<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE TWO WORLD TRADE CENTER,
INCOME FUND NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS DECEMBER 31, 1998
DEAR SHAREHOLDER:
We are pleased to present the annual report of Morgan Stanley Dean Witter
California Tax-Free Income Fund for the year ended December 31, 1998.
Since our last report six months ago, global financial turmoil, including the
Russian currency crisis, continued to affect the securities markets. The
resulting flight-to-quality bond rally pushed U.S. Treasury bond yields to
30-year lows. Municipal bond yields declined but lagged the downward trend of
Treasury yields.
The deflationary impact of the international financial crisis began to temper
U.S. economic growth prior to the summer's tumultuous market activity. Lower
commodity prices, cheaper imports and improved
productivity offset the potential inflationary impact of strong domestic
employment. With inflation held in check, the Federal Reserve Board
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BOND YIELDS 1994-1998
30-Year
Insured 30-Year U.S. Insured Municipal
Treasury
Municipal Yields Yields on a
Percentage of U.S. Treasury
Yields Yields
<S> <C> <C> <C>
12/31/1993 5.40% 6.34% 85.17%
1/31/1994 5.40% 6.24% 86.54%
2/28/1994 5.80% 6.66% 87.09%
3/31/1994 6.40% 7.09% 90.27%
4/29/1994 6.35% 7.32% 86.75%
5/31/1994 6.25% 7.43% 84.12%
6/30/1994 6.50% 7.61% 85.41%
7/29/1994 6.25% 7.39% 84.57%
8/31/1994 6.30% 7.45% 84.56%
9/30/1994 6.55% 7.81% 83.87%
10/31/1994 6.75% 7.96% 84.80%
11/30/1994 7.00% 8.00% 87.50%
12/30/1994 6.75% 7.88% 85.66%
1/31/1995 6.40% 7.70% 83.12%
2/28/1995 6.15% 7.44% 82.66%
3/31/1995 6.15% 7.43% 82.77%
4/28/1995 6.20% 7.34% 84.47%
5/31/1995 5.80% 6.66% 87.09%
6/30/1995 6.10% 6.62% 92.15%
7/31/1995 6.10% 6.86% 88.92%
8/31/1995 6.00% 6.66% 90.09%
9/29/1995 5.95% 6.48% 91.82%
10/31/1995 5.75% 6.33% 90.84%
11/30/1995 5.50% 6.14% 89.58%
12/29/1995 5.35% 5.94% 90.07%
1/31/1996 5.40% 6.03% 89.55%
2/29/1996 5.60% 6.46% 86.69%
3/29/1996 5.85% 6.66% 87.84%
4/30/1996 5.95% 6.89% 86.36%
5/31/1996 6.05% 6.99% 86.55%
6/28/1996 5.90% 6.89% 85.63%
7/31/1996 5.85% 6.97% 83.93%
8/30/1996 5.90% 7.11% 82.98%
9/30/1996 5.70% 6.93% 82.25%
10/31/1996 5.65% 6.64% 85.09%
11/29/1996 5.50% 6.35% 86.61%
12/31/1996 5.60% 6.63% 84.46%
1/31/1997 5.70% 6.79% 83.95%
2/28/1997 5.65% 6.80% 83.09%
3/31/1997 5.90% 7.10% 83.10%
4/30/1997 5.75% 6.94% 82.85%
5/30/1997 5.65% 6.91% 81.77%
6/30/1997 5.60% 6.78% 82.60%
7/30/1997 5.30% 6.30% 84.13%
8/31/1997 5.50% 6.61% 83.21%
9/30/1997 5.40% 6.40% 84.38%
10/31/1997 5.35% 6.15% 86.99%
11/30/1997 5.30% 6.05% 87.60%
12/31/1997 5.15% 5.92% 86.99%
1/31/1998 5.15% 5.80% 88.79%
2/28/1998 5.20% 5.92% 87.84%
3/31/1998 5.25% 5.93% 88.53%
4/30/1998 5.35% 5.95% 89.92%
5/29/1998 5.20% 5.80% 89.66%
6/30/1998 5.20% 5.65% 92.04%
7/31/1998 5.18% 5.71% 90.72%
8/31/1998 5.03% 5.27% 95.45%
9/30/1998 4.95% 5.00% 99.00%
10/31/1998 5.05% 5.16% 97.87%
11/30/1998 5.00% 5.06% 98.81%
12/31/1998 5.05% 5.10% 99.02%
Source: Municipal Market
Data
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
LETTER TO THE SHAREHOLDERS DECEMBER 31, 1998, CONTINUED
provided liquidity to the markets by lowering short-term interest rates. Between
the end of September and the middle of November, the Federal Reserve Open Market
Committee cut the federal funds rate 75 basis points from 5.50 percent to 4.75
percent in three separate moves.
MUNICIPAL MARKET CONDITIONS
At the end of December the long-term insured municipal bond index yield stood at
5.05 percent. This Index declined only 10 basis points from 5.15 percent over
the last 12 months. In contrast, the 30-year U.S. Treasury yield fell 80 basis
points during the same period.
As municipals lagged the rally in Treasuries, the ratio of municipal yields to
Treasury yields rose sharply to 99 percent. A rising ratio means that the
attractiveness of municipals relative to Treasuries has improved. The rise in
this ratio is similar to the jump witnessed in 1986 when a radical legislative
tax-reform proposal threatened the favorable tax advantage of municipal bonds.
The overall decline in interest rates led to a substantial increase in new money
municipal financing and stimulated the refunding of older, high cost debt. Total
underwriting of $284 billion for 1998 approached the record set in 1993. Half
the underwriting volume was enhanced with bond insurance. Refundings represented
29 percent of total new issuance. California new issue underwriting accounted
for 12 percent of national volume.
PERFORMANCE
For the 12-month period ended December 31, 1998, Morgan Stanley Dean Witter
California Tax-Free Income Fund Class A, B, C and D shares produced total
returns of 5.50 percent, 5.63 percent, 5.22 percent and 5.77 percent,
respectively. Performance of the Fund's shares varies, because of differing
expenses. Over the same period, the Lehman Brothers Municipal Bond Index posted
a total return of 6.48 percent, while the Lipper Analytical Services California
Municipal Debt Funds Index registered a total return of 6.15 percent. The Fund's
net assets exceeded $910 million.
PORTFOLIO STRUCTURE
The Fund remained fully invested in long-term municipal bonds during the year.
Investments were diversified among 12 long-term sectors and 68 credits. As
illustrated in the accompanying chart of bond calls, weighted average call
protection was 8 years.
2
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
LETTER TO THE SHAREHOLDERS DECEMBER 31, 1998, CONTINUED
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LONG-TERM SECTORS AS OF DECEMBER 31, 1998
(% OF NET ASSETS)
<S> <C>
Transportation 21%
Water & Sewer 19%
Refunded 10%
General Obligation 9%
Electric 9%
Tax Allocation 7%
Hospital 6%
Mortgage 5%
Public Facilities 5%
All Other 9%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
CREDIT RATINGS AS OF DECEMBER 31, 1998
(% OF TOTAL LONG-TERM PORTFOLIO)
Aaa or AAA 66%
Aa or AA 15%
A or A 8%
Baa or BBB 11%
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC.
OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CALL STRUCTURE AS OF DECEMBER 31, 1998
(% OF TOTAL LONG-TERM PORTFOLIO)
PERCENT CALLABLE
WEIGHTED AVERAGE
CALL PROTECTION: 8 YEARS
<S> <C>
1999 2%
2000 1%
2001 7%
2002 9%
2003 13%
2004 4%
2005 16%
2006 6%
2007 6%
2008 23%
2009+ 13%
YEARS BONDS CALLABLE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
</TABLE>
3
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
LETTER TO THE SHAREHOLDERS DECEMBER 31, 1998, CONTINUED
At the time of issuance, municipal bonds generally have 10 years of protection
from the municipality's option to call bonds for redemption. Interest rates have
declined since the Fund's inception and we anticipate that most municipal
issuers will use their optional call provisions to refinance portfolio holdings
at lower yields. In fact, the bonds in the refunded category have been
refinanced and the call dates announced.
The average maturity of the portfolio was 19 years. Average duration (a measure
of sensitivity to interest rate changes) was 7.9 years. High grade credit
quality was maintained with over 80 percent of long-term holdings rated double
or triple "A."
LOOKING AHEAD
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 reflation 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 municipal
relationship to Treasuries more favorable than it has been in the last 10 years,
the outlook for municipal bonds is positive.
We appreciate your ongoing support of Morgan Stanley Dean Witter California
Tax-Free Income Fund and look forward to continuing to serve your investment
needs.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
4
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE
INCOME FUND
FUND PERFORMANCE DECEMBER 31, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GROWTH OF $10,000 -- CLASS B
($ in Thousands)
FUND LEHMAN(4) LIPPER(5)
<S> <C> <C> <C>
December 31,1988 $10,000 $10,000 $10,000
December 31,1989 $10,954 $11,079 $10,976
December 31,1990 $11,577 $11,887 $11,693
December 31,1991 $12,755 $13,330 $13,001
December 31,1992 $13,754 $14,505 $14,106
December 31,1993 $15,263 $16,287 $15,895
December 31,1994 $14,352 $15,445 $14,747
December 31,1995 $16,500 $18,141 $17,461
December 31,1996 $17,015 $18,945 $18,154
December 31,1997 $18,294 $20,686 $19,855
December 31,1998 $19,324(3) $21,893 $21,074
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. PERFORMANCE FOR CLASS
A, CLASS C, AND CLASS D SHARES WILL VARY FROM THE PERFORMANCE OF CLASS B
SHARES SHOWN ABOVE DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES* CLASS A SHARES+
- ------------------------------------------------ ------------------------------------------------
PERIOD ENDED 12/31/98 PERIOD ENDED 12/31/98
- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year 5.63%(1) 0.67%(2) 1 Year 5.50%(1) 1.02%(2)
5 Year 4.83%(1) 4.51%(2) Since Inception (7/28/97) 5.87%(1) 2.69%(2)
10 Year 6.81%(1) 6.81%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES++ CLASS D SHARES#
- ------------------------------------------------- -------------------------------------------------
PERIOD ENDED 12/31/98 PERIOD ENDED 12/31/98
- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 Year 5.22%(1) 4.23%(2) 1 Year 5.77%(1)
Since Inception (7/28/97) 5.66%(1) 5.66%(2) Since Inception (7/28/97) 6.32%(1)
</TABLE>
- ------------------------
(1) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
(3) Closing value assuming a complete redemption on December 31, 1998.
(4) The Lehman Brothers Municipal Bond Index tracks the performance of municipal
bonds with maturities of 2 years or more and a minimum credit rating of Baa
or BBB, as measured by Moody's Investors Service, Inc. or Standard & Poor's
Corp. The Index does not include any expenses, fees, or charges. The Index
is unmanaged and should not be considered an investment.
(5) The Lipper California Municipal Debt Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper California Municipal Debt Funds objective. The Index, which is
adjusted for capital gains distributions and income dividends, is unmanaged
and should be considered an investment. There are currently 30 funds
represented in this index.
* The maximum CDSC for Class B is 5.0%. The CDSC declines to 0% after six
years.
+ The maximum front-end sales charge for Class A is 4.25%.
++ The maximum CDSC for Class C shares is 1% for shares redeemed within one
year of purchase.
# Class D shares have no sales charge.
5
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (96.5%)
GENERAL OBLIGATION (8.6%)
California,
$ 5,000 Ser 1990..................................................................... 7.00 % 08/01/07 $ 6,007,150
5,000 Ser 1990..................................................................... 7.00 08/01/08 6,085,250
2,000 Ser AT....................................................................... 9.50 02/01/10 2,892,300
2,400 Veterans Ser BH (AMT) (FSA).................................................. 5.40 12/01/16 2,463,648
10,000 Various Purpose Dtd 04/01/93 (FSA)........................................... 5.50 04/01/19 10,395,200
13,000 Ser 1996 (AMBAC)............................................................. 5.25 06/01/21 13,280,280
3,000 Veterans Ser BD, BE & BF (AMT) (AMBAC)....................................... 6.375 02/01/27 3,036,150
10,000 Refg Dtd 10/01/98 (MBIA)..................................................... 4.50 10/01/28 9,200,400
10,000 Los Angeles Unified School District, 1997 Ser B (FGIC)......................... 5.00 07/01/23 9,930,200
Santa Margarita/Dana Point Authority,
3,000 Impr Dists #2, 2A, 3 & 4 1997 Ser A (AMBAC).................................. 5.125 08/01/18 3,024,030
4,000 Impr Dists #3, 3A, 4 & 4A 1994 Ser B Refg (MBIA)............................. 5.75 08/01/20 4,246,800
8,500 Puerto Rico Public Improvement Ser 1999........................................ 4.75 07/01/23 8,086,560
------------
- --------
78,647,968
75,900
------------
- --------
EDUCATIONAL FACILITIES REVENUE (3.8%)
California Educational Facilities Authority,
6,000 University of San Diego Ser 1998 (AMBAC)..................................... 5.00 10/01/22 5,958,300
2,000 University of Southern California 1997 Ser A................................. 5.70 10/01/15 2,188,880
4,000 University of Southern California 1997 Ser C................................. 5.125 10/01/28 4,017,760
4,000 California Public Works Board, University of California 1997 Ser C (AMBAC)..... 5.125 09/01/22 4,020,960
California Statewide Communities Development Authority,
3,400 Gemological Institute of America COPs (Connie Lee)........................... 6.00 05/01/20 3,693,964
4,100 Gemological Institute of America COPs (Connie Lee)........................... 6.00 05/01/25 4,478,143
10,000 University of California, Multiple Purpose Refg Ser 1993 C (AMBAC)............. 5.125 09/01/18 10,123,700
------------
- --------
34,481,707
33,500
------------
- --------
ELECTRIC REVENUE (9.1%)
13,000 Los Angeles Department of Water & Power, Second Issue of 1993
(Secondary AMBAC)............................................................ 5.40 11/15/13 13,784,420
Northern California Power Agency,
5,000 Hydro #1 1993 Refg Ser A (MBIA).............................................. 5.50 07/01/16 5,211,850
5,000 Hydro #1 Refg 1998 Ser A (MBIA).............................................. 5.00 07/01/28 4,961,850
Sacramento Municipal Utility District,
5,700 Refg 1994 Ser H (MBIA)....................................................... 5.75 01/01/11 6,241,500
26,000 Refg 1992 Ser A (FGIC)....................................................... 6.30 08/15/18 28,386,280
Southern California Public Power Authority,
7,000 Mead-Adelanto 1994 Ser A (AMBAC)............................................. 5.15 07/01/15 7,342,160
1,750 Transmission Refg Ser 1988 (FGIC)............................................ 0.00 07/01/06 1,281,298
5,000 Turlock Irrigation District, Refg 1998 Ser A (MBIA)............................ 5.00 01/01/26 4,963,350
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Puerto Rico Electric Power Authority,
$ 9,000 Power Ser O.................................................................. 5.00 % 07/01/12 $ 9,017,370
2,000 Power Ser X.................................................................. 5.50 07/01/25 2,059,380
------------
- --------
83,249,458
79,450
------------
- --------
HOSPITAL REVENUE (5.7%)
10,000 Antelope Valley Healthcare District, Refg Ser 1997 A (FSA)..................... 5.20 01/01/20 10,176,100
California Health Facilities Financing Authority,
4,000 Little Company of Mary Hospital Ser 1998 A (AMBAC)........................... 4.50 10/01/28 3,680,160
5,000 Stanford Health Care 1998 Ser A (FSA)........................................ 5.00 11/15/28 4,946,150
3,500 Sutter/CHS Ser 1996 A (MBIA)................................................. 5.875 08/15/16 3,815,490
Duarte,
3,000 City of Hope National Medical Center Ser 1993 COPs........................... 5.50 04/01/01 3,109,440
4,000 City of Hope National Medical Center Ser 1993 COPs........................... 6.25 04/01/23 4,227,880
7,500 Madera County, Valley Children's Hospital Ser 1995 COPs (MBIA)................. 6.50 03/15/15 9,016,800
Rancho Mirage Joint Powers Financing Authority,
3,000 Eisenhower Medical Center Ser 1997 A COPs (MBIA)............................. 5.25 07/01/12 3,164,790
4,000 Eisenhower Medical Center Ser 1997 A COPs (MBIA)............................. 5.25 07/01/17 4,112,200
5,000 University of California, UCLA Medical Center Refg Ser 1994 (MBIA)............. 5.50 12/01/14 5,345,200
------------
- --------
51,594,210
49,000
------------
- --------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (2.9%)
California Pollution Control Financing Authority,
5,000 Atlantic Richfield Co Ser 1996 A............................................. 5.00 04/01/08 5,297,750
3,000 San Diego Gas and Electric Co 1996 Ser A..................................... 5.90 06/01/14 3,369,030
10,000 Southern California Edison Co 1992 Ser B (AMT)............................... 6.40 12/01/24 10,934,400
5,000 Waste Management Inc 1991 Ser A (AMT)........................................ 7.15 02/01/11 5,353,500
1,400 Intermodal Container Transfer Facility Joint Powers Authority, Southern Pacific
Transportation Co 1989 Ser A................................................. 7.70 11/01/14 1,469,566
------------
- --------
26,424,246
24,400
------------
- --------
MORTGAGE REVENUE - SINGLE FAMILY (5.2%)
California Housing Finance Agency,
9,000 Home 1995 Ser J (AMBAC)...................................................... 6.00 08/01/17 9,595,619
4,210 Home 1989 Ser A.............................................................. 7.75 08/01/17 4,348,130
6,450 Home 1995 Ser M (AMT) (MBIA)................................................. 6.15 08/01/27 6,869,573
8,215 Home 1995 Ser K (AMT) (AMBAC)................................................ 6.25 08/01/27 8,782,246
3,805 Home 1991 Ser G (AMT)........................................................ 7.05 08/01/27 4,015,835
7,000 Purchase 1995 Ser B-2 (AMT).................................................. 6.30 08/01/24 7,446,040
California Rural Home Financing Authority,
2,095 1997 Ser D-CL 5 (AMT)........................................................ 6.70 05/01/29 2,402,169
2,000 GNMA-Backed 1998 Ser A (AMT)................................................. 5.75 12/01/29 2,188,360
Puerto Rico Housing Finance Corporation,
625 Portfolio One GNMA-Backed Ser B.............................................. 7.65 10/15/22 659,356
665 Portfolio One GNMA-Backed Ser C.............................................. 6.85 10/15/23 708,970
------------
- --------
47,016,298
44,065
------------
- --------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUBLIC FACILITIES REVENUE (4.6%)
Anaheim Public Financing Authority,
$ 4,000 Sub 1997 Ser C (FSA)......................................................... 6.00 % 09/01/16 $ 4,589,400
20,000 Sub 1997 Ser C (FSA)......................................................... 0.00 09/01/26 4,794,000
10,000 Beverly Hills Public Financing Authority, 1993 Refg Ser A (MBIA)............... 5.65 06/01/15 10,525,400
5,000 California Public Works Board, Department of Corrections 1998 Ser B (MBIA)..... 5.00 09/01/21 4,966,150
9,500 Los Angeles County, Public Properties Refg of 1987 COPs........................ 0.00 04/01/04 6,856,055
10,000 San Jose Financing Authority, Convention Center Refg 1993 Ser C................ 6.375 09/01/13 10,643,100
------------
- --------
42,374,105
58,500
------------
- --------
TAX ALLOCATION REVENUE (6.6%)
Garden Grove Community Redevelopment Agency,
5,000 Refg Issue of 1993........................................................... 5.70 10/01/13 5,224,200
6,000 Refg Issue of 1993........................................................... 5.875 10/01/23 6,279,600
25,500 Long Beach Financing Authority, Ser 1992 (AMBAC)............................... 6.00 11/01/17 29,236,260
8,905 Pleasanton Joint Powers Financing Authority, Reassessment 1993 Ser A........... 6.15 09/02/12 9,579,554
10,000 San Jose Redevelopment Agency, Ser 1998 (AMBAC) (WI)........................... 4.75 08/01/23 9,593,400
------------
- --------
59,913,014
55,405
------------
- --------
TRANSPORTATION FACILITIES REVENUE (21.4%)
15,000 Foothill/Eastern Transportation Corridor Agency, Toll Road Sr Lien Ser 1995 A.. 6.00 01/01/34 16,030,050
Long Beach,
5,000 Harbor Refg Ser 1998 A (AMT) (FGIC).......................................... 6.00 05/15/17 5,671,350
9,000 Harbor Refg Ser 1998 A (AMT) (FGIC).......................................... 6.00 05/15/18 10,199,610
3,000 Harbor Refg Ser 1998 A (AMT) (FGIC).......................................... 6.00 05/15/19 3,399,480
20,000 Harbor Ser 1995 (AMT) (MBIA)................................................. 5.25 05/15/25 20,119,800
10,000 Los Angeles, Department of Airports Refg 1985 Ser A (FGIC)..................... 5.50 05/15/09 10,844,900
20,000 Los Angeles County Transportation Commission, Sales Tax Ser 1991 B............. 6.50 07/01/13 21,612,999
5,000 Orange County, Airport Refg Ser 1997 (MBIA) (AMT).............................. 5.50 07/01/11 5,430,050
20,000 San Diego County Regional Transportation Commission, Sales Tax 1994 Ser A
(FGIC)....................................................................... 4.75 04/01/08 20,936,200
San Francisco Airports Commission,
5,000 San Francisco Int'l Airport Second Ser Refg Issue 4 (MBIA)................... 6.00 05/01/20 5,464,100
13,970 San Francisco Int'l Airport Second Ser Issue 15 B (MBIA)..................... 4.50 05/01/25 12,914,147
San Francisco Bay Area Rapid Transit District,
5,000 Sales Tax Ser 1995 (FGIC).................................................... 5.50 07/01/15 5,268,150
2,305 Sales Tax Ser 1995 (FGIC).................................................... 5.50 07/01/20 2,405,636
10,000 Sales Tax Ser 1998 (AMBAC)................................................... 4.75 07/01/23 9,594,600
San Joaquin Hills Transportation Corridor Agency,
6,000 Toll Road Refg Ser 1997 A (MBIA)............................................. 0.00 01/15/15 2,730,180
10,000 Toll Road Refg Ser 1997 A (MBIA)............................................. 0.00 01/15/26 2,508,800
13,450 Toll Road Refg Ser 1997 A (MBIA)............................................. 5.25 01/15/30 13,723,170
10,000 Toll Road Refg Ser 1997 A (MBIA)............................................. 0.00 01/15/31 1,942,700
10,000 Toll Road Senior Lien........................................................ 5.00 01/01/33 9,575,100
15,000 Puerto Rico Highway & Transportation Authority, Ser 1998 A..................... 4.75 07/01/38 14,208,750
------------
- --------
194,579,772
207,725
------------
- --------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WATER & SEWER REVENUE (18.8%)
California Department of Water Resources,
$ 6,870 Central Valley Ser J-2....................................................... 6.125 % 12/01/13 $ 7,312,703
10,000 Central Valley Ser U......................................................... 5.00 12/01/29 9,890,900
8,000 Castaic Lake Water Agency, Refg Ser 1994 A COPs (MBIA)......................... 6.00 08/01/18 8,840,000
6,000 Central Coast Water Authority, Refg Ser 1996 A (AMBAC)......................... 5.00 10/01/16 6,074,400
10,000 Contra Costa Water District, Ser G (MBIA)...................................... 5.50 10/01/19 10,474,100
East Bay Municipal Utility District,
11,000 Water Refg Ser 1992.......................................................... 6.00 06/01/20 11,759,990
15,000 Water Ser 1998 (MBIA)........................................................ 4.75 06/01/34 14,284,350
10,000 Eastern Municipal Water District, Water & Sewer Refg Ser 1998 A COPs (FGIC).... 4.75 07/01/23 9,594,600
15,000 Los Angeles County Sanitation Districts Financing Authority, 1993 Ser A........ 5.375 10/01/13 15,858,449
5,745 Los Angeles, Wastewater Ser 1990............................................... 7.10 06/01/18 5,932,632
15,000 Metropolitan Water District of Southern California, Waterworks 1997 Ser A...... 5.00 07/01/26 14,867,100
San Diego,
10,000 Sewer 1993 Ser A............................................................. 5.25 05/15/20 10,161,600
10,000 Water 1998 (FGIC)............................................................ 4.75 08/01/28 9,556,200
San Diego County Water Authority,
1,500 Refg Ser 1997 A.............................................................. 4.75 05/01/18 1,467,780
3,650 Refg Ser 1997 A.............................................................. 4.75 05/01/20 3,516,994
10,000 San Diego Public Facilities Financing Authority, Sewer Ser 1995 (FGIC)......... 5.00 05/15/25 9,898,200
San Francisco Public Utilities Commission,
5,750 Water 1992 Refg Ser A........................................................ 6.00 11/01/15 6,118,863
10,870 Water 1996 Ser A............................................................. 5.00 11/01/21 10,767,061
5,000 Stockton, Wastewater, 1998 Ser A COPs (MBIA)................................... 5.00 09/01/23 4,964,600
------------
- --------
171,340,522
169,385
------------
- --------
OTHER REVENUE (0.2%)
1,820 Orange County Community Facilities District #86-2, Ranchc Santa Margarita Ser A
of 1990...................................................................... 7.65 08/15/17 1,909,071
------------
- --------
REFUNDED (9.6%)
20,000 Desert Hospital District, Desert Hospital Corp Ser 1992 COPs (FSA)............. 6.392 07/28/02+ 22,022,800
Los Angeles Convention & Exhibition Center Authority,
10,000 Ser 1985 COPs................................................................ 9.00 12/01/05+ 13,073,700
14,000 Ser 1985 COPs**.............................................................. 9.00 12/01/05+ 18,303,180
5,400 Los Angeles County, 1991 Master Refg COPs...................................... 6.708 05/01/01+ 5,853,330
8,000 San Diego County Water Authority, Ser 1991- B COPs (MBIA)...................... 6.30 04/27/06+ 9,194,400
Southern California Public Power Authority,
5,000 Palo Verde Ser A (AMBAC) (ETM)............................................... 5.00 07/01/15 5,021,850
5,250 Transmission Refg Ser 1988 A (FGIC) (ETM).................................... 0.00 07/01/06 3,863,738
9,000 Puerto Rico Electric Power Authority Power Ser X............................... 6.125 07/01/05+ 10,252,170
------------
- --------
87,585,168
76,650
------------
- --------
TOTAL CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS
(IDENTIFIED COST $813,513,630).........................................................................
875,800 879,115,539
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1998, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM CALIFORNIA TAX EXEMPT MUNICIPAL OBLIGATIONS (3.6%)
$ 9,700 California Economic Development Financing Authority, California Independent
System Operator Corp 1998 Ser A (Demand 01/04/99)............................ 5.00* % 04/01/08 $ 9,700,000
4,000 California Health Facilities Finacing Authority, Adventist Health 1998 Ser
(Demand 01/04/99)............................................................ 5.00* 09/01/28 4,000,000
2,500 California Statewide Communities Development Authority, John Muir/ Mt Diablo
Health Ser 1997 COPs (AMBAC) (Demand 01/04/99)............................... 4.80* 08/15/27 2,500,000
16,850 Newport Beach, Hoag Memorial Hospital/Presbyterian Ser 1992 (Demand
------- 01/04/99).................................................................... 5.10* 10/01/22 16,850,000
------------
TOTAL SHORT-TERM CALIFORNIA TAX-EXEMPT MUNICIPAL OBLIGATIONS
(IDENTIFIED COST $33,050,000)..........................................................................
33,050 33,050,000
- -------- ------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
$908,850 TOTAL INVESTMENTS
(IDENTIFIED COST $846,563,630) (A)......................................................... 100.1 % 912,165,539
- ---------
- ---------
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................................. (0.1) (1,290,351)
------ -------------
NET ASSETS................................................................................. 100.0 % $ 910,875,188
------ -------------
------ -------------
</TABLE>
- ---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
WI Security purchased on a "when-issued" basis.
+ Prerefunded to call date shown.
* Current coupon of variable rate demand obligation.
** A portion of this security is segregated in connection with the
purchase of a "when-issued" security.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$66,467,180 and the aggregate gross unrealized depreciation is
$865,271, resulting in net unrealized appreciation of $65,601,909.
BOND INSURANCE:
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $846,563,630).............................................................. $912,165,539
Cash.......................................................................................... 555,472
Receivable for:
Investments sold.......................................................................... 14,601,645
Interest.................................................................................. 12,830,104
Shares of beneficial interest sold........................................................ 436,191
Prepaid expenses and other assets............................................................. 19,353
------------
TOTAL ASSETS............................................................................. 940,608,304
------------
LIABILITIES:
Payable for:
Investments purchased..................................................................... 19,526,164
Dividends and distributions to shareholders............................................... 7,924,724
Shares of beneficial interest repurchased................................................. 917,674
Plan of distribution fee.................................................................. 583,984
Investment management fee................................................................. 417,174
Accrued expenses and other payables........................................................... 363,396
------------
TOTAL LIABILITIES........................................................................ 29,733,116
------------
NET ASSETS............................................................................... $910,875,188
------------
------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $844,068,216
Net unrealized appreciation................................................................... 65,601,909
Accumulated undistributed net realized gain................................................... 1,205,063
------------
NET ASSETS............................................................................... $910,875,188
------------
------------
CLASS A SHARES:
Net Assets.................................................................................... $3,787,521
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 297,006
NET ASSET VALUE PER SHARE................................................................ $12.75
------------
------------
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)........................................ $13.32
------------
------------
CLASS B SHARES:
Net Assets.................................................................................... $896,685,119
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 69,982,582
NET ASSET VALUE PER SHARE................................................................ $12.81
------------
------------
CLASS C SHARES:
Net Assets.................................................................................... $9,848,975
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 768,977
NET ASSET VALUE PER SHARE................................................................ $12.81
------------
------------
CLASS D SHARES:
Net Assets.................................................................................... $553,573
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 43,311
NET ASSET VALUE PER SHARE................................................................ $12.78
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME................................................................................ $49,290,397
-----------
EXPENSES
Investment management fee...................................................................... 4,871,646
Plan of distribution fee (Class A shares)...................................................... 6,337
Plan of distribution fee (Class B shares)...................................................... 6,763,732
Plan of distribution fee (Class C shares)...................................................... 53,763
Transfer agent fees and expenses............................................................... 231,855
Shareholder reports and notices................................................................ 62,131
Professional fees.............................................................................. 53,728
Custodian fees................................................................................. 36,260
Trustees' fees and expenses.................................................................... 18,799
Registration fees.............................................................................. 7,265
Other.......................................................................................... 32,060
-----------
TOTAL EXPENSES............................................................................ 12,137,576
Less: expense offset........................................................................... (36,170)
Less: plan of distribution fee rebate (Class B shares)......................................... (3,465,883)
-----------
NET EXPENSES.............................................................................. 8,635,523
-----------
NET INVESTMENT INCOME..................................................................... 40,654,874
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain.............................................................................. 17,556,128
Net change in unrealized appreciation.......................................................... (8,093,340)
-----------
NET GAIN.................................................................................. 9,462,788
-----------
NET INCREASE................................................................................... $50,117,662
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................................................................... $ 40,654,874 $ 41,943,761
Net realized gain................................................................................... 17,556,128 917,033
Net change in unrealized appreciation............................................................... (8,093,340) 23,634,172
-------------- --------------
NET INCREASE................................................................................... 50,117,662 66,494,966
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares.................................................................................. (113,998) (2,074)
Class B shares.................................................................................. (40,239,955) (41,903,238)
Class C shares.................................................................................. (287,533) (38,101)
Class D shares.................................................................................. (13,388) (348)
Net realized gain
Class A shares.................................................................................. (69,921) --
Class B shares.................................................................................. (16,702,217) --
Class C shares.................................................................................. (181,009) --
Class D shares.................................................................................. (10,153) --
-------------- --------------
TOTAL DIVIDENDS AND DISTRIBUTIONS.............................................................. (57,618,174) (41,943,761)
-------------- --------------
Net decrease from transactions in shares of beneficial interest..................................... (928,349) (80,949,361)
-------------- --------------
NET DECREASE................................................................................... (8,428,861) (56,398,156)
NET ASSETS:
Beginning of period................................................................................. 919,304,049 975,702,205
-------------- --------------
END OF PERIOD.................................................................................. $910,875,188 $919,304,049
-------------- --------------
-------------- --------------
</TABLE>
- ---------------------
* Class A, Class C and Class D shares were issued July 28, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter California Tax-Free Income Fund (the "Fund"),
formerly Dean Witter California Tax-Free Income Fund, is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
provide a high level of current income which is exempt from federal and
California income tax, consistent with the preservation of capital. The Fund was
organized as a Massachusetts business trust on April 9, 1984 and commenced
operations on July 11, 1984. On July 28, 1997, the Fund commenced offering three
additional classes of shares, with the then current shares designated as Class B
shares.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
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 for the Fund by
an outside independent pricing service approved by the Trustees. The pricing
service has informed the Fund that in valuing the Fund's portfolio securities,
it uses both a computerized matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Fund's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
14
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Fund amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the record date. The amount of dividends
and distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Manager"), formerly Dean Witter InterCapital
Inc., the Fund pays the Investment Manager a management fee, accrued daily and
payable monthly, by applying the following annual rates to the Fund's net assets
determined as of the close of each business day: 0.55% to the portion of daily
net assets not exceeding $500 million; 0.525% to the portion of daily net assets
exceeding $500 million but not exceeding $750 million; 0.50% to the portion of
daily net assets exceeding
15
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
$750 million but not exceeding $1 billion; 0.475% to the portion of daily net
assets exceeding $1 billion but not exceeding $1.25 billion; and 0.45% to the
portion of daily net assets in excess of $1.25 billion.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has
adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 0.75% of
the lesser of: (a) the average daily aggregate gross sales of the Class B shares
since the inception of the Fund (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B; and (iii) Class C -- up to 0.75% of the average daily net
assets of Class C. In the case of Class A shares, amounts paid under the Plan
are paid to the Distributor for services provided. In the case of Class B and
Class C shares, amounts paid under the Plan are paid to the Distributor for (1)
services provided and the expenses borne by it and others in the distribution of
the shares of these Classes, including the payment of commissions for sales of
these Classes and incentive compensation to, and expenses of, the Morgan Stanley
Dean Witter Financial Advisors and others who engage in or support distribution
of the shares or who service shareholder accounts, including overhead and
telephone expenses;(2) printing and distribution of prospectuses and reports
used in connection with the offering of these shares to other than current
shareholders; and (3) preparation, printing and distribution of sales literature
and advertising materials. In addition, the Distributor may utilize fees paid
pursuant to the Plan, in the case of Class B shares, to compensate Dean Witter
Reynolds Inc.
16
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
("DWR"), an affiliate of the Investment Manager and Distributor, and other
selected broker-dealers for their opportunity costs in advancing such amounts,
which compensation would be in the form of a carrying charge on any unreimbursed
expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that there were no excess expenses as of
December 31, 1998.
For the year ended December 31, 1998, the Distributor rebated a portion of the
distribution fees paid by the fund on Class B shares in the amount of
$3,465,883.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.75% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the year ended December 31, 1998, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.25% and
0.75%, respectively.
The Distributor has informed the Fund that for the year ended December 31, 1998,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $694,975 and $1,943, respectively
and received $43,401 in front-end sales charges from sales of the Fund's Class A
shares. The respective shareholders pay such charges which are not an expense of
the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended December 31, 1998 aggregated
$171,196,945 and $211,293,988, respectively.
17
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, CONTINUED
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At December 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $10,500.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended December 31, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $6,120. At December 31, 1998, the Fund had an accrued pension liability of
$51,231 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997*
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 278,438 $ 3,615,711 91,032 $ 1,171,264
Reinvestment of dividends and distributions...................... 4,755 60,900 98 1,257
Redeemed......................................................... (77,317) (1,003,589) -- --
----------- -------------- ----------- ------------
Net increase - Class A........................................... 205,876 2,673,022 91,130 1,172,521
----------- -------------- ----------- ------------
CLASS B SHARES
Sold............................................................. 7,164,773 93,003,382 5,189,823 65,387,817
Reinvestment of dividends and distributions...................... 2,410,233 31,062,347 1,737,487 21,926,214
Redeemed......................................................... (10,377,338) (134,515,057) (13,733,885) (173,042,410)
----------- -------------- ----------- ------------
Net decrease - Class B........................................... (802,332) (10,449,328) (6,806,575) (85,728,379)
----------- -------------- ----------- ------------
CLASS C SHARES
Sold............................................................. 503,894 6,520,311 279,066 3,558,314
Reinvestment of dividends and distributions...................... 29,925 385,668 2,255 28,911
Redeemed......................................................... (44,199) (576,331) (1,964) (25,237)
----------- -------------- ----------- ------------
Net increase - Class C........................................... 489,620 6,329,648 279,357 3,561,988
----------- -------------- ----------- ------------
CLASS D SHARES
Sold............................................................. 39,412 512,790 3,442 44,176
Reinvestment of dividends and distributions...................... 431 5,519 26 333
----------- -------------- ----------- ------------
Net increase - Class D........................................... 39,843 518,309 3,468 44,509
----------- -------------- ----------- ------------
Net decrease in Fund............................................. (66,993) $ (928,349) (6,432,620) $(80,949,361)
----------- -------------- ----------- ------------
----------- -------------- ----------- ------------
</TABLE>
- ---------------------
* For Class A, C and D shares, for the period July 28, 1997 (issue date)
through December 31, 1997.
18
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997* 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER
SHARE DATA:
Net asset value,
beginning of
period.......... $ 12.92 $ 12.57 $ 12.92 $ 11.87 $ 13.31
---------- --------- --------- ---------- ----------
Income (loss)
from investment
operations:
Net investment
income......... 0.58 0.57 0.58 0.61 0.64
Net realized
and unrealized
gain........... 0.13 0.35 (0.21) 1.13 (1.42)
---------- --------- --------- ---------- ----------
Total income
(loss) from
investment
operations...... 0.71 0.92 0.37 1.74 (0.78)
---------- --------- --------- ---------- ----------
Less dividends
and
distributions
from:
Net investment
income......... (0.58) (0.57) (0.58) (0.61) (0.64)
Net realized
gain........... (0.24) -- (0.14) (0.08) (0.02)
---------- --------- --------- ---------- ----------
Total dividends
and
distributions... (0.82) (0.57) (0.72) (0.69) (0.66)
---------- --------- --------- ---------- ----------
Net asset value,
end of period... $ 12.81 $ 12.92 $ 12.57 $ 12.92 $ 11.87
---------- --------- --------- ---------- ----------
---------- --------- --------- ---------- ----------
TOTAL RETURN+.... 5.63% 7.51% 3.13% 14.96% (5.97)%
RATIOS TO AVERAGE
NET ASSETS:
Expenses......... 0.95%(2)(3) 1.33% 1.32%(1) 1.33% 1.32%
Net investment
income.......... 4.46%(2)(3) 4.51% 4.66% 4.90% 5.10%
SUPPLEMENTAL DATA:
Net assets, end
of period, in
millions........ $897 $914 $976 $1,055 $1,008
Portfolio
turnover rate... 20% 15% 11% 23% 12%
</TABLE>
- ---------------------
* Prior to July 28, 1997, the Fund issued one class of shares. All shares of
the Fund held prior to that date have been designated Class B shares.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Does not reflect the effect of expense offset of 0.01%.
(2) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(3) If the Distributor had not rebated a portion of its fees to the Fund, the
expense and net investment income ratios would have been 1.33% and 4.08%,
respectively.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 12.89 $ 12.80
------ ------
Income from investment operations:
Net investment income.............................................. 0.59 0.27
Net realized and unrealized gain................................... 0.10 0.09
------ ------
Total income from investment operations............................... 0.69 0.36
------ ------
Less dividends and distributions from:
Net investment income.............................................. (0.59) (0.27)
Net realized gain.................................................. (0.24) --
------ ------
Total dividends and distributions..................................... (0.83) (0.27)
------ ------
Net asset value, end of period........................................ $ 12.75 $ 12.89
------ ------
------ ------
TOTAL RETURN+......................................................... 5.50% 2.82%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.83%(3) 0.78%(2)
Net investment income................................................. 4.58%(3) 4.47%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $3,788 $1,175
Portfolio turnover rate............................................... 20% 15%
</TABLE>
<TABLE>
<S> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 12.92 $ 12.80
------ ------
Income from investment operations:
Net investment income.............................................. 0.53 0.23
Net realized and unrealized gain................................... 0.13 0.12
------ ------
Total income from investment operations............................... 0.66 0.35
------ ------
Less dividends and distributions from:
Net investment income.............................................. (0.53) (0.23)
Net realized gain.................................................. (0.24) --
------ ------
Total dividends and distributions..................................... (0.77) (0.23)
------ ------
Net asset value, end of period........................................ $ 12.81 $ 12.92
------ ------
------ ------
TOTAL RETURN+......................................................... 5.22% 2.80%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 1.33%(3) 1.31%(2)
Net investment income................................................. 4.08%(3) 4.24%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $9,849 $3,610
Portfolio turnover rate............................................... 20% 15%
</TABLE>
- ---------------------
* The date shares were first issued.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR JULY 28, 1997*
ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................................. $ 12.92 $ 12.80
------ ------
Income from investment operations:
Net investment income............................................... 0.63 0.28
Net realized and unrealized gain.................................... 0.10 0.12
------ ------
Total income from investment operations............................... 0.73 0.40
------ ------
Less dividends and distributions from:
Net investment income............................................... (0.63) (0.28)
Net realized gain................................................... (0.24) --
------ ------
Total dividends and distributions..................................... (0.87) (0.28)
------ ------
Net asset value, end of period........................................ $ 12.78 $ 12.92
------ ------
------ ------
TOTAL RETURN+......................................................... 5.77% 3.18%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.58%(3) 0.60%(2)
Net investment income................................................. 4.83%(3) 5.34%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $554 $45
Portfolio turnover rate............................................... 20% 15%
</TABLE>
- ---------------------
* The date shares were first issued.
+ Calculated based on the net asset value as of the last business day of the
period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE
INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Morgan Stanley Dean Witter
California Tax-Free Income Fund (the "Fund"), formerly Dean Witter California
Tax-Free Income Fund, at December 31, 1998, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
FEBRUARY 10, 1999
1998 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended December 31, 1998, the Fund paid to
shareholders the following per share amounts from net investment
income: Class A, $0.59; Class B, $0.58; Class C, $0.53; and Class
D, $0.63 per share. All of these dividends from net investment
income were exempt interest dividends, excludable from gross
income for Federal income tax purposes. For the year ended
December 31, 1998 the Fund paid to Class A, B, C and D
shareholders $0.24 per share from long-term capital gains, all of
which is taxable as 20% rate gain.
22
<PAGE>
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
James F. Willison
Vice President
Joseph R. Arcieri
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- ---------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ---------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- ---------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Fund.
This report is not authorized for distribution to prospective investors in
the Fund unless preceded or accompanied by an effective prospectus.
MORGAN STANLEY DEAN WITTER
CALIFORNIA
TAX-FREE
INCOME FUND
[GRAPHIC]
ANNUAL REPORT
DECEMBER 31, 1998
