<PAGE> 1
ACTIVE ASSETS TAX-FREE TRUST Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS December 31, 1998
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, 1998.
The defining event for the municipal money market in 1998 was the decision in
late September by the Federal Reserve Board to begin easing monetary policy. The
change in policy came in the face of international financial turmoil and took
the form of three separate rate cuts. Aided by the Fed's move, tax-free money
market yields trended lower. Healthy municipal government finances also
contributed to the decline in short-term municipal yields as increased tax
revenues and rising budget surpluses resulted in a diminished need for borrowing
against cash flow. Improving municipal balance sheets had the added benefit of
reducing credit quality concerns.
Within the municipal money market sector, securities with the longest maturities
were the primary beneficiaries of the reduced cost of borrowing. The Bond Buyer
One Year Note Index, the benchmark indicator for the long end of the tax-free
money market, registered a net decline of 53 basis points (hundredths of a
percent) by the end of the third quarter as investor demand outstripped the
lighter supply of newly issued notes. The Fed's actions during the closing
months of the year helped to bring the Index lower by an additional 20 basis
points. Over the course of the full year, the Index declined by 73 basis points
to 3.04 percent.
At the short end of the tax-free money market, yields for variable rate demand
obligations (VRDOs) with daily and weekly rate changes were only about 25 basis
points lower, on average, during the second half of 1998 than they were during
the second half of 1997. However, seasonal imbalances in supply and demand were
the cause for pronounced swings in the yields for daily and weekly VRDOs. Yields
for weekly VRDOs ranged from a low of 2.75 percent in early September to a high
of 4.00 percent in both late September and late December.
<PAGE> 2
ACTIVE ASSETS TAX-FREE TRUST
LETTER TO THE SHAREHOLDERS December 31, 1998, continued
PORTFOLIO MANAGEMENT AND PERFORMANCE
Active Assets Tax-Free Trust's annualized net investment income (ratio to
average net assets) was 2.83 percent for the six-month period ended December 31,
1998. The Trust's thirty-day moving average yield was 2.78 percent as of
December 31, 1998.
On December 31, the Trust's net assets totaled $2 billion with approximately 58
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 approximately 31 percent and 11 percent of the portfolio,
respectively. The Trust was broadly diversified geographically with holdings in
39 states.
Portfolio holdings are continuously reviewed to maintain or improve
creditworthiness. In addition to evaluating the issuer's credit, particular
attention is devoted to monitoring the credit quality of institutions which
provide enhancement and/or liquidity facilities. The Trust has had no exposure
to Asian bank letters of credit or liquidity facilities for over two years.
The Trust's weighted average maturity reached a high for the year of 73 days in
early July. The extension of maturity at mid-year followed a typical seasonal
pattern resulting from the purchase of newly issued one-year tax and revenue
anticipation notes (TRANs). These instruments come to market in large supply
each year between mid-June and early July in conjunction with the start of the
new fiscal year for most municipal governments. Investments in longer fixed-rate
securities offset some of the yield volatility associated with daily and weekly
VRDOs. With the absence of a fresh supply of longer-term paper, the Trust's
weighted average maturity gradually shortened over the balance of the year. At
the end of December, the Trust's average maturity was 48 days.
LOOKING FORWARD
Global economic conditions seem likely to keep inflationary pressures under
control and have contributed to lower interest rates. The fixed-income markets
appear concerned about the risk of renewed inflation as countries seek to
stimulate economic growth. However, the ability of the Fed to maintain stability
by responding with appropriate monetary policy is encouraging. With the unlikely
prospects for a near-term rise in municipal money market interest rates, the
weighted average maturity of the Trust's portfolio is expected to remain in its
current range of approximately 30 to 60 days until newly issued one-year TRANs
become available in larger supply.
2
<PAGE> 3
ACTIVE ASSETS TAX-FREE TRUST
LETTER TO THE SHAREHOLDERS December 31, 1998, continued
We appreciate your support of Active Assets Tax-Free Trust and look forward to
continuing to serve your investment needs and objectives.
Sincerely yours,
/S/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
3
<PAGE> 4
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (57.3%)
Alabama
$22,500 Birmingham Medical Clinic Board, University of Alabama
Health Services Foundation Ser 1991........................ 3.85% 01/08/99 $ 22,500,000
24,700 University of Alabama, Birmingham Hospital Ser 1997B........ 3.85 01/08/99 24,700,000
Arizona
12,200 Arizona Educational Loan Marketing Corporation, 1991 Ser A
(AMT)...................................................... 4.10 01/08/99 12,200,000
10,400 Maricopa County, Arizona Public Service Co Palo Verde 1994
Ser C...................................................... 5.00 01/04/99 10,400,000
Arkansas
20,000 Crossett, Georgia Pacific Corp Ser 1984..................... 3.90 01/08/99 20,000,000
California
3,400 California Health Facilities Financing Authority, Adventist
Health System/West 1998 Ser A (MBIA)....................... 5.00 01/04/99 3,400,000
8,500 California Statewide Communities Development Authority, John
Muir/Mt Diablo Health System COPs (AMBAC).................. 4.80 01/04/99 8,500,000
10,000 Foothill/Eastern Transportation Corridor Agency, Toll Road
Ser 1995C.................................................. 3.60 01/08/99 10,000,000
7,150 Newport Beach, Hoag Memorial Hospital/Presbyterian 1996 Ser
A.......................................................... 5.10 01/04/99 7,150,000
Colorado
15,000 Colorado Student Obligation Bond Authority, Ser 1989A
(AMT)...................................................... 3.95 01/08/99 15,000,000
Connecticut
7,500 Connecticut Health & Educational Facilities Authority, Yale
University Ser T........................................... 3.75 01/08/99 7,500,000
30,000 Connecticut Special Assessment, Unemployment Compensation
1993 Ser C (FGIC).......................................... 3.60 07/01/99 30,000,000
Delaware
10,000 Delaware Economic Development Authority, Star Enterprise Ser
1997C (AMT)................................................ 4.11 01/08/99 10,000,000
Florida
24,900 Dade County, Water & Sewer Ser 1994 (FGIC).................. 3.40 01/08/99 24,900,000
3,000 Dade County Health Facilities Authority, Miami Children's
Hospital Ser 1990.......................................... 4.00 01/04/99 3,000,000
21,550 Dade County Industrial Development Authority, Dolphins
Stadium Ser 1985 B & C..................................... 3.90 01/08/99 21,550,000
10,000 Escambia County, Gulf Power Co Ser 1997..................... 5.10 01/04/99 10,000,000
14,000 Putnam County Development Authority, Seminole Electric Co-op
Inc Ser 1984 D (NRU-CFC Gtd)............................... 2.85 06/15/99 14,000,000
20,000 Volusia County Health Facilities Authority, Pooled Ser 1985
(FGIC)..................................................... 3.75 01/08/99 20,000,000
Georgia
21,000 Albany-Dougherty County Hospital Authority, Phoebe-Putney
Memorial Hospital Ser 1991 (AMBAC)......................... 4.00 01/08/99 21,000,000
14,000 Clayton County Hospital Authority, Southern Regional Medical
Center, Ser 1998B.......................................... 4.00 01/08/99 14,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Hawaii
$ 5,000 Hawaii Department of Budget & Finance, Kaiser Permanente
Semiannual Tender Ser 1984 B............................... 3.80% 03/01/99 $ 5,000,000
Illinois
8,000 Chicago, Chicago Midway Airport Second Lien Ser 1998B (MBIA)
(AMT)...................................................... 5.10 01/04/99 8,000,000
Illinois Health Facilities Authority,
8,800 Gottlieb Health Resources Ser 1990......................... 4.10 01/08/99 8,800,000
11,000 Resurrection Health Care System Ser 1993................... 5.15 01/04/99 11,000,000
20,000 Illinois Toll Highway Authority, Refg 1993 Ser B (MBIA)..... 3.85 01/08/99 20,000,000
Indiana
8,500 Indiana Development Finance Authority, Southern Indiana Gas
& Electric Co 1988 Ser A................................... 3.65 03/01/99 8,500,000
18,000 Indiana Hospital Equipment Financing Authority, Ser 1985 A
(MBIA)..................................................... 4.00 01/08/99 18,000,000
10,000 Indianapolis, Ogden Martin Systems Inc Ser 1987 (AMT)....... 5.15 01/04/99 10,000,000
8,400 Petersburg, Indianapolis Power & Light Co Ser 1995B
(AMBAC).................................................... 4.15 01/08/99 8,400,000
Kentucky
7,000 Jamestown, Union Underwear Co 1983 Ser A.................... 3.75 01/08/99 7,000,000
Louisiana
15,000 New Orleans Aviation Board, Ser 1993 B (MBIA)............... 4.05 01/08/99 15,000,000
6,400 St Charles Parish, Shell Oil Co Ser 1993 (AMT).............. 5.20 01/04/99 6,400,000
Maryland
Maryland Health & Higher Educational Facilities Authority,
7,500 Johns Hopkins Hospital Ser A............................... 4.05 01/08/99 7,500,000
9,900 North Arundel Hospital Ser 1997A........................... 4.20 01/08/99 9,900,000
18,000 Washington Suburban Sanitary District, 1998 Ser BANs........ 4.05 01/08/99 18,000,000
Massachusetts
15,000 Massachusetts, Refg 1998 Ser A.............................. 3.90 01/08/99 15,000,000
23,250 Massachusetts Bay Transportation Authority, 1984 Ser A...... 3.50 03/01/99 23,250,000
Massachusetts Health & Educational Facilities Authority,
9,700 Amherst College Ser F...................................... 3.90 01/08/99 9,700,000
45,000 Harvard University Ser 1985 I.............................. 3.95 01/08/99 45,000,000
16,605 Williams College Ser E..................................... 3.70 01/08/99 16,605,000
Michigan
5,800 Delta County Economic Development Corporation, Mead-Escanaba
Paper Co Ser 1985 E........................................ 5.00 01/04/99 5,800,000
9,100 Michigan Strategic Fund, Detroit Edison Co Ser 1995CC....... 5.15 01/04/99 9,100,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Minnesota
$ 2,000 Beltrami County, Environmental Northwood Panelboard Co Ser
1991....................................................... 5.05% 01/04/99 $ 2,000,000
5,900 Minneapolis & St Paul Housing & Redevelopment Authority,
Children's Health Care Ser 1995B (FSA)..................... 5.15 01/04/99 5,900,000
Missouri
Missouri Health & Educational Facilities Authority,
2,000 Cox Health Systems Ser 1997 (MBIA)......................... 5.00 01/04/99 2,000,000
6,700 Drury College Ser 1996A.................................... 5.15 01/04/99 6,700,000
6,500 Washington University Ser 1996C............................ 5.00 01/04/99 6,500,000
New Hampshire
10,000 New Hampshire Higher Educational & Health Facilities
Authority,
St Paul's School Ser 1998.................................. 4.00 01/08/99 10,000,000
New Jersey
3,000 New Jersey Economic Development Authority, United Water New
Jersey Inc 1996 Ser B (AMBAC).............................. 4.80 01/04/99 3,000,000
23,400 New Jersey Turnpike Authority, Ser 1991 D (FGIC)............ 3.75 01/08/99 23,400,000
New Mexico
26,200 Albuquerque, Airport Sub Lien Ser 1995 (AMBAC).............. 3.85 01/08/99 26,200,000
New York
6,000 Long Island Power Authority, Electric Sub Ser 6............. 4.85 01/04/99 6,000,000
2,600 New York State Dormitory Authority, Cornell University Ser
1990 B..................................................... 5.00 01/04/99 2,600,000
1,100 New York State Energy Research & Development Authority, New
York State Electric & Gas Corp Ser 1994 D.................. 4.80 01/04/99 1,100,000
North Carolina
10,000 Charlotte, Airport Refg Ser 1993A (MBIA).................... 3.85 01/08/99 10,000,000
14,800 Durham, Ser 1993A COPs...................................... 4.00 01/08/99 14,800,000
7,000 North Carolina Educational Facilities Finance Agency, The
Bowman Gray School of Medicine Ser 1996.................... 4.00 01/08/99 7,000,000
18,500 North Carolina Medical Care Commission, Duke University
Hospital Ser 1985B......................................... 3.95 01/08/99 18,500,000
21,700 Person County Industrial Facilities & Pollution Control
Financing Authority, Carolina Power & Light Co Ser 1992A... 4.10 01/08/99 21,700,000
Ohio
10,000 Cleveland, Airport System Ser 1997 D (AMT).................. 4.00 01/08/99 10,000,000
12,600 Columbus, Unlimited Tax Ser 1995-1.......................... 3.85 01/08/99 12,600,000
30,915 Cuyahoga County, Cleveland Clinic Health System Obligated
Group Ser 1997B (AMBAC) & Ser 1998A........................ 4.10 01/08/99 30,915,000
2,400 Ohio Air Quality Development Authority, Sohio Air-British
Petroleum Co Ser 1995...................................... 5.00 01/04/99 2,400,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- -------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Oklahoma
$ 8,000 Oklahoma Student Loan Authority, Ser 1998A (MBIA) (AMT)..... 4.10% 01/08/99 $ 8,000,000
34,205 Oklahoma Water Resources Board, State Loan Ser 1994A & Ser
1995....................................................... 3.50 03/01/99 34,205,000
Oregon
25,200 Oregon, Veterans' Ser 73 E.................................. 4.00 01/08/99 25,200,000
Pennsylvania
16,500 Pennsylvania Higher Education Assistance Agency, Student
Loan 1997
Ser A (AMT)................................................ 4.35 01/08/99 16,500,000
20,000 Pennsylvania Turnpike Commission, Ser Q of 1998............. 5.00 01/04/99 20,000,000
17,700 York General Authority, Pooled Ser 1996..................... 4.10 01/08/99 17,700,000
South Carolina
York County,
14,835 North Carolina Electric Membership Corp Ser 1984 N-5
(NRU-CFC Gtd).............................................. 3.30 03/15/99 14,835,000
22,805 Saluda River Electric Co-op Inc Ser 1984 E-1 & E-2 (NRU-CFC
Gtd)....................................................... 3.55 02/16/99 22,805,000
Tennessee
24,500 Clarksville Public Building Authority, Pooled Financing Ser
1995....................................................... 4.05 01/08/99 24,500,000
8,300 Metropolitan Nashville Airport Authority, American Airlines
Inc Refg Ser 1995B......................................... 4.85 01/04/99 8,300,000
Texas
25,000 Harris County, Toll Road Unlimited Tax Sub Lien Ser 1994
C.......................................................... 3.95 01/08/99 25,000,000
10,000 Texas Municipal Gas Corporation, Senior Lien Gas Reserve Ser
1998....................................................... 4.00 01/08/99 10,000,000
18,300 Waco Health Facilities Development Corporation, Charity
Obligated Group - Daughters of Charity National Health
System Ser 1997F........................................... 3.90 01/08/99 18,300,000
Utah
20,000 Intermountain Power Agency, 1985 Ser E (AMBAC).............. 3.30 03/15/99 20,000,000
Washington
19,100 Washington, Ser 1996 A...................................... 3.90 01/08/99 19,100,000
Wisconsin
9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT)................ 4.30 01/08/99 9,500,000
Wyoming
15,900 Lincoln County, Exxon Corp Ser 1987 A (AMT)................. 5.10 01/04/99 15,900,000
10,800 Sweetwater County, Pacificorp Ser 1984...................... 5.10 01/04/99 10,800,000
--------------
TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS
(Amortized Cost $1,139,715,000)................................................. 1,139,715,000
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (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 (30.7%)
Arizona
$ 7,750 Maricopa County Pollution Control Corporation, Southern
California Edison Co 1985 Ser B........................... 3.40% 01/27/99 3.40% $ 7,750,000
Salt River Project Agricultural Improvement & Power
District,
7,000 Ser 1997 A................................................ 3.40 01/21/99 3.40 7,000,000
6,500 Ser 1997 A................................................ 2.95 03/08/99 2.95 6,500,000
Colorado
Platte River Power Authority,
10,000 Electric Sub Lien S-1..................................... 3.00 02/17/99 3.00 10,000,000
15,000 Electric Sub Lien S-1..................................... 3.00 02/18/99 3.00 15,000,000
Florida
Jacksonville Electric Authority,
8,000 Ser C..................................................... 3.10 02/09/99 3.10 8,000,000
11,300 Ser C..................................................... 3.00 03/11/99 3.00 11,300,000
Georgia
10,000 Monroe County Development Authority, Georgia Power Co 1st
Ser 1995.................................................. 3.25 01/20/99 3.25 10,000,000
Hawaii
4,000 Hawaii Department of Budget & Finance, Citizens Utilities
Co 1988 Ser B (AMT)....................................... 3.05 03/09/99 3.05 4,000,000
13,500 Honolulu City & County, Ser 1998 BANs...................... 2.95 02/08/99 2.95 13,500,000
Indiana
Petersburg,
9,900 Indianapolis Power & Light Co Ser 1991.................... 3.15 01/15/99 3.15 9,900,000
13,000 Indianapolis Power & Light Co Ser 1991.................... 2.85 02/24/99 2.85 13,000,000
Louisiana
Plaquemines Port Harbor & Terminal District,
10,000 Electric - Coal Transfer Co Ser 1985 B.................... 3.00 03/11/99 3.00 10,000,000
13,400 Electric - Coal Transfer Co Ser 1985 D.................... 3.00 03/08/99 3.00 13,400,000
Maryland
Baltimore County,
10,000 Ser 1995 BANs............................................. 2.90 01/26/99 2.90 10,000,000
13,900 Ser 1995 BANs............................................. 2.90 03/18/99 2.90 13,900,000
10,500 Baltimore Gas & Electric Co Ser 1985....................... 3.00 03/05/99 3.00 10,500,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (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>
Minnesota
Rochester,
$11,950 Mayo Foundation/Mayo Medical Center Ser 1992 C............ 3.40% 01/21/99 3.40% $11,950,000
8,600 Mayo Foundation/Mayo Medical Center Ser 1992 C............ 2.90 04/06/99 2.90 8,600,000
Nebraska
10,000 Nebraska Public Power District, Series A Notes............. 3.20 02/09/99 3.20 10,000,000
New Jersey
15,000 New Jersey, Ser Fiscal 1999 A TRANs........................ 3.00 01/28/99 3.00 15,000,000
Nevada
8,000 Las Vegas Valley Water District, Water Ser A............... 3.00 02/08/99 3.00 8,000,000
North Carolina
North Carolina Eastern Municipal Power Agency,
10,000 Ser 1996.................................................. 3.10 01/27/99 3.10 10,000,000
10,000 Ser 1996.................................................. 3.05 03/10/99 3.05 10,000,000
Oklahoma
5,000 Oklahoma City Industrial & Cultural Facilities Trust, SSM
Health Care Ser 1998 B (MBIA)............................. 3.00 02/19/99 3.00 5,000,000
Pennsylvania
8,000 Delaware County Industrial Development Authority, PECO
Energy
Ser 1988 C (FGIC)......................................... 3.05 02/04/99 3.05 8,000,000
Montgomery County Industrial Development Authority,
12,800 PECO Energy Co Ser 1994 A................................. 3.50 01/26/99 3.50 12,800,000
12,000 PECO Energy Co Ser 1994 A................................. 2.95 02/23/99 2.95 12,000,000
15,000 Montour County, Penn State Geisinger Health System 1998 Ser
B......................................................... 3.20 01/25/99 3.20 15,000,000
South Carolina
South Carolina Public Service Authority,
12,100 Santee Cooper Ser 1998.................................... 2.90 01/28/99 2.90 12,100,000
8,000 Santee Cooper Ser 1998.................................... 3.10 01/29/99 3.10 8,000,000
25,000 Santee Cooper Ser 1998.................................... 3.00 02/22/99 3.00 25,000,000
12,500 Santee Cooper Ser 1998.................................... 2.85 02/25/99 2.85 12,500,000
10,100 Santee Cooper Ser 1998.................................... 3.00 02/25/99 3.00 10,100,000
Texas
Dallas Area Rapid Transit,
8,000 Sales Tax Ser A........................................... 3.05 02/19/99 3.05 8,000,000
6,000 Sales Tax Ser B........................................... 3.20 02/11/99 3.20 6,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (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>
Houston,
$10,000 1996 Ser B................................................ 3.05% 02/26/99 3.05% $10,000,000
8,000 Water & Sewer 1994 Ser A.................................. 3.00 01/20/99 3.00 8,000,000
11,000 Water & Sewer 1994 Ser A.................................. 2.90 02/23/99 2.90 11,000,000
15,000 Water & Sewer 1994 Ser A.................................. 3.00 02/24/99 3.00 15,000,000
8,000 Water & Sewer 1994 Ser A.................................. 2.90 03/04/99 2.90 8,000,000
10,000 Water & Sewer 1994 Ser A.................................. 3.05 03/09/99 3.05 10,000,000
10,200 San Antonio, Electric & Gas Ser 1988A...................... 3.55 02/11/99 3.55 10,200,000
Texas,
10,000 Ser 1997B TRANs........................................... 2.90 04/21/99 2.90 10,000,000
10,000 Ser 1997B TRANs........................................... 2.90 04/28/99 2.90 10,000,000
20,000 Ser 1997B TRANs........................................... 2.90 05/26/99 2.90 20,000,000
20,000 Ser 1997B TRANs........................................... 2.90 05/27/99 2.90 20,000,000
Texas A & M University,
8,000 Ser 1993 B................................................ 2.85 02/18/99 2.85 8,000,000
15,000 Ser 1993 B................................................ 3.00 03/05/99 3.00 15,000,000
12,800 Ser 1993 B................................................ 3.00 03/10/99 3.00 12,800,000
Texas Municipal Power Agency,
9,000 Ser 1991.................................................. 3.05 01/20/99 3.05 9,000,000
10,000 Ser 1991.................................................. 3.00 02/10/99 3.00 10,000,000
Washington
3,000 King County, Sewer Ser A................................... 3.05 02/17/99 3.05 3,000,000
Wisconsin
15,973 Wisconsin, Transportation Notes 1997 Ser A................. 3.00 02/05/99 3.00 15,973,000
Wisconsin Health & Educational Facilities Authority,
15,000 SSM Health Care Ser 1998 B................................ 3.00 02/10/99 3.00 15,000,000
8,000 SSM Health Care Ser 1998 B................................ 3.00 03/04/99 3.00 8,000,000
-----------
TOTAL TAX-EXEMPT COMMERCIAL PAPER
(Amortized Cost $610,773,000)................................................................ 610,773,000
-----------
SHORT-TERM MUNICIPAL NOTES (11.4%)
Idaho
10,000 Idaho, Ser 1998 TANs, dtd 07/01/98......................... 4.50 06/30/99 3.60 10,042,824
Illinois
9,000 Chicago Park District, 1998 Tax Anticipation Warrants, dtd
08/27/98.................................................. 4.30 09/17/99 3.55 9,046,077
Indiana
10,000 Indianapolis Local Improvement Bond Bank, Ser 1998 E Notes,
dtd 12/17/98.............................................. 3.50 07/12/99 2.95 10,028,382
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (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>
Iowa
$45,000 Iowa School Corporations, Warrant Certificates 1998-99 Ser
A (FSA), dtd 06/25/98..................................... 4.50% 06/25/99 3.65% $45,176,918
Kentucky
15,000 Kentucky Asset/Liability Commission, 1998 Ser A TRANs, dtd
07/01/98.................................................. 4.50 06/25/99 3.57 15,064,565
Michigan
7,500 Michigan Municipal Bond Authority, Ser 1998 B-1 Notes, dtd
07/02/98.................................................. 4.50 07/02/99 3.60 7,532,461
New Mexico
New Mexico,
30,000 Ser 1998 TRANs, dtd 07/02/98.............................. 4.25 06/30/99 3.60 30,092,826
20,000 Ser 1998A TRANs, dtd 12/10/98............................. 3.75 06/30/99 2.98 20,074,852
Texas
15,000 Harris County, Ser 1998 TANs, dtd 08/06/98................. 4.25 02/26/99 3.55 15,015,771
20,000 Houston, Ser 1998 TRANs, dtd 07/01/98...................... 4.50 06/30/99 3.55 20,066,659
Wisconsin
44,500 Wisconsin, Operating Notes of 1998, dtd 07/01/98........... 4.50 06/15/99 3.55 44,685,163
-----------
TOTAL SHORT-TERM MUNICIPAL NOTES (Amortized Cost $226,826,498)............................. 226,826,498
--------------
TOTAL INVESTMENTS (Amortized Cost $1,977,314,498) (a)............................... 99.4% 1,977,314,498
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES...................................... 0.6 11,920,091
----- --------------
NET ASSETS.......................................................................... 100.0% $1,989,234,589
===== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
ACTIVE ASSETS TAX-FREE TRUST
PORTFOLIO OF INVESTMENTS December 31, 1998 (unaudited) continued
- ---------------------
AMT Alternative Minimum Tax.
BANs Bond Anticipation Notes.
COPs Certificates of Participation.
NRU-CFC National Rural Utilities - Cooperative Finance Corporation.
TANs Tax Anticipation Notes.
TRANs Tax and Revenue Anticipation Notes.
+ Rate shown is the rate in effect at December 31, 1998.
* Date on which the principal amount can be recovered through
demand.
(a) Cost is the same for federal income tax purposes.
Bond Insurance:
- ---------------
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
12
<PAGE> 13
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(amortized cost $1,977,314,498)............................ $1,977,314,498
Cash........................................................ 115,102
Interest receivable......................................... 12,785,555
Prepaid expenses and other assets........................... 52,824
--------------
TOTAL ASSETS............................................ 1,990,267,979
--------------
LIABILITIES:
Payable for:
Investment management fee............................... 699,291
Plan of distribution fee................................ 180,015
Shares of beneficial interest repurchased............... 18,900
Accrued expenses............................................ 135,184
--------------
TOTAL LIABILITIES....................................... 1,033,390
--------------
NET ASSETS.............................................. $1,989,234,589
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $1,989,224,548
Accumulated undistributed net investment income............. 10,041
--------------
NET ASSETS.............................................. $1,989,234,589
==============
NET ASSET VALUE PER SHARE,
1,989,234,648 shares outstanding
(unlimited shares authorized of $.01 par value)............ $1.00
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended December 31, 1998 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $34,897,846
-----------
EXPENSES
Investment management fee................................... 4,065,433
Plan of distribution fee.................................... 1,040,149
Transfer agent fees and expenses............................ 172,504
Registration fees........................................... 132,001
Custodian fees.............................................. 43,900
Shareholder reports and notices............................. 30,223
Professional fees........................................... 26,451
Trustees' fees and expenses................................. 8,934
Other....................................................... 15,836
-----------
TOTAL EXPENSES.......................................... 5,535,431
Less: expense offset........................................ (43,898)
-----------
NET EXPENSES............................................ 5,491,533
-----------
NET INVESTMENT INCOME................................... 29,406,313
NET REALIZED GAIN....................................... 27,500
-----------
NET INCREASE................................................ $29,433,813
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 15
ACTIVE ASSETS TAX-FREE TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1998
<CAPTION>
- ---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.............................. $ 29,406,313 $ 56,736,920
Net realized gain.................................. 27,500 5,223
-------------- --------------
NET INCREASE................................... 29,433,813 56,742,143
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................. (29,406,106) (56,742,296)
Net realized gain.................................. (26,181) --
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS.............. (29,432,287) (56,742,296)
-------------- --------------
Net increase from transactions in shares of
beneficial interest............................... 119,842,219 235,864,187
-------------- --------------
NET INCREASE................................... 119,843,745 235,864,034
NET ASSETS:
Beginning of period................................ 1,869,390,844 1,633,526,810
-------------- --------------
END OF PERIOD
(Including undistributed net investment income
of
$10,041 and $9,834, respectively).............. $1,989,234,589 $1,869,390,844
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE> 16
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998 (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 Morgan Stanley Dean Witter
Advisors 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
16
<PAGE> 17
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998 (unaudited) continued
portion of 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
Morgan Stanley 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 sales representatives of the
Dean Witter Reynolds Inc., an affiliate of the Investment Manager and
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. Expenses incurred by the Distributor pursuant to the
Plan in any fiscal year will not be reimbursed by the Trust through payments
accrued in any subsequent
17
<PAGE> 18
ACTIVE ASSETS TAX-FREE TRUST
NOTES TO FINANCIAL STATEMENTS December 31, 1998 (unaudited) continued
fiscal year. For the six months ended December 31, 1998, 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, 1998 aggregated $2,109,406,720 and
$2,144,878,500, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Trust's transfer agent. At December 31, 1998, the Trust had
transfer agent fees and expenses payable of approximately $5,200.
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, 1998,
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,016. At December 31, 1998, the Trust had an accrued pension liability of
$51,037 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1998
----------------- --------------
(unaudited)
<S> <C> <C>
Shares sold................................................. 3,351,922,022 6,715,086,000
Shares issued in reinvestment of dividends and
distributions.............................................. 29,432,287 56,742,296
-------------- --------------
3,381,354,309 6,771,828,296
Shares repurchased.......................................... (3,261,512,090) (6,535,964,109)
-------------- --------------
Net increase in shares outstanding.......................... 119,842,219 235,864,187
============== ==============
</TABLE>
6. FEDERAL INCOME TAX STATUS
At June 30, 1998, the Trust had a net capital loss carryover of approximately
$1,300 which will be available through June 30, 2006 to offset future capital
gains to the extent provided by regulations.
18
<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, 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- -------
Net income from investment operations....................... 0.014 0.031 0.030 0.031 0.030 0.020
Less dividends from net investment income................... (0.014) (0.031) (0.030) (0.031) (0.030) (0.020)
------- ------- ------- ------- ------- -------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
TOTAL RETURN................................................ 1.44%(1) 3.11% 3.05% 3.12% 3.09% 2.01%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.53%(2) 0.54% 0.55% 0.55% 0.56% 0.56%
Net investment income....................................... 2.83%(2) 3.05% 2.98% 3.08% 3.05% 1.98%
SUPPLEMENTAL DATA:
Net assets, end of period, in millions...................... $1,989 $1,869 $1,634 $1,542 $1,499 $1,416
</TABLE>
- ---------------------
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
19
<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
- ---------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ---------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- ---------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
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, 1998