<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, 1999
DEAR SHAREHOLDER:
Interest rates rose steadily during 1999, making it the worst year for the
fixed-income markets since 1994. The benchmark 30-year Treasury bond began the
year yielding 5.1 percent amid fears of a global recession. However, the
economic problems in Asia, Europe and Latin America abated as the year
progressed. The U.S. economy, led by consumer demand, experienced robust growth.
As a result, the fixed-income markets anticipated that the Federal Reserve Board
would change monetary policy and remove the liquidity it had provided during the
1998 international economic crises. Between June and November, the Fed raised
the federal funds rate a total of 75 basis points from 4.75 percent to 5.50
percent. At year-end, the yield on the Treasury bond was nearly 6.50 percent.
Subsequently, on February 2, 2000 the fed-funds rate was raised an additional 25
basis points.
MUNICIPAL MARKET CONDITIONS
The long-term insured municipal index yield began 1999 near a record low of
5.05 percent. By the end of December, this index yield had increased almost a
full percentage point, to 5.97 percent. Because bond prices move inversely to
changes in interest rates, higher yields have caused bond prices to decline
significantly. The increase in the index yield during 1999 translated into a 13
percent price decline for a generic insured municipal bond with a 30-year
maturity.
The municipal market index outperformed U.S. Treasury bonds early last year but
later gave ground as interest rates continued to rise. The ratio of the 30-year
municipal yield to the Treasury bond yield is a measure of relative performance.
The yield ratio declined from 99 percent in January to 91 percent in May 1999
and ended the year at 92 percent. A declining ratio means municipals have
outperformed Treasuries and a rising ratio indicates underperformance by
municipals. Over the past five years, the ratio has ranged from a high of 99
percent to a low of 82 percent.
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
LETTER TO THE SHAREHOLDERS DECEMBER 31, 1999, CONTINUED
Higher interest rates reduced municipal market underwriting in 1999. New-issue
volume declined 20 percent. Refunding activity, the most interest-rate-sensitive
component of supply, was down more than 50 percent. California new-issue
underwriting accounted for 12 percent of national market volume.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR BOND YIELDS 1994-1999
<S> <C> <C> <C>
Insured U.S. Insured Municipal Yields as a
Municipal Yields Treasury Yields Percentage of U.S. Treasury Yields
12/31/93 5.40% 6.34% 85.17%
1/31/94 5.40% 6.24% 86.54%
2/28/94 5.80% 6.66% 87.09%
3/31/94 6.40% 7.09% 90.27%
4/29/94 6.35% 7.32% 86.75%
5/31/94 6.25% 7.43% 84.12%
6/30/94 6.50% 7.61% 85.41%
7/29/94 6.25% 7.39% 84.57%
8/31/94 6.30% 7.45% 84.56%
9/30/94 6.55% 7.81% 83.87%
10/31/94 6.75% 7.96% 84.80%
11/30/94 7.00% 8.00% 87.50%
12/30/94 6.75% 7.88% 85.66%
1/31/95 6.40% 7.70% 83.12%
2/28/95 6.15% 7.44% 82.66%
3/31/95 6.15% 7.43% 82.77%
4/28/95 6.20% 7.34% 84.47%
5/31/95 5.80% 6.66% 87.09%
6/30/95 6.10% 6.62% 92.15%
7/31/95 6.10% 6.86% 88.92%
8/31/95 6.00% 6.66% 90.09%
9/30/95 5.95% 6.48% 91.82%
10/31/95 5.75% 6.33% 90.84%
11/30/95 5.50% 6.14% 89.58%
12/29/95 5.35% 5.94% 90.07%
1/31/96 5.40% 6.03% 89.55%
2/29/96 5.60% 6.46% 86.69%
3/29/96 5.85% 6.66% 87.84%
4/30/96 5.95% 6.89% 86.36%
5/31/96 6.05% 6.99% 86.55%
6/28/96 5.90% 6.89% 85.63%
7/31/96 5.85% 6.97% 83.93%
8/30/96 5.90% 7.11% 82.98%
9/30/96 5.70% 6.93% 82.25%
10/31/96 5.65% 6.64% 85.09%
11/29/96 5.50% 6.35% 86.61%
12/31/96 5.60% 6.63% 84.46%
1/31/97 5.70% 6.79% 83.95%
2/28/97 5.65% 6.80% 83.09%
3/31/97 5.90% 7.10% 83.10%
4/30/97 5.75% 6.94% 82.85%
5/30/97 5.65% 6.91% 81.77%
6/30/97 5.60% 6.78% 82.60%
7/30/97 5.30% 6.30% 84.13%
8/31/97 5.50% 6.61% 83.21%
9/30/97 5.40% 6.40% 84.38%
10/31/97 5.35% 6.15% 86.99%
11/30/97 5.30% 6.05% 87.60%
12/31/97 5.15% 5.92% 86.99%
1/31/98 5.15% 5.80% 88.79%
2/28/98 5.20% 5.92% 87.84%
3/31/98 5.25% 5.93% 88.53%
4/30/98 5.35% 5.95% 89.92%
5/29/98 5.20% 5.80% 89.66%
6/30/98 5.20% 5.65% 92.04%
7/31/98 5.18% 5.71% 90.72%
8/31/98 5.03% 5.27% 95.45%
9/30/98 4.95% 5.00% 99.00%
10/31/98 5.05% 5.16% 97.87%
11/30/98 5.00% 5.06% 98.81%
12/31/98 5.05% 5.10% 99.02%
1/31/99 5.00% 5.09% 98.23%
2/28/99 5.10% 5.58% 91.40%
3/31/99 5.15% 5.63% 91.47%
4/30/99 5.20% 5.66% 91.87%
5/31/99 5.30% 5.83% 90.91%
6/30/99 5.47% 5.96% 91.78%
7/31/99 5.55% 6.10% 90.98%
8/31/99 5.75% 6.06% 94.88%
9/30/99 5.85% 6.05% 96.69%
10/31/99 6.03% 6.16% 97.89%
11/30/99 6.00% 6.29% 95.39%
12/31/99 5.97% 6.48% 92.10%
Source: Municipal Market Data - A Division of Thomson
Financial Municipal Group and Bloomberg L.P.
</TABLE>
PERFORMANCE
The performance of Morgan Stanley Dean Witter California Tax-Free Income Fund
was impacted by the higher interest-rate environment. For the 12-month period
ended December 31, 1999, the Fund's Class B shares returned -3.99 percent
compared to -2.06 percent for the Lehman Brothers Municipal Bond Index. For the
same period, the Fund's Class A, C and D shares returned -3.91 percent, -4.41
percent and -3.63 percent, respectively. (The performance of the Fund's four
share
2
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
LETTER TO THE SHAREHOLDERS DECEMBER 31, 1999, CONTINUED
classes varies because of differing expenses. Total return figures assume the
reinvestment of all distributions and do not reflect the deduction of any
applicable sales charges.) The accompanying chart compares the Fund's
performance to that of the Lehman index.
PORTFOLIO STRUCTURE
The Fund's net assets of $782 million were diversified among 12 long-term
sectors and 61 credits. As interest rates have increased, the Fund's short-term
investment position, which had ranged from 1 - 4 percent in 1998, was gradually
increased to 6 - 7 percent. Refunded bonds represented 13 percent of net assets.
Refunded issues have been refinanced and generally are defensive portfolio
holdings. At the end of December, the portfolio's average maturity was 16 years.
Average duration, a measure of sensitivity to interest-rate changes, was
8.3 years. The accompanying charts provide current information on the
portfolio's credit quality, and sector distribution. Optional call provisions by
year and their respective cost (book) yields are also charted.
LOOKING AHEAD
The Federal Reserve Board raised the fed-funds rate twice last summer and once
more in November. These actions confirmed its previously disclosed bias of
becoming less accommodative in the face of continued strong domestic economic
growth. It is anticipated that the central bank may raise short-term interest
rates further in 2000, again influencing long-term rates. However, we believe
municipal bonds continue to offer tax-conscious investors good long-term value
relative to Treasuries. We continue to stress credit quality and a conservative
portfolio management profile.
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,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
/s/ Mitchell M. Merin
MITCHELL M. MERIN
PRESIDENT
3
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE
INCOME FUND
LETTER TO THE SHAREHOLDERS DECEMBER 31,
1999, CONTINUED
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LARGEST SECTORS AS OF DECEMBER 31, 1999
(% OF NET ASSETS)
<S> <C>
TRANSPORTATION 20%
WATER AND SEWER 16%
REFUNDED 13%
ELECTRIC 9%
TAX ALLOCATION 7%
GENERAL OBLIGATIONS 7%
MORTGAGE 5%
HOSPITAL 5%
PUBLIC FACILITIES 5%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CREDIT RATINGS AS OF DECEMBER 31, 1999
(% OF TOTAL LONG-TERM PORTFOLIO)
<S> <C>
Aaa or AAA 68%
Aa or AA 17%
A or A 6%
Baa or BBB 9%
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC. OR STANDARD &
POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
</TABLE>
4
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE
INCOME FUND
LETTER TO THE SHAREHOLDERS DECEMBER 31,
1999, CONTINUED
CALL AND COST (BOOK) YIELD STRUCTURE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERCENT CALLABLE
<S> <C>
WEIGHTED AVERAGE
CALL PROTECTION: 7 YEARS
YEARS BONDS CALLABLE
2000 2%
2001 7%
2002 10%
2003 13%
2004 5%
2005 15%
2006 7%
2007 7%
2008 19%
2009 2%
2010+ 13%
COST (BOOK) YIELD**
WEIGHTED AVERAGE
BOOK YIELD: 6.0%
2000 6.9%
2001 6.6%
2002 6.4%
2003 5.7%
2004 6.3%
2005 6.7%
2006 6.0%
2007 6.0%
2008 5.3%
2009 5.2%
2010+ 5.9%
* % BASED ON LONG-TERM PORTFOLIO.
** COST OR "BOOK" YIELD IS THE ANNUAL
INCOME EARNED ON A PORTFOLIO
INVESTMENT BASED ON ITS ORIGINAL PURCHASE
PRICE BEFORE FUND OPERATING EXPENSES.
FOR EXAMPLE, THE FUND EARNED A BOOK YIELD
OF 6.6% ON 7% OF THE BONDS IN THE
LONG-TERM PORTFOLIO THAT ARE CALLABLE IN 2001.
PORTFOLIO STRUCUTURE IS SUBJECT TO CHANGE.
</TABLE>
5
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE
INCOME FUND
FUND PERFORMANCE DECEMBER 31, 1999
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GROWTH OF $10,000 - CLASS B
($ IN THOUSANDS)
<S> <C> <C>
FUND LEHMAN(4)
December 1989 $10,000 $10,000
December 1990 $10,569 $10,729
December 1991 $11,644 $12,032
December 1992 $12,556 $13,093
December 1993 $13,934 $14,700
December 1994 $13,102 $13,940
December 1995 $15,062 $16,374
December 1996 $15,534 $17,100
December 1997 $16,700 $18,671
December 1998 $17,641 $19,881
December 1999 $16,937(3) $19,472
</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* CLASS A+
------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year -3.99%(1) -8.57%(2) 1 Year -3.91%(1) -8.00%(2)
5 Years 5.27 (1) 4.94 (2) Since Inception (7/28/97) 1.72 (1) -0.08 (2)
10 Years 5.41 (1) 5.41 (2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C++ CLASS D#
------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year -4.41%(1) -5.33%(2) 1 Year -3.63%(1)
Since Inception (7/28/97) 1.39 (1) 1.39 (2) Since Inception (7/28/97) 2.10 (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, 1999.
(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.
* 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.
6
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
<C> <S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (92.8%)
GENERAL OBLIGATION (7.1%)
California,
$ 5,000 Ser 1990............................................................ 7.00 % 08/01/07 $ 5,623,750
5,000 Ser 1990............................................................ 7.00 08/01/08 5,656,400
2,000 Veterans Ser AT..................................................... 9.50 02/01/10 2,674,660
2,400 Veterans Ser BH (AMT) (FSA)......................................... 5.40 12/01/16 2,260,296
10,000 Various Purpose 04/01/93 (FSA)...................................... 5.50 04/01/19 9,542,400
10,000 Ser 1996 (AMBAC).................................................... 5.25 06/01/21 9,090,700
3,000 Veterans Ser BD, BE & BF (AMT) (AMBAC).............................. 6.375 02/01/27 3,000,300
10,000 Los Angeles Unified School District, 1997 Ser B (FGIC)................ 5.00 07/01/23 8,658,400
2,000 Santa Margarita/Dana Point Authority, Impr Dists #3, 3A, 4 & 4A
1994 Ser B Refg (MBIA).............................................. 5.75 08/01/20 1,959,740
8,500 Puerto Rico, Public Improvement Ser 1999.............................. 4.75 07/01/23 6,877,775
------------
--------
55,344,421
57,900
------------
--------
EDUCATIONAL FACILITIES REVENUE (3.2%)
California Educational Facilities Authority,
6,000 University of San Diego Ser 1998 (AMBAC)............................ 5.00 10/01/22 5,213,160
4,000 University of Southern California 1997 Ser C........................ 5.125 10/01/28 3,464,720
California Statewide Communities Development Authority,
3,400 Gemological Institute of America COPs (Connie Lee).................. 6.00 05/01/20 3,412,070
4,100 Gemological Institute of America COPs (Connie Lee).................. 6.00 05/01/25 4,101,722
10,000 University of California, Multiple Purpose Refg Ser 1993 C (AMBAC).... 5.125 09/01/18 9,066,200
------------
--------
25,257,872
27,500
------------
--------
ELECTRIC REVENUE (9.3%)
13,000 Los Angeles Department of Water & Power, Second Issue of 1993
(Secondary AMBAC)................................................... 5.40 11/15/13 12,948,910
5,000 Northern California Power Agency, Hydro #1 1993 Refg Ser A (MBIA)..... 5.50 07/01/16 4,852,400
Sacramento Municipal Utility District,
5,700 Refg 1994 Ser H (MBIA).............................................. 5.75 01/01/11 5,848,029
26,000 Refg 1992 Ser A (FGIC).............................................. 6.30 08/15/18 26,751,920
Southern California Public Power Authority,
7,000 Mead-Adelanto 1994 Ser A (AMBAC).................................... 5.15 07/01/15 6,593,440
1,750 Transmission Refg Ser 1988 (FGIC)................................... 0.00 07/01/06 1,262,257
5,000 Turlock Irrigation District, Refg 1998 Ser A (MBIA)................... 5.00 01/01/26 4,293,200
Puerto Rico Electric Power Authority,
9,000 Power Ser O......................................................... 5.00 07/01/12 8,496,000
2,000 Power Ser X......................................................... 5.50 07/01/25 1,828,940
------------
--------
72,875,096
74,450
------------
--------
HOSPITAL REVENUE (4.8%)
10,000 Antelope Valley Healthcare District, Refg Ser 1997 A (FSA)............ 5.20 01/01/20 9,015,200
3,500 California Health Facilities Financing Authority, Sutter/CHS
Ser 1996 A (MBIA)................................................... 5.875 08/15/16 3,500,910
10,000 Duarte, City of Hope National Medical Center Ser 1999 A COPs.......... 5.25 04/01/19 8,306,600
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1999, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 7,500 Madera County, Valley Children's Hospital Ser 1995 COPs (MBIA)........ 6.50 % 03/15/15 $ 8,208,300
4,000 Rancho Mirage Joint Powers Financing Authority, Eisenhower Medical
Center Ser 1997 A COPs (MBIA)....................................... 5.25 07/01/17 3,698,080
5,000 University of California, UCLA Medical Center Refg Ser 1994 (MBIA).... 5.50 12/01/14 4,914,950
------------
--------
37,644,040
40,000
------------
--------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (2.3%)
California Pollution Control Financing Authority,
5,000 Atlantic Richfield Co Ser 1996 A.................................... 5.00 04/01/08 4,928,250
3,000 San Diego Gas and Electric Co 1996 Ser A............................ 5.90 06/01/14 3,070,140
10,000 Southern California Edison Co 1992 Ser B (AMT)...................... 6.40 12/01/24 9,964,700
------------
--------
17,963,090
18,000
------------
--------
MORTGAGE REVENUE - SINGLE FAMILY (4.9%)
California Housing Finance Agency,
9,000 Home 1995 Ser J (AMBAC)............................................. 6.00 08/01/17 9,026,550
6,300 Home 1995 Ser M (AMT) (MBIA)........................................ 6.15 08/01/27 6,192,837
8,215 Home 1995 Ser K (AMT) (AMBAC)....................................... 6.25 08/01/27 8,150,430
2,930 Home 1991 Ser G (AMT)............................................... 7.05 08/01/27 2,996,482
6,900 Purchase 1995 Ser B-2 (AMT)......................................... 6.30 08/01/24 6,921,804
California Rural Home Financing Authority,
2,015 Home 1997 Ser D-CL 5 (AMT).......................................... 6.70 05/01/29 2,103,539
1,915 Home 1998 Ser A (AMT)............................................... 6.35 12/01/29 1,932,867
Puerto Rico Housing Finance Corporation,
175 Portfolio One GNMA-Backed Ser B..................................... 7.65 10/15/22 180,061
665 Portfolio One GNMA-Backed Ser C..................................... 6.85 10/15/23 692,910
------------
--------
38,197,480
38,115
------------
--------
PUBLIC FACILITIES REVENUE (4.7%)
4,000 Anaheim Public Financing Authority, Sub 1997 Ser C (FSA).............. 6.00 09/01/16 4,158,320
10,000 Beverly Hills Public Financing Authority, 1993 Refg Ser A (MBIA)...... 5.65 06/01/15 9,898,100
5,000 California Public Works Board, Department of Corrections 1998 Ser B
(MBIA) ............................................................. 5.00 09/01/21 4,370,350
9,500 Los Angeles County, Public Properties Refg of 1987 COPs............... 0.00 04/01/04 7,487,615
10,000 San Jose Financing Authority, Convention Center Refg 1993 Ser C....... 6.375 09/01/13 10,434,500
------------
--------
36,348,885
38,500
------------
--------
TAX ALLOCATION REVENUE (6.9%)
Garden Grove Community Redevelopment Agency,
5,000 Refg Issue of 1993.................................................. 5.70 10/01/13 4,892,400
6,000 Refg Issue of 1993.................................................. 5.875 10/01/23 5,582,880
25,500 Long Beach Financing Authority, Ser 1992 (AMBAC)...................... 6.00 11/01/17 26,202,780
8,830 Pleasanton Joint Powers Financing Authority, Reassessment 1993
Ser A............................................................... 6.15 09/02/12 8,929,956
10,000 San Jose Redevelopment Agency, Ser 1999 (AMBAC)....................... 4.75 08/01/23 8,257,900
------------
--------
53,865,916
55,330
------------
--------
TRANSPORTATION FACILITIES REVENUE (19.9%)
10,000 Alameda Corridor Transportation Authority, Sr Lien Ser 1999 A
(MBIA).............................................................. 5.25 10/01/21 9,083,300
14,000 Foothill/Eastern Transportation Corridor Agency, Toll Road
Ser 1999............................................................ 0.00 01/15/23 7,230,440
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1999, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Long Beach,
$ 5,000 Harbor Refg Ser 1998 A (AMT) (FGIC)................................. 6.00 % 05/15/17 $ 5,135,800
9,000 Harbor Refg Ser 1998 A (AMT) (FGIC)................................. 6.00 05/15/18 9,190,800
3,000 Harbor Refg Ser 1998 A (AMT) (FGIC)................................. 6.00 05/15/19 3,044,520
15,000 Harbor Ser 1995 (AMT) (MBIA)........................................ 5.25 05/15/25 13,136,850
10,000 Los Angeles, Department of Airports Refg 1995 Ser A (FGIC)............ 5.50 05/15/09 10,184,800
20,000 Los Angeles County Transportation Commission, Sales Tax Ser 1991 B.... 6.50 07/01/13 20,899,000
5,000 Orange County, Airport Refg Ser 1997 (AMT) (MBIA)..................... 5.50 07/01/11 5,047,900
20,000 San Diego County Regional Transportation Commission, Sales Tax
1994 Ser A (FGIC)................................................... 4.75 04/01/08 19,670,600
San Francisco Airports Commission, San Francisco Int'l Airport
4,055 Second Ser Refg Issue 4 (MBIA)...................................... 6.00 05/01/20 4,071,098
10,000 Second Ser Issue 15 B (MBIA)........................................ 4.50 05/01/25 7,862,500
San Francisco Bay Area Rapid Transit District, Sales Tax
5,000 Ser 1995 (FGIC)..................................................... 5.50 07/01/15 4,933,350
2,305 Ser 1995 (FGIC)..................................................... 5.50 07/01/20 2,180,461
10,000 Ser 1998 (AMBAC).................................................... 4.75 07/01/23 8,261,100
San Joaquin Hills Transportation Corridor Agency, Toll Road
10,000 Refg Ser 1997 A (MBIA).............................................. 0.00 01/15/31 1,466,700
10,000 Refg Ser 1997 A (MBIA).............................................. 5.25 01/15/30 8,835,500
10,000 Senior Lien......................................................... 5.00 01/01/33 8,040,100
10,000 Puerto Rico Highway & Transportation Authority, Ser 1998 A............ 4.75 07/01/38 7,684,300
------------
--------
155,959,119
182,360
------------
--------
WATER & SEWER REVENUE (16.4%)
California Department of Water Resources, Central Valley
6,870 Ser J-2............................................................. 6.125 12/01/13 7,042,918
10,000 Ser U............................................................... 5.00 12/01/29 8,470,900
8,000 Castaic Lake Water Agency, Refg Ser 1994 A COPs (MBIA)................ 6.00 08/01/18 8,064,320
6,000 Central Coast Water Authority, Refg Ser 1996 A (AMBAC)................ 5.00 10/01/16 5,453,580
10,000 Contra Costa Water District, Ser G (MBIA)............................. 5.50 10/01/19 9,547,300
East Bay Municipal Utility District,
11,000 Water Refg Ser 1992................................................. 6.00 06/01/20 11,020,460
5,000 Water Ser 1998 (MBIA)............................................... 4.75 06/01/34 3,961,000
10,000 Eastern Municipal Water District, Water & Sewer Refg Ser 1998 A COPs
(FGIC).............................................................. 4.75 07/01/23 8,239,700
15,000 Los Angeles County Sanitation Districts Financing Authority, 1993
Ser A............................................................... 5.375 10/01/13 14,862,150
15,000 Metropolitan Water District of Southern California, Waterworks 1997
Ser A............................................................... 5.00 07/01/26 12,862,950
10,000 San Diego, Water 1998 Ser (FGIC)...................................... 4.75 08/01/28 8,094,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1999, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
San Diego Public Facilities Financing Authority,
$ 10,000 Sewer 1993 Ser A.................................................... 5.25 % 05/15/20 $ 9,080,500
7,000 Sewer Ser 1995 (FGIC)............................................... 5.00 05/15/25 6,012,020
San Francisco Public Utilities Commission,
5,750 Water 1992 Refg Ser A............................................... 6.00 11/01/15 5,799,967
10,870 Water 1996 Ser A.................................................... 5.00 11/01/21 9,448,639
------------
--------
127,960,504
140,490
------------
--------
OTHER REVENUE (0.2%)
1,820 Orange County Community Facilities District #86-2, Rancho Santa
Margarita
Ser A of 1990....................................................... 7.65 08/15/17 1,862,097
------------
--------
REFUNDED (13.1%)
20,000 Desert Hospital District, Desert Hospital Corp Ser 1992 COPs (FSA).... 6.392 07/01/02+ 21,234,200
Foothill/Eastern Transportation Corridor Agency, Toll Road Sr Lien
4,000 Ser 1995 A.......................................................... 0.00 01/01/10+ 3,392,200
15,000 Ser 1995 A.......................................................... 6.00 01/01/07+ 16,059,450
Los Angeles Convention & Exhibition Center Authority,
10,000 Ser 1985 COPs....................................................... 9.00 12/01/05+ 12,198,000
14,000 Ser 1985 COPs....................................................... 9.00 12/01/05+ 17,077,200
5,400 Los Angeles County, 1991 Master Refg COPs............................. 6.708 05/01/01+ 5,661,468
8,000 San Diego County Water Authority, Ser 1991-B COPs (MBIA).............. 6.30 04/27/06+ 8,743,760
Southern California Public Power Authority,
5,000 Palo Verde Ser A (AMBAC) (ETM)...................................... 5.00 07/01/15 4,604,250
5,250 Transmission Refg Ser 1988 A (FGIC) (ETM)........................... 0.00 07/01/06 3,808,455
9,000 Puerto Rico Electric Power Authority, Power Ser X..................... 6.125 07/01/05+ 9,763,830
------------
--------
102,542,813
95,650
------------
--------
770,115 TOTAL CALIFORNIA TAX-EXEMPT MUNICIPAL BONDS (IDENTIFIED COST $732,207,328)................... 725,821,333
------------
--------
SHORT-TERM CALIFORNIA TAX-EXEMPT MUNICIPAL OBLIGATIONS (6.1%)
13,000 California Health Facilities Financing Authority, Adventist Health
West 1998 Ser B (MBIA) (Demand 01/03/00)............................ 4.25* 09/01/28 13,000,000
14,000 California Pollution Control Financing Authority, Pacific Gas &
Electric Co Ser 1996 D (Demand 01/03/00)............................ 4.40* 11/01/26 14,000,000
3,500 California Statewide Communities Development Authority, John Muir/
Mt Diablo Health COPs (AMBAC) (Demand 01/03/00)..................... 4.25* 08/15/27 3,500,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1999, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 17,000 Newport Beach, Hoag Memorial Hospital/Presbyterian Ser 1992
(Demand 01/03/00)................................................... 4.40*% 10/01/22 $ 17,000,000
------------
--------
47,500 TOTAL SHORT-TERM CALIFORNIA TAX-EXEMPT MUNICIPAL OBLIGATIONS
- ---------- (IDENTIFIED COST $47,500,000)................................................................
47,500,000
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
$817,615 TOTAL INVESTMENTS (IDENTIFIED COST $779,707,328) (A)......................................... 98.9% 773,321,333
- --------
- --------
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................. 1.1 8,600,291
----- -------------
NET ASSETS................................................................................. 100.0% $ 781,921,624
----- -------------
----- -------------
</TABLE>
- ---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
+ Prerefunded to call date shown.
* Current coupon of variable rate demand obligation.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$22,689,340 and the aggregate gross unrealized depreciation is
$29,075,335, resulting in net unrealized depreciation of $6,385,995.
BOND INSURANCE:
AMBAC AMBAC Assurance Corporation.
Connie Lee Connie Lee Insurance Company - A wholly owned subsidiary of AMBAC
Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $779,707,328).............................................................. $773,321,333
Cash.......................................................................................... 197,826
Receivable for:
Interest.................................................................................. 11,351,714
Investments sold.......................................................................... 61,148
Shares of beneficial interest sold........................................................ 33,311
Prepaid expenses and other assets............................................................. 28,688
------------
TOTAL ASSETS............................................................................. 784,994,020
------------
LIABILITIES:
Payable for:
Dividends and distributions to shareholders............................................... 1,813,265
Plan of distribution fee.................................................................. 499,241
Investment management fee................................................................. 362,927
Shares of beneficial interest repurchased................................................. 288,364
Accrued expenses and other payables........................................................... 108,599
------------
TOTAL LIABILITIES........................................................................ 3,072,396
------------
NET ASSETS............................................................................... $781,921,624
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................... $789,862,172
Net unrealized depreciation................................................................... (6,385,995)
Accumulated net realized loss................................................................. (1,554,553)
------------
NET ASSETS............................................................................... $781,921,624
============
CLASS A SHARES:
Net Assets.................................................................................... $6,252,598
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 535,720
NET ASSET VALUE PER SHARE................................................................ $11.67
============
MAXIMUM OFFERING PRICE PER SHARE,
(NET ASSET VALUE PLUS 4.44% OF NET ASSET VALUE)........................................ $12.19
============
CLASS B SHARES:
Net Assets.................................................................................... $761,548,098
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 64,904,124
NET ASSET VALUE PER SHARE................................................................ $11.73
============
CLASS C SHARES:
Net Assets.................................................................................... $13,099,494
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 1,116,289
NET ASSET VALUE PER SHARE................................................................ $11.73
============
CLASS D SHARES:
Net Assets.................................................................................... $1,021,434
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE)..................................... 87,245
NET ASSET VALUE PER SHARE................................................................ $11.71
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................................................... $ 47,166,010
------------
EXPENSES
Plan of distribution fee (Class A shares)..................................................... 11,519
Plan of distribution fee (Class B shares)..................................................... 6,314,572
Plan of distribution fee (Class C shares)..................................................... 91,541
Investment management fee..................................................................... 4,616,624
Transfer agent fees and expenses.............................................................. 219,286
Professional fees............................................................................. 78,760
Shareholder reports and notices............................................................... 70,014
Custodian fees................................................................................ 34,863
Trustees' fees and expenses................................................................... 18,620
Registration fees............................................................................. 7,565
Other......................................................................................... 22,879
------------
TOTAL EXPENSES........................................................................... 11,486,243
Less: expense offset.......................................................................... (34,780)
Less: plan of distribution fee rebate (Class B shares)........................................ (3,599,718)
------------
NET EXPENSES............................................................................. 7,851,745
------------
NET INVESTMENT INCOME.................................................................... 39,314,265
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss............................................................................. (1,554,488)
Net change in unrealized appreciation......................................................... (71,987,904)
------------
NET LOSS................................................................................. (73,542,392)
------------
NET DECREASE.................................................................................. $(34,228,127)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<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, 1999 DECEMBER 31, 1998
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................................. $ 39,314,265 $ 40,654,874
Net realized gain (loss).............................................. (1,554,488) 17,556,128
Net change in unrealized appreciation................................. (71,987,904) (8,093,340)
------------ ------------
NET INCREASE (DECREASE).......................................... (34,228,127) 50,117,662
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares.................................................... (277,350) (113,998)
Class B shares.................................................... (38,495,780) (40,239,955)
Class C shares.................................................... (503,645) (287,533)
Class D shares.................................................... (37,490) (13,388)
Net realized gain
Class A shares.................................................... (8,850) (69,921)
Class B shares.................................................... (1,176,642) (16,702,217)
Class C shares.................................................... (18,511) (181,009)
Class D shares.................................................... (1,125) (10,153)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS................................ (40,519,393) (57,618,174)
------------ ------------
Net decrease from transactions in shares of
beneficial interest................................................. (54,206,044) (928,349)
------------ ------------
NET DECREASE..................................................... (128,953,564) (8,428,861)
NET ASSETS:
Beginning of period................................................... 910,875,188 919,304,049
------------ ------------
END OF PERIOD.................................................... $781,921,624 $910,875,188
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter California Tax-Free Income Fund (the "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.
15
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 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"), 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
16
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, CONTINUED
$750 million; 0.50% to the portion of daily net assets exceeding $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.
17
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, 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, 1999.
For the year ended December 31, 1999, the Distributor rebated a portion of the
distribution fees paid by the fund on Class B shares in the amount of
$3,599,718.
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, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.19% and
0.75%, respectively.
The Distributor has informed the Fund that for the year ended December 31, 1999,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class B shares and Class C shares of $714,211 and $6,349, respectively
and received $26,238 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, 1999 aggregated
$41,251,818 and $122,863,713, respectively.
18
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, CONTINUED
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Fund's transfer agent. At December 31, 1999, the Fund had
transfer agent fees and expenses payable of approximately $6,900.
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, 1999
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,902. At December 31, 1999, the Fund had an accrued pension liability of
$52,766 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. FEDERAL INCOME TAX STATUS
At December 31, 1999, the Fund had a net capital loss carryover of approximately
$813,000 which will be available through December 31, 2007 to offset future
capital gains to the extent provided by regulations.
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $741,000 during fiscal 1999.
6. SUBSEQUENT EVENT
On January 26, 2000, the Board of Trustees of the Fund and of Morgan Stanley
Dean Witter Multi-State Municipal Series Trust -- California
Series ("California Series") approved a reorganization plan ("the Plan") whereby
California Series would be merged into the Fund. The Plan is subject to the
consent of California Series' shareholders. If approved, the assets of
California Series would be combined with the assets of the Fund and shareholders
of California Series would become Class D shareholders of the Fund, receiving
Class D shares of the Fund equal to the value of their holdings in California
Series.
19
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999, CONTINUED
7. 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, 1999 DECEMBER 31, 1998
--------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................................................. 926,566 $ 11,343,045 278,438 $ 3,615,711
Reinvestment of dividends and distributions...................... 11,792 142,937 4,755 60,900
Redeemed......................................................... (699,644) (8,463,085) (77,317) (1,003,589)
----------- -------------- ----------- -------------
Net increase - Class A........................................... 238,714 3,022,897 205,876 2,673,022
----------- -------------- ----------- -------------
CLASS B SHARES
Sold............................................................. 5,551,229 68,931,047 7,164,773 93,003,382
Reinvestment of dividends and distributions...................... 1,629,078 20,067,143 2,410,233 31,062,347
Redeemed......................................................... (12,258,765) (151,099,720) (10,377,338) (134,515,057)
----------- -------------- ----------- -------------
Net decrease - Class B........................................... (5,078,458) (62,101,530) (802,332) (10,449,328)
----------- -------------- ----------- -------------
CLASS C SHARES
Sold............................................................. 849,916 10,411,727 503,894 6,520,311
Reinvestment of dividends and distributions...................... 33,209 407,782 29,925 385,668
Redeemed......................................................... (535,813) (6,487,818) (44,199) (576,331)
----------- -------------- ----------- -------------
Net increase - Class C........................................... 347,312 4,331,691 489,620 6,329,648
----------- -------------- ----------- -------------
CLASS D SHARES
Sold............................................................. 47,799 586,296 39,412 512,790
Reinvestment of dividends and distributions...................... 450 5,466 431 5,519
Redeemed......................................................... (4,315) (50,864) -- --
----------- -------------- ----------- -------------
Net increase - Class D........................................... 43,934 540,898 39,843 518,309
----------- -------------- ----------- -------------
Net decrease in Fund............................................. (4,448,498) $ (54,206,044) (66,993) $ (928,349)
=========== ============== =========== =============
</TABLE>
20
<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 PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................................. $12.75 $12.89 $12.80
------ ------ ------
Income (loss) from investment operations:
Net investment income............................................. 0.58 0.59 0.27
Net realized and unrealized gain (loss)........................... (1.06) 0.10 0.09
------ ------ ------
Total income (loss) from investment operations....................... (0.48) 0.69 0.36
------ ------ ------
Less dividends and distributions from:
Net investment income............................................. (0.58) (0.59) (0.27)
Net realized gain................................................. (0.02) (0.24) --
------ ------ ------
Total dividends and distributions.................................... (0.60) (0.83) (0.27)
------ ------ ------
Net asset value, end of period....................................... $11.67 $12.75 $12.89
====== ====== ======
TOTAL RETURN+........................................................ (3.91)% 5.50% 2.82%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................................. 0.78 %(3)(4) 0.83%(3) 0.78%(2)
Net investment income................................................ 4.70 %(3) 4.58%(3) 4.47%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.............................. $6,253 $3,788 $1,175
Portfolio turnover rate.............................................. 5 % 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.
(4) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
21
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997* 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period.......... $ 12.81 $ 12.92 $ 12.57 $ 12.92 $ 11.87
-------- ------------ ------- --------- ---------
Income (loss) from investment operations:
Net investment income...................... 0.57 0.58 0.57 0.58 0.61
Net realized and unrealized gain (loss).... (1.06) 0.13 0.35 (0.21) 1.13
-------- ------------ ------- --------- ---------
Total income (loss) from investment
operations................................... (0.49) 0.71 0.92 0.37 1.74
-------- ------------ ------- --------- ---------
Less dividends and distributions from:
Net investment income...................... (0.57) (0.58) (0.57) (0.58) (0.61)
Net realized gain.......................... (0.02) (0.24) -- (0.14) (0.08)
-------- ------------ ------- --------- ---------
Total dividends and distributions............. (0.59) (0.82) (0.57) (0.72) (0.69)
-------- ------------ ------- --------- ---------
Net asset value, end of period................ $ 11.73 $ 12.81 $ 12.92 $ 12.57 $ 12.92
======== ============ ======= ========= =========
TOTAL RETURN+................................. (3.99)% 5.63% 7.51% 3.13% 14.96%
RATIOS TO AVERAGE NET ASSETS:
Expenses...................................... 0.91%(1)(2)(3) 0.95%(2)(3) 1.33% 1.32%(1) 1.33%
Net investment income......................... 4.57%(2)(3) 4.46%(2)(3) 4.51% 4.66% 4.90%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands....... $761,548 $896,685 $914,474 $975,702 $1,054,881
Portfolio turnover rate....................... 5% 20% 15% 11% 23%
</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 1.34% and 4.14%,
respectively, for the year ended December 31, 1999 and 1.33% and 4.08%,
respectively, for the year ended December 31, 1998.
SEE NOTES TO FINANCIAL STATEMENTS
22
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................................. $ 12.81 $12.92 $12.80
------- ------ ------
Income (loss) from investment operations:
Net investment income............................................. 0.51 0.53 0.23
Net realized and unrealized gain (loss)........................... (1.06) 0.13 0.12
------- ------ ------
Total income (loss) from investment operations....................... (0.55) 0.66 0.35
------- ------ ------
Less dividends and distributions from:
Net investment income............................................. (0.51) (0.53) (0.23)
Net realized gain................................................. (0.02) (0.24) --
------- ------ ------
Total dividends and distributions.................................... (0.53) (0.77) (0.23)
------- ------ ------
Net asset value, end of period....................................... $ 11.73 $12.81 $12.92
======= ====== ======
TOTAL RETURN+........................................................ (4.41)% 5.22% 2.80%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................................. 1.34%(3)(4) 1.33%(3) 1.31%(2)
Net investment income................................................ 4.14%(3) 4.08%(3) 4.24%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.............................. $13,099 $9,849 $3,610
Portfolio turnover rate.............................................. 5% 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.
(4) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
23
<PAGE>
MORGAN STANLEY DEAN WITTER CALIFORNIA TAX-FREE INCOME FUND
FINANCIAL HIGHLIGHTS, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR JULY 28, 1997*
ENDED ENDED THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period................................. $12.78 $12.92 $12.80
------ ------ ------
Income (loss) from investment operations:
Net investment income............................................. 0.60 0.63 0.28
Net realized and unrealized gain (loss)........................... (1.05) 0.10 0.12
------ ------ ------
Total income (loss) from investment operations....................... (0.45) 0.73 0.40
------ ------ ------
Less dividends and distributions from:
Net investment income............................................. (0.60) (0.63) (0.28)
Net realized gain................................................. (0.02) (0.24) --
------ ------ ------
Total dividends and distributions.................................... (0.62) (0.87) (0.28)
------ ------ ------
Net asset value, end of period....................................... $11.71 $12.78 $12.92
====== ====== ======
TOTAL RETURN+........................................................ (3.63)% 5.77% 3.18%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................................. 0.59%(3)(4) 0.58%(3) 0.60%(2)
Net investment income................................................ 4.89%(3) 4.83%(3) 5.34%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.............................. $1,021 $554 $45
Portfolio turnover rate.............................................. 5% 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.
(4) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
24
<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") at December 31, 1999, 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 indicated, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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, 1999 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
FEBRUARY 7, 2000
1999 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended December 31, 1999, the Fund paid the
following per share amounts from tax-exempt income: $0.58 to
Class A shareholders, $0.57 to Class B shareholders, $0.51 to
Class C shareholders and $0.60 to Class D shareholders.
For the year ended December 31, 1999 the Fund paid long-term
capital gains of $0.02 per share to Class A, B, C and D
shareholders.
25
<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
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. Read the
prospectus carefully before investing.
MORGAN STANLEY
DEAN WITTER
CALIFORNIA
TAX-FREE
INCOME FUND
[GRAPHIC]
ANNUAL REPORT
DECEMBER 31, 1999
