<PAGE> 1
ACTIVE ASSETS TAX-FREE TRUST Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS December 31, 1997
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, 1997.
The second half of 1997 was largely uneventful for the tax-free money market.
Short-term municipal interest rates had adjusted upward earlier in the year in
response to the Federal Reserve Board's modest tightening of monetary policy
late in the first quarter. For the balance of the year seasonal changes in
tax-free money fund cash flows became the primary determinant of interest rate
movements. Continuing economic growth left most municipal governments with
improving budgetary balances and kept credit quality concerns to a minimum. The
Asian crisis late in the year had little impact on the municipal money market,
because most tax-free money funds had already significantly reduced or
eliminated their exposure to Asian bank liquidity facilities.
Yields for one-year maturities were confined to a narrow range during the final
six months of 1997. The Bond Buyer One-Year Note Index, which tracks the
movement of longer-term municipal money market yields, registered a net decline
of seven basis points from 3.85 percent at the end of June to 3.78 percent at
the end of December. For the year as a whole, however, one-year yields ended 27
basis points higher reflecting the Fed's quarter-point step toward higher
interest rates.
The ratio of the One-Year Note Index to the yield for one-year U.S. Treasury
bills was 68 percent at year end, unchanged from the end of June but up from 64
percent at the end of 1996. The rising ratio means that yields in this sector of
the municipal market became more attractive in relation to Treasuries with
comparable maturities.
At the short end of the tax-free money market maturity range, yields for
variable rate demand obligations (VRDOs) with daily and weekly rate changes were
driven primarily by changing cash flows and fluctuated more widely than yields
for longer maturities. The highest yields for weekly VRDOs during the second
half of 1997 were recorded at the end
<PAGE> 2
ACTIVE ASSETS TAX-FREE TRUST
LETTER TO THE SHAREHOLDERS December 31, 1997, continued
of each quarter, with a peak of 4.15 percent in late December. The second-half
low yield of 3.35 percent was set in August when cash inflows were strong.
PORTFOLIO MANAGEMENT AND PERFORMANCE
The Trust's annualized net investment income for the six-month period under
review was 3.13 percent, and its 30-day annualized yield for December was 3.21
percent.
The Trust's net assets totaled $1.7 billion, with 65 percent of the Trust's
portfolio invested in VRDOs. Tax-exempt commercial paper and municipal notes,
the two other types of securities held by the portfolio, comprised 26 percent
and 9 percent of the portfolio, respectively. The Trust was broadly diversified
geographically with holdings in 39 states.
The Trust's portfolio holdings are continuously reviewed to maintain or improve
creditworthiness. Particular effort is devoted to monitoring the credit quality
of institutions that provide credit enhancement and liquidity facilities for our
investments. During the period under review, the Trust had no exposure to Asian
bank letters of credit or liquidity facilities.
Seasonal purchases of new one-year tax and revenue anticipation notes (TRANs)
brought the Trust's weighted average maturity out to 60 days in mid-July.
However, the Trust's maturity extension was more limited than in some previous
years because attractive yields were available for shorter maturities and new
one-year financings were aggressively priced. The Trust's weighted average
maturity shortened again during August and September and then stayed in a
moderate range of approximately 40 to 50 days for the balance of 1997. At the
end of December, the Trust's weighted average maturity was 43 days.
LOOKING FORWARD
No change appears imminent in Federal Reserve Board monetary policy. The rate of
inflation remains low and the potential drag that the Asian crisis might place
on the U.S. economy should keep price pressures from heating up. In the absence
of external forces on interest rates, the tax-free money market yield curve
should remain relatively flat except during periods of heavy cash flows. The
weighted average maturity of the Trust's portfolio is thus expected to be
maintained in its current moderate range of 35 to 55 days.
<PAGE> 3
ACTIVE ASSETS TAX-FREE TRUST
LETTER TO THE SHAREHOLDERS December 31, 1997, continued
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> 4
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (66.1%)
Alabama
$16,300 Birmingham Medical Clinic Board, University of Alabama Health Services
Foundation Ser 1991................................................... 3.65% 01/08/98 $ 16,300,000
20,800 University of Alabama, Hospital Ser 1997 B............................. 3.70 01/08/98 20,800,000
Arizona
12,200 Arizona Educational Loan Marketing Corporation, 1991 Ser A (AMT)....... 3.75 01/08/98 12,200,000
3,565 Maricopa County Industrial Development Authority, Samaritan Health Svc
Ser B-2 (MBIA)........................................................ 5.00 01/02/98 3,565,000
Arkansas
20,000 Crossett, Georgia Pacific Corp Ser 1984................................ 4.15 01/08/98 20,000,000
California
California Pollution Control Financing Authority,
2,000 Pacific Gas & Electric Co 1997 Ser A.................................. 4.75 01/02/98 2,000,000
11,900 Pacific Gas & Electric Co 1997 Ser C (AMT)............................ 4.75 01/02/98 11,900,000
4,000 Southern California Edison Co 1986 Ser A.............................. 4.20 01/02/98 4,000,000
3,100 California Statewide Communities Development Authority, John Muir/
Mt Diablo Health System Ser 1997 COPs (AMBAC)......................... 4.85 01/02/98 3,100,000
21,750 Newport Beach, Hoag Memorial Hospital/Presbyterian Ser 1992 &
Ser 1996 A & B........................................................ 5.00 01/02/98 21,750,000
Colorado
11,500 Colorado Health Facilities Authority, Kaiser Permanente 1994 Ser A..... 3.75 01/08/98 11,500,000
15,000 Colorado Student Obligation Bond Authority, Ser 1989 A (AMT)........... 3.75 01/08/98 15,000,000
Connecticut
25,000 Connecticut Development Authority, Connecticut Light & Power Co 1993
Ser A................................................................. 3.65 01/08/98 25,000,000
15,000 Connecticut Health & Education Facilities Authority, Yale University
Ser T................................................................. 4.00 01/08/98 15,000,000
30,000 Connecticut Special Assessment, Unemployment Compensation 1993 Ser C
(FGIC)................................................................ 3.90 07/01/98 30,000,000
Delaware
Delaware Economic Development Authority,
10,000 Star Enterprise Ser 1997 A (AMT)...................................... 3.75 01/08/98 10,000,000
10,000 Star Enterprise Ser 1997 C (AMT)...................................... 3.95 01/08/98 10,000,000
Florida
25,000 Dade County, Water & Sewer Ser 1994 (FGIC)............................. 3.65 01/08/98 25,000,000
10,000 Dade County Health Facilities Authority, Miami Children's Hospital Ser
1990.................................................................. 5.20 01/02/98 10,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 5
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$21,900 Dade County Industrial Development Authority, Dolphins Stadium
Ser 1985 B & C........................................................ 3.65% 01/08/98 $ 21,900,000
14,000 Putnam County Development Authority, Seminole Electric Co-op Inc Ser
1984 D (NRU-CFC Gtd).................................................. 3.65 06/15/98 14,000,000
25,000 Volusia County Health Facilities Authority, Pooled Ser 1985 (FGIC)..... 3.70 01/08/98 25,000,000
Georgia
21,000 Albany-Dougherty County Hospital Authority, Phoebe-Putney Memorial
Hospital Ser 1991 (AMBAC)............................................. 3.75 01/08/98 21,000,000
16,102 Georgia Municipal Association, Pool Ser 1990 COPs (MBIA)............... 4.15 01/08/98 16,101,957
Hawaii
11,460 Hawaii Department of Budget & Finance, Kaiser Permanente Semiannual
Tender Ser 1984 B..................................................... 3.75 03/02/98 11,460,000
Idaho
3,100 Idaho Health Facilities Authority, St Luke's Regional Medical Center
Ser 1995.............................................................. 5.10 01/02/98 3,100,000
Illinois
Illinois Health Facilities Authority,
8,900 Gottlieb Health Resources Ser 1990.................................... 3.80 01/08/98 8,900,000
5,000 Northwestern Memorial Hospital Ser 1995............................... 5.05 01/02/98 5,000,000
11,685 Illinois Housing Development Authority, Homeowner Mortgage 1997 Subser
E-2 (AMT)............................................................. 3.85 12/17/98 11,685,000
20,000 Illinois Toll Highway Authority, Refg Ser 1993-B (MBIA)................ 3.65 01/08/98 20,000,000
Indiana
11,000 Indiana Health Facility Financing Authority, Charity Obligated Group -
Daughters of Charity National Health System Ser 1997 E................ 3.65 01/08/98 11,000,000
14,000 Indiana Hospital Equipment Financing Authority, Ser 1985 A (MBIA)...... 3.75 01/08/98 14,000,000
12,760 Indianapolis, Ogden Martin Sys Inc Ser 1987 (AMT)...................... 5.20 01/02/98 12,760,000
8,400 Petersburg, Indianapolis Power & Light Co Ser 1995 B (AMBAC)........... 3.70 01/08/98 8,400,000
Kentucky
7,000 Jamestown, Union Underware Co 1983 Ser A............................... 3.80 01/08/98 7,000,000
Louisiana
29,800 New Orleans Aviation Board, Ser 1993 B (MBIA).......................... 3.80 01/08/98 29,800,000
4,100 St Charles Parish, Shell Oil Co Ser 1995............................... 4.80 01/02/98 4,100,000
Maryland
Maryland Health & Educational Facilities Authority,
8,000 Johns Hopkins Hospital Ser 1997 A..................................... 3.70 01/08/98 8,000,000
10,000 North Arundel Hospital Ser 1997 A..................................... 4.15 01/08/98 10,000,000
6,700 Washington Suburban Sanitary District, 1996 Ser BANs................... 3.85 01/08/98 6,700,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Massachusetts
$15,000 Massachusetts Bay Transportation Authority, 1984 Ser A................. 3.75% 03/01/98 $ 15,000,000
28,700 Massachusetts Health & Educational Facilities Authority, Harvard
University Ser 1985 I................................................. 3.80 01/08/98 28,700,000
15,200 Massachusetts Industrial Finance Agency, Ogden Haverhill Ser 1992 A.... 3.50 01/08/98 15,200,000
10,000 Massachusetts Municipal Wholesale Electric Company, Power Supply System
1994 Ser C (MBIA)..................................................... 3.50 01/08/98 10,000,000
Michigan
4,700 Delta County Economic Development Corporation, Mead-Escanaba Paper Co
Ser 1985 C............................................................ 4.85 01/02/98 4,700,000
9,100 Michigan Strategic Fund, Detroit Edison Co Ser 1995 CC................. 5.05 01/02/98 9,100,000
Minnesota
8,000 Minneapolis & St Paul Housing & Redevelopment Authority, Childrens'
Health Care Ser 1995 B (FSA).......................................... 5.30 01/02/98 8,000,000
Missouri
Missouri Health & Educational Facilities Authority,
10,000 Sisters of Mercy Health System St Louis Inc Ser 1989 A................ 3.70 01/08/98 10,000,000
6,000 Washington University Ser 1996 C...................................... 5.00 01/02/98 6,000,000
10,000 St Louis County Industrial Development Authority, Charity Obligated
Group - Daughters of Charity National Health System Ser 1997 E........ 3.65 01/08/98 10,000,000
New Hampshire
2,500 New Hampshire Higher Educational & Health Facilities Authority,
Darmouth Education Loan Corp Ser 1993 (AMT)........................... 4.05 06/01/98 2,500,000
New Jersey
New Jersey Economic Development Authority,
12,200 New Jersey Natural Gas Co Ser 1995 A (AMBAC) (AMT).................... 4.80 01/02/98 12,200,000
400 Toys "R" Us Inc....................................................... 4.75 01/02/98 400,000
5,200 United Water New Jersey Inc Ser 1996 B (AMBAC)........................ 4.75 01/02/98 5,200,000
23,400 New Jersey Turnpike Authority, Ser 1991 D (FGIC)....................... 3.45 01/08/98 23,400,000
5,000 Union County Pollution Control Financing Authority, Exxon Corp 1994
Ser................................................................... 4.70 01/02/98 5,000,000
New Mexico
27,000 Albuquerque, Airport Sub Lien Ser 1995 (AMBAC)......................... 3.65 01/08/98 27,000,000
New York
2,000 New York State Energy Research & Development Authority, New York State
Electric & Gas Corp Ser 1994 C........................................ 5.00 01/02/98 2,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
North Carolina
$ 9,400 Craven County Industrial Facilities & Pollution Control Financing
Authority, Craven County Wood Energy Ltd 1989 Ser C (AMT)............. 5.15% 01/02/98 $ 9,400,000
14,800 Durham, Ser 1993 A COPs................................................ 3.65 01/08/98 14,800,000
7,000 North Carolina Educational Facilities Finance Agency, Bowman Gray
School of Medicine Ser 1996........................................... 3.70 01/08/98 7,000,000
18,500 North Carolina Medical Care Commission, Duke University Hospital Ser
1985 B................................................................ 4.10 01/08/98 18,500,000
21,700 Person County Industrial Facilities & Pollution Control Financing
Authority, Carolina Power & Light Co Ser 1992 A....................... 3.90 01/08/98 21,700,000
North Dakota
10,000 Oliver County, Square Butte Electric Co-op Ser 1996 B (AMBAC).......... 3.65 01/08/98 10,000,000
Ohio
10,000 Cleveland, Airport System Ser 1997 D (AMT)............................. 3.75 01/08/98 10,000,000
24,095 Cuyahoga County, Cleveland Clinic Foundation Ser 1997 B (AMBAC)........ 3.65 01/08/98 24,095,000
2,800 Ohio Air Quality Development Authority, Sohio Air-British Petroleum Co
Ser 1995.............................................................. 4.85 01/02/98 2,800,000
Oklahoma
34,205 Oklahoma Water Resources Board, State Loan Program Ser 1994 A &
Ser 1995.............................................................. 3.75 03/02/98 34,205,000
Pennsylvania
10,000 Allegheny County Hospital Development Authority, Health Education &
Research Corp Ser 1988 B.............................................. 3.75 01/08/98 10,000,000
2,000 Delaware County Industrial Development Authority, United Parcel Service
of America Inc Ser 1985............................................... 5.00 01/02/98 2,000,000
11,500 Pennsylvania Higher Education Assistance Agency, Student Loan 1997
Ser A (AMT)........................................................... 3.85 01/08/98 11,500,000
Pennsylvania Higher Education Facilities Authority,
2,800 Carnegie Mellon University Ser A...................................... 4.85 01/02/98 2,800,000
15,000 Thomas Jefferson University 1992 Ser C................................ 3.80 02/17/98 15,000,000
15,000 York General Authority, Pooled Ser 1996................................ 4.20 01/08/98 15,000,000
South Carolina
8,110 South Carolina Jobs Economic Development Authority, St Francis Hospital
Ser 1990.............................................................. 5.00 01/02/98 8,110,000
York County,
13,310 North Carolina Electric Membership Corp Ser 1984 N-5 (NRU-CFC Gtd).... 3.70 03/15/98 13,310,000
21,295 Saluda River Electric Co-op Inc Ser 1984 E-1 & E-2 (NRU-CFC Gtd)...... 3.65 02/15/98 21,295,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Tennessee
$ 7,900 Memphis, Airport Refg Ser 1995 B (AMT)................................. 3.75% 01/08/98 $ 7,900,000
6,100 Metropolitan Nashville Airport Authority, American Airlines Refg Ser
1995 B................................................................ 5.00 01/02/98 6,100,000
6,000 Tennessee Housing Development Agency, Homeownership Ser 1997-1 (AMT)... 3.75 02/19/98 6,000,000
Texas
16,000 Harris County, Toll Road Unlimited Tax Sub Lien Ser 1994 C............. 3.80 01/08/98 16,000,000
10,000 Hockley County Industrial Development Corporation, Amoco Oil Co Ser
1985.................................................................. 3.75 05/01/98 10,000,000
7,900 Nueces River Authority, Reynolds Metal Co Ser 1985..................... 5.20 01/02/98 7,900,000
Utah
15,000 Intermountain Power Agency, 1985 Ser E................................. 3.75 03/16/98 15,000,000
Washington
5,800 Seattle, Municipal Light & Power Ser 1993.............................. 3.70 01/08/98 5,800,000
15,200 Washington, Ser 1996 A................................................. 3.60 01/08/98 15,200,000
9,400 Washington Health Care Facilities Authority, Fred Hutchinson Cancer
Research Center Ser 1996.............................................. 5.10 01/02/98 9,400,000
Wisconsin
9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT)........................... 4.45 01/08/98 9,500,000
11,280 Wisconsin Health & Educational Facilities Authority, Franciscan Health
Care Inc Ser 1985 A-1................................................. 3.70 01/08/98 11,280,000
Wyoming
7,400 Lincoln County, Exxon Corp Ser 1995 B (AMT)............................ 5.20 01/02/98 7,400,000
4,100 Uinta County, Chevron USA Ser 1993..................................... 5.00 01/02/98 4,100,000
------------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(Amortized Cost $1,114,516,957)............................................................... 1,114,516,957
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (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>
TAX-EXEMPT COMMERCIAL PAPER (26.0%)
Arizona
$ 7,750 Maricopa County Pollution Control Corporation, Southern
California Edison Co 1985 Ser B........................ 3.75% 02/18/98 3.75% $ 7,750,000
Florida
8,000 Jacksonville Electric Authority, Ser C.................. 3.75 02/10/98 3.75 8,000,000
Hawaii
4,000 Hawaii Department of Budget & Finance, Citizens
Utilities Co 1996 Ser B (AMT).......................... 3.85 04/07/98 3.85 4,000,000
5,800 Honolulu City & County, Ser 1993 BANs................... 3.80 03/10/98 3.80 5,800,000
Louisiana
Plaquemines Port Harbor & Terminal District,
4,150 Electric - Coal Transfer Co Ser 1985 B................. 3.60 01/20/98 3.60 4,150,000
8,200 Electric - Coal Transfer Co Ser 1985 B................. 3.75 01/20/98 3.75 8,200,000
10,000 Electric - Coal Transfer Co Ser 1985 D................. 3.80 02/17/98 3.80 10,000,000
9,700 Electric - Coal Transfer Co Ser 1985 D................. 3.80 03/05/98 3.80 9,700,000
Maryland
Anne Arundel County,
10,000 Ser A BANs............................................. 3.70 01/12/98 3.70 10,000,000
3,500 Ser A BANs............................................. 3.75 01/12/98 3.75 3,500,000
Baltimore County,
8,500 Baltimore Gas & Electric Co Ser 1985................... 3.75 02/23/98 3.75 8,500,000
6,500 Metro District Ser 1995 BANs........................... 3.75 02/10/98 3.75 6,500,000
5,000 Ser 1995 BANs.......................................... 3.55 03/31/98 3.55 5,000,000
5,000 Montgomery County, Ser 1995 BANs........................ 3.80 03/10/98 3.80 5,000,000
Massachusetts
10,000 Massachusetts Health & Educational Facilities Authority,
Boston University Ser H................................ 3.80 01/21/98 3.80 10,000,000
Nebraska
Nebraska Public Power District,
15,200 Series B Notes......................................... 3.70 01/28/98 3.70 15,200,000
5,000 Series B Notes......................................... 3.65 02/05/98 3.65 5,000,000
12,000 Series B Notes......................................... 3.75 03/09/98 3.75 12,000,000
13,000 Series B Notes......................................... 3.75 03/11/98 3.75 13,000,000
New York
New York State Power Authority,
5,000 Ser 2.................................................. 3.70 01/14/98 3.70 5,000,000
10,000 Ser 2.................................................. 3.70 02/11/98 3.70 10,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (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>
North Carolina
North Carolina Eastern Municipal Power Agency,
$ 5,700 Ser 1988 B............................................. 3.75% 02/12/98 3.75% $ 5,700,000
5,000 Ser 1988 B............................................. 3.75 02/18/98 3.75 5,000,000
5,000 Ser 1988 B............................................. 3.80 02/18/98 3.80 5,000,000
4,000 Ser 1996............................................... 3.60 01/21/98 3.60 4,000,000
3,200 Ser 1996............................................... 3.75 01/21/98 3.75 3,200,000
10,000 Ser 1996............................................... 3.75 03/11/98 3.75 10,000,000
Pennsylvania
13,350 Montgomery County Industrial Development Authority, Peco
Energy Co 1996 Ser A................................... 3.80 01/22/98 3.80 13,350,000
Texas
Bexar Metropolitan Water District,
7,500 Ser 1997............................................... 3.85 02/09/98 3.85 7,500,000
10,500 Ser 1997............................................... 3.80 02/25/98 3.80 10,500,000
7,000 Dallas Area Rapid Transit, Sales Tax Ser A.............. 3.75 04/08/98 3.75 7,000,000
10,000 Harris County Health Facilities Development Corporation,
Sisters of Charity of the Incarnate Word Ser 1997 A.... 3.70 02/26/98 3.70 10,000,000
Houston,
10,000 1993 Ser A............................................. 3.75 01/29/98 3.75 10,000,000
6,000 1993 Ser A............................................. 3.65 02/09/98 3.65 6,000,000
7,000 Airport Ser 1993 A (AMT)............................... 3.80 01/27/98 3.80 7,000,000
5,000 Water & Sewer 1994 Ser A............................... 3.60 02/09/98 3.60 5,000,000
10,000 Water & Sewer 1994 Ser A............................... 3.80 02/12/98 3.80 10,000,000
San Antonio,
4,000 Electric & Gas Ser 1988 A.............................. 3.60 02/06/98 3.60 4,000,000
6,200 Electric & Gas Ser 1988 A.............................. 3.65 02/06/98 3.65 6,200,000
8,000 Electric & Gas Ser 1988 A.............................. 3.70 02/11/98 3.70 8,000,000
8,600 Electric & Gas Ser 1988 A.............................. 3.75 02/11/98 3.75 8,600,000
7,000 Electric & Gas Ser 1988 A.............................. 3.75 03/05/98 3.75 7,000,000
12,000 Electric & Gas Ser 1988 A.............................. 3.65 03/06/98 3.65 12,000,000
13,400 Electric & Gas Ser 1988 A.............................. 3.75 03/09/98 3.75 13,400,000
14,300 Electric & Gas Ser 1995 A.............................. 3.70 03/26/98 3.70 14,300,000
Texas,
10,000 Ser 1997 B TRANs....................................... 3.65 03/12/98 3.65 10,000,000
10,000 Ser 1997 B TRANs....................................... 3.75 03/19/98 3.75 10,000,000
10,000 Ser 1997 B TRANs....................................... 3.55 03/31/98 3.55 10,000,000
Utah
Utah,
10,000 Highway Ser 1997 B..................................... 3.70 01/15/98 3.70 10,000,000
10,000 Highway Ser 1997 B..................................... 3.80 02/05/98 3.80 10,000,000
Virginia
10,000 Virginia, Ser 1997 BANs................................. 3.75 03/25/98 3.75 10,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (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>
Wisconsin
Wisconsin,
$11,681 1997 Ser A........................................... 3.70% 02/24/98 3.70% $ 11,681,000
8,000 Transportation Notes 1997 Ser A...................... 3.80 02/06/98 3.80 8,000,000
-----------
TOTAL TAX-EXEMPT COMMERCIAL PAPER
(Amortized Cost $438,731,000)................................................................... 438,731,000
-----------
SHORT-TERM MUNICIPAL NOTES (9.6%)
Colorado
10,000 Colorado, Ser 1997 A TRANs, dtd 07/01/97................ 4.50 06/26/98 3.85 10,030,165
Idaho
17,000 Idaho, Ser 1997 TANs, dtd 07/01/97...................... 4.625 06/30/98 3.88 17,060,107
Indiana
12,000 Indiana Bond Bank, Advance Funding Ser 1997 A-2,
dtd 02/04/97........................................... 4.25 01/21/98 3.70 12,003,494
Indianapolis Local Improvement Bond Bank,
5,000 Ser 1997 A Notes, dtd 06/19/97......................... 4.375 01/08/98 3.76 5,000,578
5,000 Ser 1997 E Notes, dtd 12/18/97......................... 4.25 07/09/98 3.80 5,011,405
Iowa
18,000 Iowa School Corporations, Warrant Certificates Ser A
1997-98 (FSA), dtd 06/26/97............................ 4.50 06/26/98 3.89 18,050,914
Michigan
30,000 Michigan Municipal Bond Authority, Ser 1997 B Notes, dtd
07/02/97............................................... 4.50 07/02/98 3.89 30,088,540
New Mexico
15,000 New Mexico, Ser 1997-1998 TRANs, dtd 07/11/97........... 4.50 06/30/98 3.87 15,044,847
Pennsylvania
5,000 Temple University, Ser 1997, dtd 05/19/97............... 4.75 05/18/98 3.90 5,015,337
Texas
15,000 Texas, Ser 1997 A TRANs, dtd 09/02/97................... 4.75 08/31/98 3.85 15,086,200
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1997 (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>
Wisconsin
$25,000 Milwaukee, Ser 1997 A RANs, dtd 02/25/97................ 4.25% 02/19/98 3.76% $ 25,015,312
5,000 Wisconsin, Operating Notes of 1997, dtd 07/01/97........ 4.50 06/15/98 3.85 5,014,160
--------------
TOTAL SHORT-TERM MUNICIPAL NOTES (Amortized Cost $162,421,059).................................. 162,421,059
--------------
TOTAL INVESTMENTS (Amortized Cost $1,715,669,016) (a).....................................101.7% 1,715,669,016
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................................ (1.7) (28,435,934)
----- --------------
NET ASSETS................................................................................100.0% $1,687,233,082
===== ==============
</TABLE>
- ---------------------
AMT Alternative Minimum Tax.
BANs Bond Anticipation Notes.
COPs Certificates of Participation.
NRU-CFC National Rural Utilities-Cooperative Finance Corporation.
RANs Revenue Anticipation Notes.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
+ Rate shown is the rate in effect at December 31, 1997.
* Date on 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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 13
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997 (unaudited)
ASSETS:
Investments in securities, at value
(amortized cost $1,715,669,016).................................... $1,715,669,016
Cash................................................................ 280,671
Interest receivable................................................. 11,941,872
Prepaid expenses and other assets................................... 83,649
--------------
TOTAL ASSETS.................................................... 1,727,975,208
--------------
LIABILITIES:
Payable for:
Investments purchased........................................... 39,776,566
Investment management fee....................................... 657,467
Plan of distribution fee........................................ 164,047
Shares of beneficial interest repurchased....................... 39,224
Accrued expenses.................................................... 104,822
--------------
TOTAL LIABILITIES............................................... 40,742,126
--------------
NET ASSETS...................................................... $1,687,233,082
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital..................................................... $1,687,224,816
Accumulated undistributed net investment income..................... 14,808
Accumulated net realized loss....................................... (6,542)
--------------
NET ASSETS...................................................... $1,687,233,082
==============
NET ASSET VALUE PER SHARE,
1,687,234,916 shares outstanding
(unlimited shares authorized of $.01 par value).................... $1.00
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 14
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended December 31, 1997 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $32,691,967
-----------
EXPENSES
Investment management fee.............................................. 3,591,006
Plan of distribution fee............................................... 891,648
Transfer agent fees and expenses....................................... 178,825
Registration fees...................................................... 65,882
Custodian fees......................................................... 38,586
Shareholder reports and notices........................................ 30,781
Professional fees...................................................... 28,157
Trustees' fees and expenses............................................ 8,179
Other.................................................................. 10,086
-----------
TOTAL EXPENSES..................................................... 4,843,150
Less: expense offset................................................... (38,370)
-----------
NET EXPENSES....................................................... 4,804,780
-----------
NET INVESTMENT INCOME AND NET INCREASE................................. $27,887,187
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 15
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, 1997 JUNE 30, 1997
- -------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.............................. $ 27,887,187 $ 49,576,805
Net realized gain (loss)........................... -- (6,542)
-------------- --------------
NET INCREASE................................... 27,887,187 49,570,263
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.............................. (27,887,589) (49,562,686)
Net realized gain.................................. -- (7,971)
-------------- --------------
TOTAL.......................................... (27,887,589) (49,570,657)
-------------- --------------
Net increase from transactions in shares of
beneficial interest............................... 53,706,674 91,640,075
-------------- --------------
NET INCREASE................................... 53,706,272 91,639,681
NET ASSETS:
Beginning of period................................ 1,633,526,810 1,541,887,129
-------------- --------------
END OF PERIOD
(Including undistributed net investment income
of $14,808 and $15,210, respectively).......... $1,687,233,082 $1,633,526,810
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 16
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1997 (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
<PAGE> 17
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1997 (unaudited) continued
daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.325% to
the portion of daily net 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, 1997, the
distribution fee was accrued at the annual rate of 0.10%.
<PAGE> 18
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1997 (unaudited) continued
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, 1997 aggregated $1,899,737,300 and
$1,833,990,000, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager and Distributor,
is the Trust's transfer agent. At December 31, 1997, the Trust had transfer
agent fees and expenses payable of approximately $2,000.
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, 1997,
included in Trustees' fees and expenses in the Statement of Operations amounted
to $1,549. At December 31, 1997, the Trust had an accrued pension liability of
$48,182 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 FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997
----------------- --------------
(unaudited)
<S> <C> <C>
Shares sold........................................................................ 3,038,715,902 5,701,581,425
Shares issued in reinvestment of dividends and distributions....................... 27,887,589 49,570,657
-------------- --------------
3,066,603,491 5,751,152,082
Shares repurchased................................................................. (3,012,896,817) (5,659,512,007)
-------------- --------------
Net increase in shares outstanding................................................. 53,706,674 91,640,075
============== ==============
</TABLE>
6. FEDERAL INCOME TAX STATUS
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Trust's next
taxable year. The Trust incurred and will elect to defer net capital losses of
approximately $6,500 during fiscal 1997.
As of June 30, 1997, the Trust had temporary book/tax differences primarily
attributable to post-October losses.
<PAGE> 19
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, 1997 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
(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 0.031 0.030 0.020 0.021
Less dividends from net investment income.......... (0.016) (0.030) (0.031) (0.030) (0.020) (0.021)
------- ------- ------- ------- ------- -------
Net asset value, end of period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN+........................... 1.59%(1) 3.05% 3.12% 3.09% 2.01% 2.15%
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... 0.54%(2) 0.55% 0.55% 0.56% 0.56% 0.57%
Net investment income.............................. 3.13%(2) 2.98% 3.08% 3.05% 1.98% 2.13%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions............. $1,687 $1,634 $1,542 $1,499 $1,416 $1,355
</TABLE>
- ---------------------
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 20
Trustees
- -----------------------------------------------------
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
- -----------------------------------------------------
Dean Witter Trust FSB
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.
- ---------------
ACTIVE
- ---------------
ASSETS(R)
- ---------------
ACCOUNT
- ---------------
ACTIVE ASSETS
TAX-FREE TRUST
Semiannual Report
December 31, 1997
