at the end of December. For all of 1996, however, the net
change in the Index was just nine basis points and reflected the stable
short-term interest rate atmosphere. At the end of 1996, the ratio of the Index
yield to the yield for one-year U.S. Treasury bills was 64 percent, compared
with 69 percent at the end of 1995. The decline in the ratio meant municipal
note yields became less attractive relative to Treasuries as the year
progressed.
At the short end of the tax-free money market maturity range, variable rate
demand obligations (VRDOs) with daily and weekly rate changes conformed to the
recurring pattern of wide interest rate swings and the predictable seasonal
timing of highs and lows. As in prior years, yields declined at the start of
each quarter when demand was strong and rose with each quarter end when cash
outflows were heavy. During the second half of the year, the low for weekly
VRDOs was set in early July at 2.35 percent and the high of 4.00 percent was
recorded at the end of December.
<PAGE> 2
ACTIVE ASSETS TAX-FREE TRUST
LETTER TO THE SHAREHOLDERS December 31, 1996, continued
PORTFOLIO MANAGEMENT AND PERFORMANCE
Active Assets Tax-Free Trust's total return for the six-month period ended
December 31, 1996, was 1.50 percent. Thirty-day yields ranged from a low of 2.64
percent for the month of July to a high of 3.06 percent for the month of
December.
The Trust's net assets totaled $1.5 billion with 72 percent of the Trust's
portfolio invested in VRDOs. Tax-exempt commercial paper and municipal notes,
the two other types of securities utilized in the portfolio, comprised 18
percent and 10 percent of the portfolio, respectively. The Trust was broadly
diversified geographically with holdings in 41 states.
Holdings are continuously reviewed to maintain the portfolio's high quality.
Particular effort is devoted to monitoring the creditworthiness of institutions
that provide credit enhancement and/or liquidity facilities to the debt
obligations.
In early July, the Trust's weighted average maturity extended beyond 60 days to
take advantage of the attractive yields available while the market digested a
heavy seasonal slate of new one-year note financings. As supply abated and
one-year yields moved to lower levels, the Trust's weighted average maturity
returned to a moderate range of approximately 40 to 60 days for the balance of
1996. At the end of December, the Trust's average maturity was 40 days.
LOOKING AHEAD
Market participants continue to express concern that prolonged economic strength
will eventually lead to an increase in the rate of inflation. The Federal
Reserve Board appears to be on the alert for price pressures that might call for
tightening of monetary policy. With market sentiment vacillating with the
release of each new economic statistic, the weighted average maturity of the
Trust's portfolio is expected to be maintained in the 30- to 60-day range for
flexibility.
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/ C. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 3
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (71.3%)
Alaska
$10,300 Valdez, Marine Terminal Exxon Pipeline Co Ser A........................ 5.10% 01/02/97 $ 10,300,000
Arizona
12,200 Arizona Educational Loan Marketing Corporation, 1991 Ser A (AMT)....... 4.25 01/08/97 12,200,000
8,000 Maricopa County, Arizona Public Service Co 1994 Ser F.................. 3.75 01/08/97 8,000,000
Arkansas
20,000 Crossett, Georgia Pacific Corp Ser 1984................................ 4.15 01/08/97 20,000,000
California
3,100 Chula Vista, San Diego Gas & Electric Co 1996 Ser B.................... 4.75 01/02/97 3,100,000
5,000 Riverside County, 1996-97 Ser B TRANs.................................. 3.90 01/08/97 5,000,000
Colorado
11,500 Colorado Health Facilities Authority, Kaiser Permanente 1994 Ser A..... 4.15 01/08/97 11,500,000
Connecticut
38,000 Connecticut Development Authority, The Connecticut Light & Power Co
1993 A Ser............................................................ 4.15 01/08/97 38,000,000
30,000 Connecticut Special Assessment, Unemployment Compensation 1993 Ser C
(FGIC)................................................................ 3.90 07/01/97 30,000,000
Florida
15,000 Dade County, Water & Sewer Ser 1994 (FGIC)............................. 4.00 01/08/97 15,000,000
Dade County Industrial Development Authority,
22,300 Dolphins Stadium Ser 1985 B & C........................................ 4.05 01/08/97 22,300,000
7,700 Florida Power & Light Co Ser 1993...................................... 4.90 01/02/97 7,700,000
4,200 Jacksonville Health Facilities Authority, Baptist Medical Center Ser
1993 (MBIA)........................................................... 5.45 01/02/97 4,200,000
5,000 Orange County Housing Finance Authority, Single Family Ser 1996 B
(AMT)................................................................. 3.65 04/01/97 5,000,000
32,600 Volusia County Health Facilities Authority, Pooled Ser 1985 (FGIC)..... 4.20 01/08/97 32,600,000
Georgia
10,000 Albany-Dougherty County Hospital Authority, Phoebe-Putney Memorial
Hospital Ser 1991 (AMBAC)............................................. 4.10 01/08/97 10,000,000
16,102 Georgia Municipal Association, Pool Ser 1990 COPs (MBIA)............... 4.00 01/08/97 16,101,957
Hawaii
5,000 Hawaii Department of Budget & Finance, Kaiser Permanente Semiannual
Tender Ser 1984 B..................................................... 3.65 03/01/97 5,000,000
Illinois
15,000 Chicago, Chicago O'Hare Int'l Airport 2nd Lien 1994 Ser B (AMT)........ 4.25 01/08/97 15,000,000
5,900 Illinois Development Finance Authority, Palos Community Hospital Ser
1994.................................................................. 4.15 01/08/97 5,900,000
Illinois Health Facilities Authority,
8,900 Gottlieb Health Resources Inc Ser 1990................................. 4.20 01/08/97 8,900,000
19,600 Highland Park Hospital Ser 1991 A (FGIC)............................... 4.15 01/08/97 19,600,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 4
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
<C> <S> <C> <C> <C>
$22,500 Lutheran General Health Care System Ser 1985 B......................... 3.50% 01/08/97 $ 22,500,000
10,000 Parkside Development Corp Ser 1991..................................... 4.10 01/08/97 10,000,000
10,000 The University of Chicago Hospitals Ser 1994 C (MBIA).................. 4.15 01/08/97 10,000,000
Indiana
14,000 Indiana Hospital Equipment Financing Authority, Ser 1985 (MBIA)........ 4.20 01/08/97 14,000,000
15,160 Indianapolis, Ogden Martin Sys Inc Ser 1987 (AMT)...................... 5.10 01/02/97 15,160,000
8,400 Petersburg, Indianapolis Power & Light Co Ser 1995 B (AMBAC)........... 4.00 01/08/97 8,400,000
6,000 Princeton, PSI Energy Inc 1996 Ser..................................... 5.10 01/02/97 6,000,000
Kentucky
7,000 Jamestown, Union Underwear Co 1983 Ser A............................... 4.30 01/08/97 7,000,000
Louisiana
15,000 Louisiana Offshore Terminal Authority, LOOP Inc 1992 Ser A............. 4.10 01/08/97 15,000,000
28,100 New Orleans Aviation Board, Ser 1993 B (MBIA).......................... 4.10 01/08/97 28,100,000
Maryland
8,000 Washington Suburban Sanitary District, 1996 Ser BANs................... 4.10 01/08/97 8,000,000
Massachusetts
14,500 Massachusetts Bay Transportation Authority, 1984 Ser A................. 3.625 03/01/97 14,500,000
29,500 Massachusetts Health & Educational Facilities Authority, Harvard
University Ser 1985 I................................................. 3.80 01/08/97 29,500,000
15,200 Massachusetts Industrial Finance Agency, Ogden Haverhill Ser 1992 A.... 3.90 01/08/97 15,200,000
6,100 Massachusetts Municipal Wholesale Electric Company, Power Supply 1994
Ser C................................................................. 4.00 01/08/97 6,100,000
Michigan
4,400 Delta County Economic Development Corporation, Mead-Escanaba Paper Co
Ser 1985 E............................................................ 4.95 01/02/97 4,400,000
Minnesota
8,100 Minneapolis & St Paul Housing & Redevelopment Authority, Childrens'
Health Care Ser 1995 B (FSA).......................................... 5.05 01/02/97 8,100,000
10,500 University of Minnesota Regents, Ser 1985 F............................ 3.75 02/01/97 10,500,000
Mississippi
7,000 Jackson County, Chevron USA Inc Ser 1993............................... 4.90 01/02/97 7,000,000
10,300 Mississippi Business Finance Corporation, Mississippi Power Co (AMT)... 5.10 01/02/97 10,300,000
Missouri
Missouri Health & Educational Facilities Authority,
10,000 Sisters of Mercy Health System St Louis Inc Ser 1989 A................. 4.20 01/08/97 10,000,000
10,000 SSM Healthcare Ser 1995 B.............................................. 4.10 01/08/97 10,000,000
6,500 Washington University Ser 1996 C....................................... 4.75 01/02/97 6,500,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 5
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
<C> <S> <C> <C> <C>
Nebraska
Nebraska Higher Education Loan Program Inc,
$10,000 1985 Ser E (MBIA)...................................................... 4.15% 01/08/97 $ 10,000,000
8,600 1986 Ser C (AMT)....................................................... 4.25 01/08/97 8,600,000
Nevada
18,400 Clark County, Nevada Cogeneration Assc Ser 1990 (AMT).................. 5.10 01/02/97 18,400,000
New Hampshire
2,500 New Hampshire Higher Educational & Health Facilities Authority,
Dartmouth Education Loan Corp Ser 1993 (AMT).......................... 3.90 06/01/97 2,500,000
New Jersey
New Jersey Economic Development Authority,
12,200 New Jersey Natural Gas Ser 1995 A (AMBAC).............................. 4.80 01/02/97 12,200,000
2,700 Toys R Us.............................................................. 4.75 01/02/97 2,700,000
8,000 New Jersey Turnpike Authority, Ser 1991 D (FGIC)....................... 3.75 01/08/97 8,000,000
8,100 Union County Industrial Pollution Control Financing Authority, Exxon
Corp Ser 1994......................................................... 4.80 01/02/97 8,100,000
New Mexico
38,300 Albuquerque, Airport Sub Lien Ser 1995 (AMBAC)......................... 4.00 01/08/97 38,300,000
New York
14,800 New York Local Government Assistance Corporation, Ser 1995 B........... 4.00 01/08/97 14,800,000
1,400 New York State Dormitory Authority, Cornell University Ser 1990 B...... 4.80 01/02/97 1,400,000
1,000 St Lawrence County Industrial Development Agency, Reynolds Metals Co
Ser 1995 (AMT)........................................................ 4.00 01/08/97 1,000,000
North Carolina
9,400 Craven County Industrial Facilities & Pollution Control Financing
Authority, Craven County Wood Energy Ltd 1989 Ser C (AMT)............. 5.25 01/02/97 9,400,000
7,000 North Carolina Educational Facilities Finance Agency, Bowman Gray
School of Medicine Ser 1996........................................... 4.15 01/08/97 7,000,000
26,985 North Carolina Medical Care Commission, Duke University Hospital Ser
1985 B & C............................................................ 3.95 01/08/97 26,985,000
21,700 Person County Industrial Facilities & Pollution Control Financing
Authority, Carolina Power & Light Co Ser 1992 A....................... 4.25 01/08/97 21,700,000
North Dakota
10,000 Oliver County, Square Butte Electric Co-op Ser 1996 B (AMBAC).......... 4.15 01/08/97 10,000,000
Ohio
5,200 Ohio Air Quality Development Authority, Cincinnati Gas & Electric Co
Ser A................................................................. 5.10 01/02/97 5,200,000
12,000 Ohio Housing Financing Agency, Residential Mtg 1996 Ser A-3 (AMT)...... 3.40 03/03/97 12,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
<C> <S> <C> <C> <C>
Oklahoma
Oklahoma Water Resources Board,
$23,725 State Loan Prog Ser 1994 A............................................. 3.75% 03/03/97 $ 23,725,000
10,000 State Loan Prog Ser 1995............................................... 3.70 03/03/97 10,000,000
Pennsylvania
10,000 Allegheny County Hospital Development Authority, Health Education &
Research Corp Ser 1988 B.............................................. 4.10 01/08/97 10,000,000
10,400 Pennsylvania Energy Development Authority, Clarion Co Piney Creek Ser A
(AMT)................................................................. 4.25 01/08/97 10,400,000
10,000 Pennsylvania Higher Educational Facilities Authority,
Thomas Jefferson University 1992 Ser C................................. 3.70 02/26/97 10,000,000
8,100 Washington County Authority, Pooled Ser 1985 A-1 Subser B.............. 3.85 01/08/97 8,100,000
15,000 York General Authority, Pooled Ser 1996................................ 4.15 01/08/97 15,000,000
South Carolina
10,810 York County, Saluda River Electric Co-op Inc Ser 1984 E-2 (NRU-CFC
Gtd).................................................................. 3.65 02/15/97 10,810,000
Tennessee
7,109 Clarksville Public Building Authority, Ser 1990 (MBIA)................. 4.00 01/08/97 7,109,000
7,900 Memphis, Airport Refg Ser 1995 B....................................... 4.15 01/08/97 7,900,000
20,000 Volunteer State Student Funding, Ser A-3 (AMT)......................... 4.25 01/08/97 20,000,000
Texas
10,690 Guadalupe-Blanco River Authority, Central Power & Light Co Ser 1995.... 5.10 01/02/97 10,690,000
16,000 Harris County, Toll Road Unlimited Tax Sub Lien Ser 1994 C............. 4.05 01/08/97 16,000,000
10,000 Hockley County Industrial Development Corporation, Amoco Oil Co Ser
1985.................................................................. 3.60 05/01/97 10,000,000
13,400 Sabine River Authority, Texas Utilities Co Ser 1996 A (AMBAC).......... 5.10 01/02/97 13,400,000
14,800 Texas, Veterans' Housing Assistance Fund I Ser 1995.................... 4.00 01/08/97 14,800,000
Utah
30,000 Intermountain Power Agency, 1985 Ser E................................. 3.75 03/17/97 30,000,000
Washington
5,800 Seattle, Municipal Light & Power Ser 1993.............................. 4.15 01/08/97 5,800,000
4,000 Washington, Ser 1996 A................................................. 4.15 01/08/97 4,000,000
Wisconsin
9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT)........................... 4.30 01/08/97 9,500,000
10,000 Wisconsin Health Facilities Authority, Franciscan Health Care Inc Ser
1985 A-1.............................................................. 4.10 01/08/97 10,000,000
Wyoming
13,100 Lincoln County, Exxon Corp Ser 1987 C (AMT)............................ 5.10 01/02/97 13,100,000
5,700 Platte County, Tri-State Generation and Transmission Ser 1984 A........ 5.05 01/02/97 5,700,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ------------
<C> <S> <C> <C> <C>
$ 9,000 Sublette County, Exxon Corp Ser 1987 A (AMT)........................... 5.10% 01/02/97 $ 9,000,000
7,800 Sweetwater County, Idaho Power Co Ser 1996 C........................... 5.10 01/02/97 7,800,000
-----------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(Amortized Cost $1,092,780,957)............................................................... 1,092,780,957
-----------
</TABLE>
<TABLE>
<CAPTION>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------ -------- ----------
<C> <S> <C> <C> <C> <C>
TAX-EXEMPT COMMERCIAL PAPER (18.0%)
Florida
8,710 Florida Local Government Finance Commission, Ser 1991..... 3.55% 03/19/97 3.55% 8,710,000
7,000 Jacksonville Electric Authority, Ser A.................... 3.60 01/28/97 3.60 7,000,000
Georgia
10,900 Burke County Development Authority, Oglethorpe Power Corp
Ser 1992 A............................................... 3.55 02/20/97 3.55 10,900,000
5,600 Georgia Municipal Gas Authority, Southern Portfolio I Ser
B........................................................ 3.40 03/27/97 3.40 5,600,000
Hawaii
Hawaii Department of Budget & Finance,
7,000 Citizens Utilities Co 1988 Ser A (AMT).................... 3.65 01/30/97 3.65 7,000,000
4,000 Citizens Utilities Co 1988 Ser B (AMT).................... 3.65 04/04/97 3.65 4,000,000
7,790 Citizens Utilities Co 1988 Ser C (AMT).................... 3.50 02/25/97 3.50 7,790,000
Indiana
8,000 Indianapolis, Citizens Gas & Coke Utility................. 3.45 03/25/97 3.45 8,000,000
Louisiana
15,000 Louisiana Public Finance Authority, Our Lady of the Lake
Regional Medical Center Ser 1985 (FSA)................... 3.55 02/07/97 3.55 15,000,000
16,000 St Charles Parish, Shell Oil Co Refg Ser 1995............. 5.00 01/02/97 5.00 16,000,000
Maryland
Baltimore County,
8,000 Ser 1995 BANs............................................. 3.35 03/06/97 3.35 8,000,000
6,000 Ser 1995 BANs............................................. 3.45 04/08/97 3.45 6,000,000
Massachusetts
10,000 Massachusetts Health & Educational Facilities Authority,
Boston University Ser H.................................. 3.70 02/13/97 3.70 10,000,000
Missouri
11,000 Missouri Environmental Improvement & Energy Resources
Authority, Union Electric Co Ser 1985 A.................. 3.45 01/30/97 3.45 11,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996 (unaudited) continued
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
<C> <S> <C> <C> <C> <C>
Nebraska
$10,000 Nebraska Public Power District, Ser B Notes............... 3.45% 04/10/97 3.45% $ 10,000,000
New Jersey
New Jersey,
10,900 Ser Fiscal 1997 A TRANs................................... 3.45 02/11/97 3.45 10,900,000
20,000 Ser Fiscal 1997 A TRANs................................... 3.625 01/14/97 3.625 20,000,000
Ohio
7,700 Ohio Air Quality Development Authority, Cleveland Electric
Illuminating Co 1988 Ser B (FGIC)........................ 3.45 03/12/97 3.45 7,700,000
South Carolina
8,000 South Carolina Public Service Authority, Promissory
Notes.................................................... 3.50 02/28/97 3.50 8,000,000
Texas
7,000 Dallas Area Rapid Transit, Sales Tax Ser A................ 3.50 02/06/97 3.50 7,000,000
Houston,
12,000 1993 Ser A................................................ 3.60 02/19/97 3.60 12,000,000
10,000 1993 Ser A................................................ 3.55 03/11/97 3.55 10,000,000
10,000 Water & Sewer 1994 Ser A.................................. 3.55 02/18/97 3.55 10,000,000
8,000 San Antonio, Electric & Gas Ser 1995 A.................... 3.50 03/13/97 3.50 8,000,000
Vermont
Vermont,
6,000 1996 Ser I RANs........................................... 3.40 01/23/97 3.40 6,000,000
10,000 1996 Ser I RANs........................................... 3.50 03/10/97 3.50 10,000,000
Virginia
10,000 Louisa Industrial Development Authority, Virginia Electric
& Power Co Ser 1985...................................... 3.40 03/19/97 3.40 10,000,000
12,800 Virginia, 1996 Ser BANs................................... 3.50 02/21/97 3.50 12,800,000
Washington
8,000 Seattle, Municipal Light & Power Ser 1991 B............... 3.55 02/12/97 3.55 8,000,000
-----------
TOTAL TAX-EXEMPT COMMERCIAL PAPER
(Amortized Cost $275,400,000)................................................................... 275,400,000
-----------
SHORT-TERM MUNICIPAL NOTES (10.0%)
Colorado
15,000 Colorado, Ser 1996 A TRANs, dtd 07/01/96.................. 4.50 06/27/97 3.86 15,044,789
Idaho
23,000 Idaho, Ser 1996 TANs, dtd 07/02/96........................ 4.50 06/30/97 3.90 23,065,464
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1996 (unaudited) continued
<TABLE>
<CAPTION>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
Indiana
$10,000 Indiana Bond Bank Advance Funding Notes Ser 1996 A-2, dtd
02/01/96................................................. 4.25% 01/09/97 3.50% $ 10,001,588
Iowa
30,000 Iowa School Corporations, Warrant Certificates Ser 1996-97
(FSA), dtd 06/27/96...................................... 4.75 06/27/97 3.95 30,111,874
Massachusetts
15,000 Massachusetts, 1996 Ser A Notes, dtd 06/11/96............. 4.25 06/10/97 3.90 15,022,083
Michigan
20,000 Michigan Municipal Bond Authority, Ser 1995 B Notes, dtd
07/03/96................................................. 4.50 07/03/97 3.90 20,057,858
Texas
15,000 Texas, Ser 1996 TRANs, dtd 08/30/96....................... 4.75 08/29/97 3.97 15,073,978
Wisconsin
25,000 Wisconsin Operating Notes of 1996, dtd 07/11/96........... 4.50 06/16/97 3.88 25,068,195
--------------
TOTAL SHORT-TERM MUNICIPAL NOTES (Amortized Cost $153,445,829).................................. 153,445,829
--------------
TOTAL INVESTMENTS (Amortized Cost $1,521,626,786) (a)..................................... 99.3% 1,521,626,786
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................ 0.7 9,994,744
----- --------------
NET ASSETS................................................................................ 100.0% $1,531,621,530
===== ==============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
BANs Bond Anticipation Notes.
COPs Certificates of Participation.
RANs Revenue Anticipation Notes.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
+ Rate shown is the rate in effect at December 31, 1996.
* 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.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996 (unaudited)
ASSETS:
Investments in securities, at value
(amortized cost $1,521,626,786)....... $1,521,626,786
Cash................................... 733,595
Interest receivable.................... 10,134,158
Prepaid expenses and other assets...... 60,841
--------------
TOTAL ASSETS....................... 1,532,555,380
--------------
LIABILITIES:
Payable for:
Investment management fee.......... 596,028
Plan of distribution fee........... 146,302
Shares of beneficial interest
repurchased....................... 66,184
Accrued expenses and other payables.... 125,336
--------------
TOTAL LIABILITIES.................. 933,850
--------------
NET ASSETS:
Paid-in-capital........................ 1,531,623,258
Accumulated undistributed net
investment income..................... 401
Accumulated net realized loss.......... (2,129)
--------------
NET ASSETS......................... $1,531,621,530
==============
NET ASSET VALUE PER SHARE,
1,531,623,258 shares outstanding
(unlimited shares authorized of $.01
par value)............................ $1.00
====
STATEMENT OF OPERATIONS
For the six months ended December 31, 1996 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME........................ $ 28,565,321
--------------
EXPENSES
Investment management fee.............. 3,366,556
Plan of distribution fee............... 820,274
Transfer agent fees and expenses....... 178,189
Custodian fees......................... 83,716
Registration fees...................... 71,824
Shareholder reports and notices........ 33,227
Professional fees...................... 26,322
Trustees' fees and expenses............ 6,722
Other.................................. 13,845
--------------
TOTAL EXPENSES..................... 4,600,675
LESS: EXPENSE OFFSET............... (17,119)
--------------
NET EXPENSES....................... 4,583,556
--------------
NET INVESTMENT INCOME AND NET
INCREASE.............................. $ 23,981,765
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1996
------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.............................. $ 23,981,765 $ 49,272,443
Net realized gain.................................. -- 67,452
--------------- --------------
NET INCREASE................................... 23,981,765 49,339,895
Dividends from net investment income............... (23,982,455) (49,272,477)
Net increase (decrease) from transactions in shares
of beneficial interest............................ (10,264,909) 42,488,823
--------------- --------------
NET INCREASE (DECREASE)........................ (10,265,599) 42,556,241
NET ASSETS:
Beginning of period................................ 1,541,887,129 1,499,330,888
-------------- --------------
END OF PERIOD
(Including undistributed net investment income
of
$401 and $1,091, respectively)................. $ 1,531,621,530 $1,541,887,129
=============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996 (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'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 Trust was organized as a
Massachusetts business trust on March 30, 1981 and commenced operations on July
7, 1981.
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 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 the Investment Manager 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 daily net assets not exceeding $500
million; 0.425% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.375% to the portion of daily net assets exceeding
$750 million but not exceeding $1 billion; 0.35% to the portion of daily net
assets exceeding $1 billion but not exceeding $1.5 billion; 0.325% to the
portion of daily net
<PAGE> 13
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996 (unaudited) continued
assets exceeding $1.5 billion but not exceeding $2 billion; 0.30% to the portion
of daily net assets exceeding $2 billion but not exceeding $2.5 billion; 0.275%
to the portion of daily net assets exceeding $2.5 billion but not exceeding $3
billion; and 0.25% to the portion of daily net assets exceeding $3 billion.
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, 1996, 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, 1996 aggregated $1,352,485,650 and
$1,473,714,000, respectively.
<PAGE> 14
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1996 (unaudited) continued
Dean Witter Trust Company, an affiliate of the Investment Manager and
Distributor, is the Trust's transfer agent. At December 31, 1996, the Trust had
transfer agent fees and expenses payable of approximately $27,600.
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, 1996,
included in Trustees' fees and expenses in the Statement of Operations amounted
to $433. At December 31, 1996, the Trust had an accrued pension liability of
$48,535 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 SIX
MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
----------------- ------------------
(unaudited)
<S> <C> <C>
Shares sold........................................................................ 2,658,906,347 5,666,091,760
Shares issued in reinvestment of dividends......................................... 23,982,455 49,272,477
-------------- --------------
2,682,888,802 5,715,364,237
Shares repurchased................................................................. (2,693,153,711) (5,672,875,414)
-------------- --------------
Net increase (decrease) in shares outstanding...................................... (10,264,909) 42,488,823
============== ==============
</TABLE>
<PAGE> 15
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, 1996 1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------
(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........................... 0.015 0.031 0.030 0.020 0.021 0.033
Less dividends from net investment income....... (0.015) (0.031) (0.030) (0.020) (0.021) (0.033)
------ ------ ------ ------ ------ ------
Net asset value, end of period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+........................ 1.50%(1) 3.12% 3.09% 2.01% 2.15% 3.38%
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................ 0.56%(2) 0.55% 0.56% 0.56% 0.57% 0.59%
Net investment income........................... 2.92%(2) 3.08% 3.05% 1.98% 2.13% 3.30%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions.......... $1,532 $1,542 $1,499 $1,416 $1,355 $1,304
</TABLE>
- ---------------------
(1) Not annualized.
(2) Annualized.
+ Calculated based on net asset value as of the last business day of the
period.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 16
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
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
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 Fund 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
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.
Active
Assets (R)
Account
Active Assets
Tax-Free Trust
SEMIANNUAL REPORT
DECEMBER 31, 1996
