-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EA7ISuXcaeYcfpdHQQOjl1K2cmMAxXpYvX1vBv7A6tMWqRngUgflx5W442+tfcmP DR/w46mb1pVIYrFixii03g== 0001047469-05-022505.txt : 20050906 0001047469-05-022505.hdr.sgml : 20050905 20050906120004 ACCESSION NUMBER: 0001047469-05-022505 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050906 DATE AS OF CHANGE: 20050906 EFFECTIVENESS DATE: 20050906 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTIVE ASSETS TAX FREE TRUST CENTRAL INDEX KEY: 0000351881 IRS NUMBER: 133075002 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-03162 FILM NUMBER: 051069568 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 N-CSR 1 a2161645zn-csr.txt N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-03162 Active Assets Tax-Free Trust (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: June 30, 2005 Date of reporting period: June 30, 2005 Item 1 - Report to Shareholders WELCOME, SHAREHOLDER: IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN ACTIVE ASSETS TAX-FREE TRUST PERFORMED DURING THE ANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT A MUTUAL FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT RISKS. FUND REPORT FOR THE YEAR ENDED JUNE 30, 2005 MARKET CONDITIONS Against the backdrop of economic improvement and rising oil prices, the Federal Open Market Committee (the "Fed") raised the federal funds target rate in each of its meetings during the 12-month reporting period. Through this "measured" series of eight 25 basis point increases, the Fed brought the target rate from 1.25 percent at the start of the reporting to 3.25 percent at the close. The yields of short-term instruments rose in response to the Fed's actions. Within the municipal money market, variable-rate securities performed particularly well. Variable-rate securities quickly adjust their yields in response to changes in interest rates, a desirable characteristic in a rising-rate environment. PERFORMANCE ANALYSIS As of June 30, 2005, Active Assets Tax-Free Trust had net assets of approximately $2.9 billion and an average portfolio maturity of 27 days. For the 12-month period ended June 30, 2005, the Fund provided a total return of 1.32 percent. For the seven-day period ended June 30, 2005, the Fund provided an effective annualized yield of 1.97 percent and a current yield of 1.95 percent, while its 30-day moving average yield for June was 1.88 percent. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. We continue to manage the Fund conservatively in anticipation of continued interest-rate increases. We favored securities with daily or weekly rate reset features; this strategy positioned the Fund to benefit speedily as rates increased. Additionally, within the Fund's fixed-rate portfolio, we emphasized commercial paper with maturities of one to three months and to a lesser extent, municipal notes and bonds in the six-to-nine month range. Meanwhile, we decreased exposure to notes with one-year maturities, to avoid hindering the Fund's ability to redeploy assets in higher yielding securities as they came to market. We sought opportunities in financings for smaller municipalities whose issues often offered more attractive yields than those of larger municipal government entities. PORTFOLIO COMPOSITION Variable Rate Municipal Obligations 84.1% Municipal Notes & Bonds 8.5 Tax-Exempt Commercial Paper 7.4
MATURITY SCHEDULE 1- 30 Days 85.1% 31- 60 Days 2.7 61- 90 Days 4.7 91- 120 Days 1.9 121+ Days 5.6
DATA AS OF JUNE 30, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR PORTFOLIO COMPOSITION AND MATURITY SCHEDULE ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. 2 INVESTMENT STRATEGY THE FUND WILL INVEST IN HIGH QUALITY, SHORT-TERM SECURITIES THAT ARE NORMALLY MUNICIPAL OBLIGATIONS THAT PAY INTEREST EXEMPT FROM FEDERAL INCOME TAXES. THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., SEEKS TO MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE PRICE REMAINING STABLE AT $1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL VALUE OF YOUR INVESTMENT. AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 3 EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 01/01/05 - 06/30/05. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds that have transactional costs, such as sales charges (loads), and redemption fees, or exchange fees.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 01/01/05 - 01/01/05 06/30/05 06/30/05 ------------- ------------- --------------- Actual (0.84% return) $ 1,000.00 $ 1,008.40 $ 2.44 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,022.36 $ 2.46
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.49% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 4 INVESTMENT ADVISORY AGREEMENT APPROVAL NATURE, EXTENT AND QUALITY OF SERVICES The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities. (The Investment Adviser and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper"). The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and investment advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory. PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the Fund's performance for the one-, three- and five-year periods ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper Reports"), compared to the performance of comparable funds selected by Lipper (the "performance peer group"), and noted that the Fund's performance was better than its performance peer group average for all three periods. The Board concluded that the Fund's performance was satisfactory. FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT STRATEGIES The Board reviewed the advisory and administrative fees (together, the "management fee") paid by the Fund under the Management Agreement. The Board noted that the rate was comparable to the management fee rates charged by the Adviser to any other funds it manages with investment strategies comparable to those of the Fund. FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the management fee rate and total expense ratio of the Fund. The Board noted that: (i) the Fund's management fee rate was lower than the average management fee rate for funds, selected by Lipper (the "expense peer group"), managed by other advisers, with investment strategies comparable to those of the Fund, 5 as shown in the Lipper Report for this Fund; and (ii) the Fund's total expense ratio was also lower than the average total expense ratio of the funds included in the Fund's expense peer group. The Board concluded that the Fund's management fee rate and total expense ratio were competitive with those of its expense peer group. BREAKPOINTS AND ECONOMIES OF SCALE The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that it includes breakpoints. The Board also reviewed the level of the Fund's management fee and noted that the fee, as a percentage of the Fund's net assets, would decrease as net assets increase because the management fee includes breakpoints. The Board concluded that the Fund's management fee would reflect economies of scale as assets increase. PROFITABILITY OF ADVISER AND AFFILIATES The Board considered and reviewed information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last two years from their relationship with the Fund and the Morgan Stanley Fund Complex and reviewed with the Controller of the Adviser the cost allocation methodology used to determine the Adviser's profitability. Based on their review of the information they received, the Board concluded that the profits earned by the Adviser and its affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund. FALL-OUT BENEFITS The Board considered so-called "fall-out benefits" derived by the Adviser and its affiliates from their relationship with the Fund and the Morgan Stanley Fund Complex, such as "float" benefits derived from handling of checks for purchases and redemptions of Fund shares through a broker-dealer affiliate of the Adviser. The Board considered the float benefits and concluded that they were relatively small. The Board also considered that a broker-dealer affiliate of the Adviser receives from the Fund 12b-1 fees for shareholder services. The Board concluded that the total benefits were relatively small and that the 12b-1 fees were competitive with those of other broker-dealer affiliates of investment advisers. SOFT DOLLAR BENEFITS The Board considered whether the Adviser realizes any benefits from commissions paid to brokers who execute securities transactions for the Fund ("soft dollars"). The Board noted that the Fund invests only in fixed income securities, which do not generate soft dollars. 6 ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement. HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Fund's operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for the Fund to continue its relationship with the Adviser. OTHER FACTORS AND CURRENT TRENDS The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund's business. GENERAL CONCLUSION After considering and weighing all of the above factors, the Board concluded it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year. 7 ACTIVE ASSETS TAX-FREE TRUST PORTFOLIO OF INVESTMENTS - JUNE 30, 2005
PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (87.5%) ALABAMA $ 6,300 Jefferson County, Sewer Ser 2003 Subser B-6 (XLCA) 2.30% 07/08/05 $ 6,300,000 ARIZONA 5,000 Pima County Industrial Development Authority, El Dorado Hospital Ser 2004 2.30 07/08/05 5,000,000 6,000 Sun Devil Energy Center LLC, Arizona State University Ser 2004 (FGIC) 2.32 07/08/05 6,000,000 2,900 University of Arizona, Student Union Bookstore Ser 1999 COPs (Ambac) 2.25 07/08/05 2,900,000 CALIFORNIA 200 California Health Facilities Financing Authority, Adventist Health System/West 1998 Ser A (MBIA) 2.22 07/01/05 200,000 700 Los Angeles Department of Water & Power, Water Systems 2001 Ser B Subser B-1 2.25 07/08/05 700,000 COLORADO 1,700 Colorado Educational & Cultural Facilities Authority, National Jewish Federation Ser 2005 B-1 2.30 07/01/05 1,700,000 Colorado Health Facilities Authority, 13,500 Catholic Health Initiatives Ser 2004 B-4 2.25 07/08/05 13,500,000 16,700 Catholic Health Initiatives Ser 2004 B-5 2.23 07/08/05 16,700,000 20,000 NCMC Inc Ser 2005 (FSA) 2.28 07/08/05 20,000,000 1,200 Sisters of Charity of Leavenworth Health System Ser 2002 2.32 07/08/05 1,200,000 15,000 Colorado Student Obligation Bond Authority, Ser 1989 A (Ambac) (AMT) 2.34 07/08/05 15,000,000 8,000 Denver Urban Renewal Authority, Stapleton Senior Tax Increment Ser 2004 A-1 P-FLOATs PT-999 2.37 07/08/05 8,000,000 16,735 Midcities Metropolitan District No 1, STARS BNP Ser 2004-110 2.35 07/08/05 16,735,000 5,775 Park Creek Metropolitan District, Ser 2001 P-FLOATs PT-2321 2.37 07/08/05 5,775,000 39,400 University of Colorado Hospital Authority, Ser 2004 A (FSA) 2.27 07/08/05 39,400,000 14,010 Westminster, Multifamily Housing Camden Arbors Apartments Ser 2004 2.29 07/08/05 14,010,000
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PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- DELAWARE $ 7,700 Delaware Economic Development Authority, St Andrew's School Ser 2004 2.30% 07/08/05 $ 7,700,000 5,100 University of Delaware, Ser 2001 B 2.42 07/01/05 5,100,000 DISTRICT OF COLUMBIA 3,500 District of Columbia, Public Welfare Foundation Ser 2000 2.29 07/08/05 3,500,000 FLORIDA 22,250 Dade County Industrial Development Authority, Dolphins Stadium Ser 1985 B & C 2.22 07/08/05 22,250,000 7,325 Florida Housing Finance Corporation, Monterey Lakes Apartments 2005 Ser C 2.27 07/08/05 7,325,000 16,855 Jacksonville Health Facilities Authority, Baptist Medical Center Ser 2003 A 2.28 07/01/05 16,855,000 18,300 Orlando Utilities Commission, Water & Electric Ser 2002 A 2.23 07/08/05 18,300,000 16,100 Orlando-Orange County Expressway Authority, Ser 2003C3 (FSA) & Ser 2005 Subser A-1 (Ambac) 2.23 07/08/05 16,100,000 4,185 Palm Beach County School Board, Ser 2004 A COPs ROCs II-R Ser 6008 (FGIC) 2.32 07/08/05 4,185,000 10,000 Port St Lucie, Utility System Ser 2005 (MBIA) 2.31 07/08/05 10,000,000 18,300 Tampa Bay Water, Utility System Ser 2002 (AMT) 2.35 07/08/05 18,300,000 GEORGIA 20,300 Albany-Dougherty County Hospital Authority, Phoebe Putney Memorial Hospital Ser 1991 (Ambac) 2.29 07/08/05 20,300,000 3,995 Atlanta, Airport Ser 2004 A MERLOTs Ser C14 (FSA) (AMT) 2.37 07/08/05 3,995,000 13,000 DeKalb County Hospital Authority, DeKalb Medical Center Ser 2005 2.29 07/08/05 13,000,000 5,990 DeKalb Private Hospital Authority, Egleston Children's Health Care System Ser 1995 B 2.28 07/08/05 5,990,000 16,450 Gwinnett County Water & Sewerage Authority, Ser 2004 A 2.26 07/08/05 16,450,000 8,200 Hapeville Development Authority, Hapeville Hotel Ltd Ser 1985 2.35 07/01/05 8,200,000 25,700 Private Colleges and Universities Authority, Emory University 2000 Ser B & 2001 Ser B 2.20 07/08/05 25,700,000 HAWAII 13,720 Hawaii, ROCs II-R Ser 6012 2.32 07/08/05 13,720,000
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PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- ILLINOIS $ 6,100 Bi-State Development Agency of the Missouri-Illinois Metropolitan District, Metrolink Cross County Extension Ser 2002 A (FSA) 2.25% 07/08/05 $ 6,100,000 Chicago, 10,000 2004 Ser A P-FLOATs PT-2361 (FSA) 2.31 07/08/05 10,000,000 8,910 Eagle Ser 20041002 Class A (FGIC) 2.32 07/08/05 8,910,000 17,900 Neighborhoods Alive Ser 21 B (MBIA) 2.28 07/08/05 17,900,000 30,500 Cook County, Ser 2002 B 2.29 07/08/05 30,500,000 12,400 Glendale Heights, Glendale Lakes Ser 2000 2.29 07/08/05 12,400,000 1,200 Illinois Development Finance Authority, Jewish Federation of Metropolitan Chicago Ser 2002 (Ambac) 2.30 07/01/05 1,200,000 15,700 Illinois Finance Authority, Northwestern University Ser 2004 B 2.25 07/08/05 15,700,000 Illinois Health Facilities Authority, 76,250 Northwestern Memorial Hospital Ser 1995 2.35 07/08/05 76,250,000 20,000 Resurrection Health Care System Ser 2005 C 2.21 07/08/05 20,000,000 10,000 Illinois Toll Highway Authority, Refg 1998 Ser B (FSA) 2.25 07/08/05 10,000,000 11,595 Kane, Cook & DuPage Counties, School District #U-46 PUTTERs Ser 426 (Ambac) 2.35 07/08/05 11,595,000 5,020 Metropolitan Pier & Exposition Authority, McCormick Place Expansion Ser 2002 A Eagle #20040030 Class A (MBIA) 2.32 07/08/05 5,020,000 12,450 Roaring Fork Municipal Products, Cook County Class A Certificates Ser 2004-1 (Ambac) 2.36 07/08/05 12,450,000 INDIANA 7,160 Franklin Community Multi-School Building Corporation, Ser 2004 ROCs II-R Ser 2140 (FGIC) 2.32 07/08/05 7,160,000 Indiana Health Facilities Financing Authority, 35,000 Ascension Health Ser 2001 A 1.73 07/05/05 35,000,000 4,750 Clarian Health Obligated Group Ser 2000 B 2.32 07/01/05 4,750,000 2,355 Indianapolis, Health Quest Realty XXI Ser 1994 A TOBs (FHA) 2.46 07/08/05 2,355,000 1,445 Merrillville, Southlake Care Center Ser 1992 A TOBs (FHA) 2.46 07/08/05 1,445,000 2,345 South Bend, Fountainview Place Ser 1992 A TOBs (FHA) 2.46 07/08/05 2,345,000 5,775 University of Southern Indiana, Student Fee ROCs II-R Ser 2117 (Ambac) 2.32 07/08/05 5,775,000
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PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- KANSAS Kansas Department of Transportation, $ 50,315 Highway Ser 2004 C-1 & C-2 2.26% 07/08/05 $ 50,315,000 40,300 Highway Ser 2004 C-4 2.20 07/08/05 40,300,000 KENTUCKY 22,500 Kenton County Airport Board, Flight Safety International Inc Ser 2001A (AMT) 2.32 07/08/05 22,500,000 MARYLAND 7,400 Maryland Health & Higher Educational Facilities Authority, Catholic Health Initiatives Ser 1997 B 2.32 07/08/05 7,400,000 MASSACHUSETTS 15,000 Massachusetts, Ser 2005 A 2.29 07/08/05 15,000,000 44,500 Massachusetts Bay Transportation Authority, Ser 2000 2.22 07/08/05 44,500,000 11,505 Massachusetts Development Finance Agency, Dana Hall School Ser 2004 2.29 07/08/05 11,505,000 Massachusetts Health & Educational Facilities Authority, 17,850 Emmanuel College Ser 2003 2.28 07/08/05 17,850,000 14,725 Partners Healthcare System Inc Ser 1997 P-1 (FSA) 2.26 07/08/05 14,725,000 15,000 Partners Healthcare System Inc 2003 Ser D-3 2.28 07/08/05 15,000,000 5,920 Partners Healthcare System Inc 2003 Ser D-5 2.28 07/01/05 5,920,000 MICHIGAN Detroit, 15,600 Sewage Disposal System Senior Lien Ser 2003 B (FSA) 2.25 07/01/05 15,600,000 38,300 Water Supply System Refg Second Lien Ser 2001-C (FGIC) 2.24 07/08/05 38,300,000 9,790 Water Supply System Refg Senior Lien Ser 2003-D (MBIA) 2.35 07/08/05 9,790,000 10,850 Holt Public Schools, Ser 2002 2.20 07/08/05 10,850,000 8,700 Kent Hospital Finance Authority, Metropolitan Hospital Ser 2005B 2.28 07/08/05 8,700,000 16,000 Michigan, Grant Anticipation Notes Ser 2002 C (FSA) 2.25 07/08/05 16,000,000 Michigan State University, 5,600 Ser 2002 A 2.25 07/01/05 5,600,000 14,885 Ser 2003 B & Ser 2005 2.22 07/08/05 14,885,000 6,000 Michigan Strategic Fund, The Van Andel Research Institute Ser 2001 2.32 07/08/05 6,000,000 1,900 Milan Area Schools, Refg Ser 2002 2.20 07/08/05 1,900,000 11,110 Oakland University, Ser 2001 (FGIC) 2.40 07/08/05 11,110,000 22,000 Saline Area Schools, Ser 2002 B 2.20 07/08/05 22,000,000
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PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- MINNESOTA $ 16,700 University of Minnesota Regents, Ser 1999 A & Ser 2001A 2.43% 07/08/05 $ 16,700,000 MISSISSIPPI 1,600 Jackson County, Chevron USA Inc Ser 1992 2.25 07/01/05 1,600,000 13,500 Mississippi Development Bank, MGAM Natural Gas Supply 2005 Ser 2.29 07/08/05 13,500,000 30,500 Perry County, Leaf River Forest Products Inc Ser 2002 2.25 07/08/05 30,500,000 MISSOURI 1,700 Missouri Development Finance Board, Nelson Gallery Foundation Ser 2001 B (MBIA) 2.29 07/01/05 1,700,000 Missouri Health & Educational Facilities Authority, 20,100 Stowers Institute Ser 2002 (MBIA) 2.30 07/08/05 20,100,000 4,100 Washington University Ser 2004 A 2.30 07/01/05 4,100,000 NEBRASKA 9,800 American Public Energy Agency, National Public Gas Agency 2003 Ser A 2.30 07/08/05 9,800,000 7,000 Omaha, Eagle #2004001 Class A 2.32 07/08/05 7,000,000 NEVADA 16,000 Clark County, Las Vegas - McCarran International Airport Passenger Facility 2005 Ser A (MBIA) (AMT) 2.31 07/08/05 16,000,000 NEW HAMPSHIRE 16,000 New Hampshire Health & Education Facilities Authority, Dartmouth College Ser 2002 2.35 07/08/05 16,000,000 5,100 New Hampshire State Business Finance Authority, Cottage Hospital Ser 2005 2.28 07/08/05 5,100,000 NEW YORK 15,000 Long Island Power Authority, Electric System Ser 2 Subser 2A 2.20 07/08/05 15,000,000 15,000 Metropolitan Transportation Authority, Ser 2002 D-1 (FSA) 2.20 07/08/05 15,000,000 4,800 Monroe County Industrial Development Agency, St John Fisher College Ser 2005 (Radian) 2.32 07/08/05 4,800,000 7,300 Nassau County Interim Finance Authority, Sales Tax Ser 2002 B (FSA) 2.17 07/08/05 7,300,000 4,150 New York City, Fiscal 2004 Subser A-4 2.18 07/08/05 4,150,000 2,000 New York City Industrial Development Agency, One Bryant Park LLC Ser 2004 A 2.32 07/08/05 2,000,000 New York State Local Government Assistance Corporation, 19,500 Ser 1994 B 2.18 07/08/05 19,500,000
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- $ 10,000 Sub Lien Ser 3V (FGIC) 2.31% 07/08/05 $ 10,000,000 1,200 Suffolk County Water Authority, Ser 2003 BANs 2.23 07/08/05 1,200,000 NORTH CAROLINA 20,000 Charlotte-Mecklenburg Hospital Authority, Health Care System Ser 1996 C 2.25 07/08/05 20,000,000 2,200 Durham, Ser 1993A COPs 2.43 07/08/05 2,200,000 30,020 Guilford County, Ser 2005 A & B 2.30 07/08/05 30,020,000 8,290 Mecklenburg County, Ser 2004 COPs 2.28 07/08/05 8,290,000 9,800 North Carolina Capital Facilities Finance Agency, Durham Academy Ser 2001 2.29 07/08/05 9,800,000 North Carolina Medical Care Commission, 25,000 Duke University Health System Ser 2005 C 2.26 07/08/05 25,000,000 27,000 Firsthealth of the Carolinas Ser 2002 2.27 07/08/05 27,000,000 600 Mission-St Joseph's Health System Ser 2003 2.35 07/08/05 600,000 31,700 North Carolina Baptist Hospitals Ser 2000 2.25 07/08/05 31,700,000 6,450 Rowan Regional Medical Center Ser 2004 ROCs II-R Ser 296 (FSA) 2.32 07/08/05 6,450,000 48,000 Raleigh, Downtown Improvement Ser 2005 B COPs 2.27 07/08/05 48,000,000 OHIO 4,000 Cincinnati City School District, Ser 2003 Eagle #20040034 Class A (FSA) 2.31 07/08/05 4,000,000 32,905 Cleveland, Water 2004 Ser M (FSA) 2.24 07/08/05 32,905,000 4,890 Middletown City School District, ROCs II-R Ser 303 (FGIC) 2.31 07/08/05 4,890,000 5,610 Ohio, Ser 2004 P-FLOATs PT-2137 2.31 07/08/05 5,610,000 OKLAHOMA 8,000 Oklahoma Student Loan Authority, Ser 2005 A (MBIA) (AMT) 2.34 07/08/05 8,000,000 Oklahoma Water Resources Board, State Loan Program 26,755 Ser 1994 A & 1999 2.20 09/01/05 26,755,000 8,030 Ser 1995 2.15 09/01/05 8,030,000 17,915 Ser 2001 2.47 10/01/05 17,915,000 10,000 Tulsa County Industrial Authority, Capital Improvement Ser 2003 A 2.95 11/15/05 10,000,000 OREGON 15,000 Clackamas County Hospital Facility Authority, Legacy Health System Ser 2003 2.28 07/08/05 15,000,000 4,500 Oregon Department of Administrative Services, Oregon Appropriation Ser 2003 Eagle #20041010 Class A (FSA) 2.32 07/08/05 4,500,000
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- $ 20,000 Oregon Health Sciences University, OHSU Medical Group Ser 2004 A 2.26% 07/08/05 $ 20,000,000 PENNSYLVANIA 10,000 Easton Area School District, Ser 2005 (FSA) 2.30 07/08/05 10,000,000 11,300 Northampton County Higher Education Authority, Lafayette College Ser 1998A 2.22 07/08/05 11,300,000 15,000 Pennsylvania Higher Education Assistance Agency, Student Loan 2001 Ser A (Ambac) (AMT) 2.45 07/08/05 15,000,000 20,900 Pennsylvania Turnpike Commission, 2002 Ser A-2 2.32 07/08/05 20,900,000 Philadelphia Hospitals & Higher Education Facilities Authority, 9,150 Children's Hospital of Philadelphia Ser 2002 D (MBIA) 2.30 07/01/05 9,150,000 7,000 Temple University Health System 2005 Ser C 2.25 07/08/05 7,000,000 31,700 Washington County Authority, The Trustees of The University of Pennsylvania Ser 2004 2.25 07/08/05 31,700,000 22,800 York General Authority, Harrisburg School District Subser 1996 B (Ambac) 2.29 07/08/05 22,800,000 RHODE ISLAND 6,000 Rhode Island Convention Center Authority, Refg 2001 Ser A (MBIA) 2.25 07/08/05 6,000,000 10,000 Rhode Island Health & Educational Building Corporation, Meeting Street Center Ser 2005 2.25 07/08/05 10,000,000 SOUTH CAROLINA 13,100 Florence County, McLeod Regional Medical Center Ser 1985 A (FGIC) 2.25 07/08/05 13,100,000 5,000 Greenwood County, Fuji Photo Film Inc Ser 2004 (AMT) 2.46 07/08/05 5,000,000 5,000 South Carolina Jobs Economic Development Authority, Burroughs & Chapin Business Park Ser 2002 2.35 07/08/05 5,000,000 4,565 South Carolina Public Service Authority, ROCs II-R Ser 6007 (Ambac) 2.32 07/08/05 4,565,000 TENNESSEE 13,000 Chattanooga Health, Educational & Housing Facility Board, The Baylor School Ser 2004 2.29 07/08/05 13,000,000 6,100 Clarksville Public Building Authority, Pooled Financing Ser 2003 2.28 07/01/05 6,100,000 17,000 Greeneville Health & Educational Facilities Board, Laughlin Memorial Hospital Ser 2004 2.29 07/08/05 17,000,000 10,125 Jackson Health, Educational & Housing Facility Board, Union University Ser 2005 2.29 07/08/05 10,125,000
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- $ 5,100 Memphis, Airport Refg Ser 1995 B (AMT) 2.47% 07/08/05 $ 5,100,000 Metropolitan Government of Nashville & Davidson County Health & Educational Facilities Board, 7,600 Ensworth School Ser 2002 2.29 07/08/05 7,600,000 7,395 Mary Queen of Angels Inc Ser 2000 2.29 07/08/05 7,395,000 23,960 Vanderbilt University Ser 2005 A-2 2.15 07/08/05 23,960,000 27,035 Montgomery County Public Building Authority, Pooled Financing Ser 1999 2.30 07/08/05 27,035,000 22,000 Shelby County Health, Educational & Housing Facilities Board, Baptist Memorial Health Care Ser 2004A P-FLOATs PA-1277 2.32 07/08/05 22,000,000 TEXAS 16,985 Austin, Water & Wastewater System Ser 2004 (FSA) 2.30 07/08/05 16,985,000 3,400 Bell County Health Facilities Development Corporation, Scott & White Memorial Hospital Ser 2001-2 (MBIA) 2.30 07/01/05 3,400,000 4,755 Bexar County Housing Finance Corporation, Multi-Family P-FLOATs PT-2082 2.31 07/08/05 4,755,000 12,000 Brownsville, Utilities System Sub Lien Ser 2001 A (MBIA) 2.45 08/24/05 12,000,000 4,500 Cypress-Fairbanks Independent School District, Ser 2004 MERLOTs Ser C16 2.32 07/08/05 4,500,000 6,180 Dallas Independent School District, Ser 2004A ROCs II-R Ser 6038 2.32 07/08/05 6,180,000 8,615 El Paso Independent School District, Ser 2004 A ROCs II-R Ser 2129 2.32 07/08/05 8,615,000 19,519 Garland Health Facilities Development Corporation, Chambrel Club Hill Ser 2002 2.27 07/08/05 19,519,000 Harris County Health Facilities Development Corporation, 31,700 Methodist Hospital Ser 2005 B 2.30 07/01/05 31,700,000 1,400 Texas Medical Center Ser 1999 B (FSA) 2.30 07/01/05 1,400,000 19,200 Harris County Industrial Development Corporation, Baytank Inc Ser 1998 2.32 07/08/05 19,200,000 5,175 Houston, Combined Utility System Ser 2004 ROCs II-R Ser 4559 (FSA) 2.32 07/08/05 5,175,000 11,000 Lower Neches Valley Authority, Chevron USA Inc Ser 1987 2.14 08/15/05 11,000,000 5,340 Northside Independent School District, Ser 2003 P-FLOATs PT-2254 2.31 07/08/05 5,340,000 9,100 Roaring Fork Municipal Products, Dallas Independent School District Class A Certificates Ser 2004-6 2.36 07/08/05 9,100,000 San Antonio, 6,000 ROCs II-R Ser 6003 (FSA) 2.32 07/08/05 6,000,000
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - ---------------------------------------------------------------------------------------------------------------- $ 20,300 Water System Sub Lien Ser 2003 B (MBIA) 2.38% 07/08/05 $ 20,300,000 14,500 Texas, Ser 2004 TRANs Floater-Trust Receipts Ser 2004 L61J 2.43 07/08/05 14,500,000 6,520 Texas Department of Housing & Community Affairs, High Point III Development Ser 1993 A 2.30 07/08/05 6,520,000 20,300 Texas Municipal Gas Corporation, Senior Lien Ser 1998 (FSA) 2.30 07/08/05 20,300,000 9,500 Texas Transportation Commission, Mobility Fund Ser 2005-B 2.22 07/08/05 9,500,000 3,000 Texas Water Development Board, Revolving Fund Senior Lien Ser 2000 A P-FLOATs PT-2187 2.30 07/08/05 3,000,000 UTAH Intermountain Power Agency, 52,650 1985 Ser E (Ambac) & 1985 Ser F (Ambac) 2.20 09/15/05 52,650,000 17,600 1985 Ser E (Ambac) 2.72 12/01/05 17,600,000 7,000 1985 Ser F (Ambac) 2.73 12/01/05 7,000,000 VARIOUS STATES 38,000 Municipal Securities Pooled Trust Receipts, Various States Ser 2004 SG P-18 2.43 07/08/05 38,000,000 VERMONT 11,000 Vermont Housing Finance Agency, West Block University of Vermont Apartments Ser 2004 A 2.30 07/08/05 11,000,000 VIRGINIA 16,000 Chesapeake Hospital Authority, Chesapeake General Hospital Ser 2001A 2.29 07/08/05 16,000,000 7,545 Fairfax County, Ser 2004 A PUTTERs Ser 461 2.32 07/08/05 7,545,000 15,000 Fairfax County Industrial Development Authority, Inova Health System Foundation Ser 2005 A-2 2.29 07/08/05 15,000,000 41,100 Loudoun County Industrial Development Authority, Howard Hughes Medical Institute Ser 2003 F 2.26 07/08/05 41,100,000 WASHINGTON 6,050 Bellevue, Ser 2004 Eagle #20041011 Class A (MBIA) 2.32 07/08/05 6,050,000 3,570 King County School District No 216, ROCs II-R Ser 5026 (FSA) 2.32 07/08/05 3,570,000 4,175 Pierce County, Puyallup School District No 3 PUTTERs Ser 415 (FSA) 2.32 07/08/05 4,175,000 WISCONSIN 9,500 Brokaw, Wausau Paper Mills Co Ser 1995 (AMT) 2.53 07/08/05 9,500,000 6,275 Wisconsin, Clean Water 2004 Ser 1 ROCs II-R Ser 2165 (MBIA) 2.32 07/08/05 6,275,000
SEE NOTES TO FINANCIAL STATEMENTS 16
PRINCIPAL AMOUNT IN COUPON DEMAND THOUSANDS RATE+ DATE* VALUE - --------------------------------------------------------------------------------------------------------------------------- $ 3,250 Wisconsin Health & Educational Facilities Authority, Ministry Health Care PUTTERs Ser 399 (MBIA) 2.32% 07/08/05 $ 3,250,000 PUERTO RICO 11,795 Puerto Rico, Public Improvement Ser 2001-1 TOCs (FSA) 2.30 07/08/05 11,795,000 ---------------- TOTAL SHORT-TERM VARIABLE RATE MUNICIPAL OBLIGATIONS (COST $2,500,739,000) 2,500,739,000 ---------------- YIELD TO MATURITY COUPON MATURITY ON DATE OF RATE DATE PURCHASE ------- -------- ---------- TAX-EXEMPT COMMERCIAL PAPER (7.8%) ARIZONA 8,750 Salt River Project Agricultural Improvement & Power District, Ser C 2.75% 07/21/05 2.75% 8,750,000 FLORIDA 8,500 Jacksonville, Ser A 2.60 07/11/05 2.60 8,500,000 Palm Beach County School District, 10,000 Sales Tax Ser 2005 2.75 08/11/05 2.75 10,000,000 8,000 Sales Tax Ser 2005 2.55 08/18/05 2.55 8,000,000 ILLINOIS 8,639 Chicago, Water System 2004 Ser A 2.45 08/18/05 2.45 8,639,000 Illinois Health Facilities Authority, 15,000 Evanston Hospital Corp Ser 1995 2.45 07/07/05 2.45 15,000,000 11,500 Evanston Hospital Corp Ser 1995 2.63 11/03/05 2.63 11,500,000 LOUISIANA 15,600 Louisiana Public Facilities Authority, Christus Health Ser 1999 B (Ambac) 2.40 07/08/05 2.40 15,600,000 MASSACHUSETTS 6,982 Massachusetts Development Finance Agency, MassDevelopment Program 2 Issue 2.65 08/04/05 2.65 6,982,000 12,000 Massachusetts Health & Educational Facilities Authority, Harvard University Ser EE 2.77 07/12/05 2.77 12,000,000 NEVADA Clark County, 10,000 Flood Control Ser 2003B 2.50 09/06/05 2.50 10,000,000 10,000 Sales Tax Ser 2004B 2.47 07/25/05 2.47 10,000,000
SEE NOTES TO FINANCIAL STATEMENTS 17
YIELD TO PRINCIPAL MATURITY AMOUNT IN COUPON MATURITY ON DATE OF THOUSANDS RATE DATE PURCHASE VALUE - --------------------------------------------------------------------------------------------------------------------------- OHIO $ 10,000 Ohio State University, General Receipts Ser 2004 F 2.72% 07/27/05 2.72% $ 10,000,000 TEXAS 26,000 Dallas Area Rapid Transit, Senior Sub Lien Ser 2001 2.40 07/13/05 2.40 26,000,000 10,175 El Paso, El Paso Water Utilities Ser 1998 2.53 07/12/05 2.53 10,175,000 20,600 San Antonio, Electric & Gas Ser 1995 A 2.55 07/14/05 2.55 20,600,000 15,000 Texas A&M University, Ser B 2.43 07/26/05 2.43 15,000,000 15,000 University of Texas System, Permanent University Fund Ser A 2.85 07/12/05 2.85 15,000,000 ---------------- TOTAL TAX-EXEMPT COMMERCIAL PAPER (COST $221,746,000) 221,746,000 ---------------- SHORT-TERM MUNICIPAL NOTES & BONDS (8.8%) ILLINOIS 20,000 Illinois, Unemployment Insurance Fund Building Receipts Ser 2004 A, dtd 07/01/04 5.00 12/15/05 2.55 20,220,402 8,000 Illinois Finance Authority, Ser 2005-A School Notes, dtd 03/02/05 3.00 12/01/05 2.52 8,015,724 INDIANA 35,000 Indiana Bond Bank, Midyear Funding Notes Ser 2005 A, dtd 06/16/05 3.50 01/27/06 2.50 35,197,307 MASSACHUSETTS 25,000 Ashburnham-Westminster Regional School District, Ser 2005 BANs, dtd 06/17/05 3.50 09/16/05 2.40 25,057,115 12,000 Montachusett Regional Transit Authority, Ser 2005 RANs, dtd 06/17/05 4.00 06/16/06 3.03 12,108,231 10,000 Pioneer Valley Transit Authority, Ser 2004 RANs, dtd 08/06/04 2.75 08/05/05 2.00 10,007,048 7,800 Southeastern Regional Transportation Authority, Ser 2004 RANs, dtd 09/10/04 2.50 09/09/05 1.85 7,809,540 14,167 Woburn, Ser 2004 BANs, dtd 10/08/04 2.50 07/22/05 1.74 14,173,126 MINNESOTA 2,420 Buffalo-Hanover-Montrose Independent School District No 877, Aid Anticipation Certificates Ser 2004 A, dtd 07/20/04 2.75 08/20/05 1.70 2,423,412 2,845 Chisago Lakes Independent School District No 2144, Aid Anticipation Certificates Ser 2004 B, dtd 07/29/04 2.75 08/29/05 1.70 2,849,731
SEE NOTES TO FINANCIAL STATEMENTS 18
YIELD TO PRINCIPAL MATURITY AMOUNT IN COUPON MATURITY ON DATE OF THOUSANDS RATE DATE PURCHASE VALUE - --------------------------------------------------------------------------------------------------------------------------- $ 4,500 Orono Independent School District No 278, Aid Anticipation Certificates Ser 2004 A, dtd 07/29/04 2.75% 08/29/05 1.72% $ 4,507,482 2,600 Rocori Area Schools Independent School District No 750, Aid Anticipation Certificates Ser 2004 A, dtd 07/15/04 3.00 08/15/05 1.70 2,604,081 NEW JERSEY 20,000 Barnegat Township Board of Education, 2005 Temporary Notes, dtd 07/07/05 (WI) 3.50 07/07/06 2.75 20,145,800 19,830 Trenton, Ser 2004 BANs, dtd 10/14/04 3.00 10/14/05 1.92 19,890,411 NEW YORK Board of Cooperative Educational Services, 6,000 Oswego County School District Ser 2005 RANs, dtd 06/23/05 4.00 06/23/06 2.85 6,065,610 3,500 Suffolk County First Supervisory District Ser 2005 RANs, dtd 07/01/05 (WI) 3.75 06/29/06 2.84 3,530,800 7,500 Westchester County Second Supervisory District Ser 2004 RANs, dtd 10/28/04 2.75 10/14/05 1.98 7,516,288 10,000 Cato-Meridian Central School District, Ser 2004 BANs, dtd 07/22/04 2.75 07/22/05 1.75 10,005,650 1,885 Murray, Ser 2004 BANs, dtd 08/05/04 3.00 08/04/05 1.75 1,887,157 8,000 Spencer-Van Etten Central School District, Ser 2005 BANs, dtd 06/17/05 4.25 06/15/06 2.83 8,105,604 10,000 Union Springs Central School District, Ser 2005 BANs, dtd 06/30/05 3.50 09/30/05 2.53 10,023,739 7,000 Utica City School District, Ser 2005 RANs, dtd 06/23/05 4.00 06/23/06 3.00 7,066,412 OHIO 1,860 St Bernard, Ser 2004 BANs, dtd 07/15/04 2.60 07/14/05 1.80 1,860,520 TEXAS 11,200 Texas, Ser 2004 TRANs, dtd 08/31/04 3.00 08/31/05 2.09 11,216,312 ---------------- TOTAL SHORT-TERM MUNICIPAL NOTES & BONDS (COST $252,287,502) 252,287,502 ---------------- TOTAL INVESTMENTS (COST $2,974,772,502) (a) (b) 104.1% 2,974,772,502 LIABILITIES IN EXCESS OF OTHER ASSETS (4.1) (118,190,505) ----- ---------------- NET ASSETS 100.0% $ 2,856,581,997 ===== ================
SEE NOTES TO FINANCIAL STATEMENTS 19 - ---------- AMT ALTERNATIVE MINIMUM TAX. BANs BOND ANTICIPATION NOTES. COPs CERTIFICATES OF PARTICIPATION. MERLOTs MUNICIPAL EXEMPT RECEIPTS - LIQUIDITY OPTION TENDER. P-FLOATs PUTTABLE FLOATING OPTION TAX-EXEMPT RECEIPTS. PUTTERs PUTTABLE TAX-EXEMPT RECEIPTS. RANs REVENUE ANTICIPATION NOTES. ROCs RESET OPTION CERTIFICATES. STARS SHORT TERM ADJUSTABLE RATE SECURITIES. TOBs TENDER OPTION BONDS. TOCs TENDER OPTION CERTIFICATES. TRANs TAX AND REVENUE ANTICIPATION NOTES. WI SECURITY PURCHASED ON A WHEN-ISSUED BASIS. + RATE SHOWN IS THE RATE IN EFFECT AT JUNE 30, 2005. * DATE ON WHICH THE PRINCIPAL AMOUNT CAN BE RECOVERED THROUGH DEMAND. (a) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO $23,676,600 IN CONNECTION WITH THE PURCHASE OF WHEN-ISSUED SECURITIES. (b) COST IS THE SAME FOR FEDERAL INCOME TAX PURPOSES. BOND INSURANCE: AMBAC AMBAC ASSURANCE CORPORATION. FGIC FINANCIAL GUARANTY INSURANCE COMPANY. FHA FEDERAL HOUSING ADMINISTRATION. FSA FINANCIAL SECURITY ASSURANCE INC. MBIA MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION. RADIAN RADIAN ASSET ASSURANCE INC. XLCA XL CAPITAL ASSURANCE INC. SEE NOTES TO FINANCIAL STATEMENTS 20 ACTIVE ASSETS TAX-FREE TRUST FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2005 ASSETS: Investments in securities, at value (cost $2,974,772,502) $ 2,974,772,502 Cash 698,529 Interest receivable 10,830,057 Prepaid expenses and other assets 136,250 ---------------- TOTAL ASSETS 2,986,437,338 ---------------- LIABILITIES: Payable for: Investments purchased 128,624,932 Investment advisory fee 735,937 Distribution fee 235,759 Administration fee 117,880 Accrued expenses and other payables 140,833 ---------------- TOTAL LIABILITIES 129,855,341 ---------------- NET ASSETS $ 2,856,581,997 ================ COMPOSITION OF NET ASSETS: Paid-in-capital $ 2,856,541,884 Accumulated undistributed net investment income 40,113 ---------------- NET ASSETS $ 2,856,581,997 ================ NET ASSET VALUE PER SHARE, 2,856,581,902 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE) $ 1.00 ================
SEE NOTES TO FINANCIAL STATEMENTS 21 STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2005 NET INVESTMENT INCOME: INTEREST INCOME $ 53,095,041 ---------------- EXPENSES Investment advisory fee 9,683,965 Distribution fee 2,968,377 Administration fee 973,325 Transfer agent fees and expenses 397,270 Custodian fees 126,595 Registration fees 79,800 Professional fees 64,424 Trustees' fees and expenses 45,052 Shareholder reports and notices 40,466 Other 156,967 ---------------- TOTAL EXPENSES 14,536,241 Less: expense offset (94,462) ---------------- NET EXPENSES 14,441,779 ---------------- NET INVESTMENT INCOME $ 38,653,262 ================
SEE NOTES TO FINANCIAL STATEMENTS 22 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED JUNE 30, 2005 JUNE 30, 2004 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 38,653,262 $ 15,202,722 Net realized gain -- 10,932 --------------- --------------- NET INCREASE 38,653,262 15,213,654 Dividends to shareholders from net investment income (38,652,509) (15,205,016) Net decrease from transactions in shares of beneficial interest (1,080,404) (258,005,853) --------------- --------------- NET DECREASE (1,079,651) (257,997,215) NET ASSETS: Beginning of period 2,857,661,648 3,115,658,863 --------------- --------------- END OF PERIOD (INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $40,113 AND $39,234, RESPECTIVELY) $ 2,856,581,997 $ 2,857,661,648 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS 23 ACTIVE ASSETS TAX-FREE TRUST NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2005 1. ORGANIZATION AND ACCOUNTING POLICIES Active Assets Tax-Free Trust (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 daily income which is exempt from federal income tax consistent with stability of principal and liquidity. The Fund was organized as a Massachusetts business trust on March 30, 1981 and commenced operations on July 7, 1981. The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS -- Portfolio securities are valued at amortized cost, which approximates market value. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable and nontaxable income to its shareholders. Accordingly, no federal income tax provision is required. D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and distributions to shareholders as of the close of each business day. E. USE OF ESTIMATES -- 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. 2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS Effective November 1, 2004, pursuant to an Investment Advisory Agreement with Morgan Stanley Investment Advisors Inc. (the "Investment Adviser"), the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.45% to the portion of the daily net assets not exceeding $500 million; 0.375% to the portion of the daily net assets exceeding $500 million but not exceeding $750 million; 0.325% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; 0.30% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.275% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.25% to the portion of the daily net assets exceeding $2 billion but not exceeding $2.5 billion; 24 0.225% to the portion of the daily net assets exceeding $2.5 billion but not exceeding $3 billion; 0.20% to the portion of the daily net assets exceeding $3 billion but not exceeding $15 billion; and 0.199% to the portion of the daily net assets exceeding $15 billion. Effective November 1, 2004, pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.05% to the Fund's daily net assets. Prior to November 1, 2004, the Fund retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement pursuant to which the Fund paid the Investment Adviser a monthly management fee accrued daily and payable monthly, by applying the annual rate of 0.50% to the portion of the daily net assets not exceeding $500 million; 0.425% to the portion of the daily net assets exceeding $500 million but not exceeding $750 million; 0.375% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; 0.35% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.325% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.30% to the portion of the daily net assets exceeding $2 billion but not exceeding $2.5 billion; 0.275% to the portion of the daily net assets exceeding $2.5 billion but not exceeding $3 billion; 0.25% to the portion of the daily net assets exceeding $3 billion but not exceeding $15 billion; and 0.249% to the portion of the daily net assets exceeding $15 billion. 3. PLAN OF DISTRIBUTION Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator, is the distributor of the Fund's shares and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act, finances certain expenses in connection with the promotion of sales of Fund shares. Reimbursements for these expenses are made in monthly payments by the Fund to the Distributor, which will in no event exceed an amount equal to a payment at the annual rate of 0.15% of the Fund's average daily net assets during the month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal year will not be reimbursed by the Fund through payments accrued in any subsequent fiscal year. For the year ended June 30, 2005, the distribution fee was accrued at the annual rate of 0.10%. 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales/maturities of portfolio securities for the year ended June 30, 2005, aggregated $7,633,423,003 and $7,656,545,000, respectively. 25 Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. The Fund has an unfunded noncontributory defined benefit pension plan covering certain 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 factors which include years of service and compensation. Aggregate pension costs for the year ended June 30, 2005, included in Trustees' fees and expenses in the Statement of Operations amounted to $7,377. At June 30, 2005, the Fund had an accrued pension liability of $61,077 which is included in accrued expenses in the Statement of Assets and Liabilities. On December 2, 2003, the Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 5. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest, at $1.00 per share, were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED JUNE 30, 2005 JUNE 30, 2004 --------------- --------------- Shares sold 11,647,980,944 10,208,181,474 Shares issued in reinvestment of dividends 38,652,509 15,205,016 --------------- --------------- 11,686,633,453 10,223,386,490 Shares redeemed (11,687,713,857) (10,481,392,343) --------------- --------------- Net decrease in shares outstanding (1,080,404) (258,005,853) =============== ===============
6. FEDERAL INCOME TAX STATUS As of June 30, 2005, the Fund had permanent book/tax differences attributable to capital gain retained by the Fund and nondeductible expenses. To reflect reclassifications arising from these differences, accumulated undistributed net realized gain was charged $842, accumulated undistributed net investment income was credited $126 and paid-in-capital was credited $716. 26 7. EXPENSE OFFSET The expense offset represents a reduction of the custodian fees for earnings on cash balances maintained by the Fund. 8. LEGAL MATTERS The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 10, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 27 ACTIVE ASSETS TAX-FREE TRUST FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED JUNE 30, ------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- SELECTED PER SHARE DATA: Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- Net income from investment operations 0.013 0.005 0.008 0.014 0.033 Less dividends from net investment income (0.013) (0.005) (0.008) (0.014) (0.033) -------- -------- -------- -------- -------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== TOTAL RETURN 1.32% 0.50% 0.81% 1.38% 3.34% RATIOS TO AVERAGE NET ASSETS: Expenses (before expense offset) 0.49% 0.48% 0.48% 0.48%(1) 0.48% Net investment income 1.30% 0.50% 0.80% 1.38% 3.28% SUPPLEMENTAL DATA: Net assets, end of period, in millions $ 2,857 $ 2,858 $ 3,116 $ 2,947 $ 3,075
- ---------- (1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%. SEE NOTES TO FINANCIAL STATEMENTS 28 ACTIVE ASSETS TAX-FREE TRUST REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF ACTIVE ASSETS TAX-FREE TRUST: We have audited the accompanying statement of assets and liabilities of Active Assets Tax-Free Trust (the "Fund"), including the portfolio of investments, as of June 30, 2005, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of June 30, 2005, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Active Assets Tax-Free Trust as of June 30, 2005, 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 five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP NEW YORK, NEW YORK AUGUST 15, 2005 29 ACTIVE ASSETS TAX-FREE TRUST TRUSTEE AND OFFICER INFORMATION INDEPENDENT TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE - ------------------------------ ----------- ------------ ------------------------------ ------------- ------------------------- Michael Bozic (64) Trustee Since Private Investor; Director or 197 Director of various c/o Kramer Levin Naftalis & April 1994 Trustee of the Retail Funds business organizations. Frankel LLP (since April 1994) and the Counsel to the Independent Institutional Funds (since Trustees July 2003); formerly Vice 1177 Avenue of the Americas Chairman of Kmart Corporation New York, NY 10036 (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. Edwin J. Garn (72) Trustee Since Consultant; Director or 197 Director of Franklin 1031 N. Chartwell Court January 1993 Trustee of the Retail Funds Covey (time management Salt Lake City, UT 84103 (since January 1993) and the systems), BMW Bank of Institutional Funds (since North America, Inc. July 2003); member of the Utah (industrial loan Regional Advisory Board of corporation), Escrow Bank Pacific Corp. (Utility USA (industrial loan Company); formerly Managing corporation), United Director of Summit Ventures Space Alliance (joint LLC (Lobbying and Consulting venture between Lockheed Firm) (2000-2004); United Martin and the Boeing States Senator (R-Utah) Company) and Nuskin Asia (1974-1992) and Chairman, Pacific (multilevel Senate Banking Committee marketing); member of the (1980-1986), Mayor of Salt board of various civic Lake City, Utah (1971-1974), and charitable Astronaut, Space Shuttle organizations. Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197 Director of The PMI Group c/o Kramer Levin Naftalis & September of the Retail Funds (since Inc. (private mortgage Frankel LLP 1997 September 1997) and the insurance); Trustee and Counsel to the Independent Institutional Funds (since Vice Chairman of The Trustees July 2003); formerly Field Museum of Natural 1177 Avenue of the Americas associated with the Allstate History; director of New York, NY 10036 Companies (1966-1994), most various other business recently as Chairman of The and charitable Allstate Corporation (March organizations. 1993-December 1994) and Chairman and Chief Executive Officer of its wholly owned subsidiary, Allstate Insurance Company (July 1989-December 1994).
30
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE - ------------------------------ ----------- ------------ ------------------------------ ------------- ------------------------- Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson Smick 197 Director of NVR, Inc. c/o Johnson Smick Group, Inc. July 1991 International, Inc., a (home construction); 888 16th Street, NW consulting firm; Chairman of Director of KFX Energy; Suite 740 the Audit Committee and Director of RBS Greenwich Washington, D.C. 20006 Director or Trustee of the Capital Holdings Retail Funds (since July 1991) (financial holding and the Institutional Funds company). (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Joseph J. Kearns (62) Trustee Since President, Kearns & Associates 198 Director of Electro Rent c/o Kearns & Associates LLC July 2003 LLC (investment consulting); Corporation (equipment PMB754 Deputy Chairman of the Audit leasing), The Ford Family 23852 Pacific Coast Highway Committee and Director or Foundation, and the UCLA Malibu, CA 90265 Trustee of the Retail Funds Foundation. (since July 2003) and the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (69) Trustee Since General Partner of Triumph 197 Director of various c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private business organizations. 445 Park Avenue investment partnership; New York, NY 10022 Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (72) Trustee Since Chairman of Lumelite Plastics 198 Trustee and Director of c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment Corporation Governance Committee and companies in the JPMorgan 85 Charles Colman Blvd. Director or Trustee of the Funds complex managed by Pawling, NY 12564 Retail Funds (since July 2003) J.P. Morgan Investment and the Institutional Funds Management Inc. (since June 1992).
31 INTERESTED TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS HELD INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** BY TRUSTEE - ------------------------------ ----------- ------------ ------------------------------ ------------- ------------------------- Charles A. Fiumefreddo (72) Chairman of Since Chairman and Director or 197 None. c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Funds Harborside Financial Center, and Trustee (since July 1991) and the Plaza Two, Institutional Funds (since Jersey City, NJ 07311 July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002). James F. Higgins (57) Trustee Since Director or Trustee of the 197 Director of AXA c/o Morgan Stanley Trust June 2000 Retail Funds (since June 2000) Financial, Inc. and The Harborside Financial Center, and the Institutional Funds Equitable Life Assurance Plaza Two, (since July 2003); Senior Society of the United Jersey City, NJ 07311 Advisor of Morgan Stanley States (financial (since August 2000); Director services). of the Distributor and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), and President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999).
- ---------- * THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE "RETAIL FUNDS"). ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE. *** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT MANAGEMENT INC.). 32 OFFICERS:
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - ---------------------------------- ---------------- -------------- ------------------------------------------------------ Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan 1221 Avenue of the Americas Stanley Investment Management Inc.; President, New York, NY 10020 Director and Chief Executive Officer of the Investment Adviser and the Administrator; Chairman and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President of the Institutional Funds (since July 2003) and President of the Retail Funds (since May 1999); Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee and President (since October 2002) of the Van Kampen Open-End Funds. Ronald E. Robison (66) Executive Vice Since Principal Executive Officer of Funds in the Fund 1221 Avenue of the Americas President and April 2003 Complex (since May 2003); Managing Director of Morgan New York, NY 10020 Principal Stanley & Co. Incorporated, Morgan Stanley Investment Executive Management Inc. and Morgan Stanley; Managing Director, Officer Chief Administrative Officer and Director of the Investment Adviser and the Administrator; Director of the Transfer Agent; Managing Director and Director of the Distributor; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003) and the Retail Funds (since April 2003); Director of Morgan Stanley SICAV (since May 2004); previously, President and Director of the Institutional Funds (March 2001-July 2003) and Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc. Joseph J. McAlinden (62) Vice President Since July 1995 Managing Director and Chief Investment Officer of the 1221 Avenue of the Americas Investment Adviser and Morgan Stanley Investment New York, NY 10020 Management Inc.; Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Barry Fink (50) Vice President Since General Counsel (since May 2000) and Managing Director 1221 Avenue of the Americas February 1997 (since December 2000) of Morgan Stanley Investment New York, NY 10020 Management; Managing Director (since December 2000), Secretary (since February 1997) and Director of the Investment Adviser and the Administrator; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of the Distributor; previously Secretary (February 1997-July 2003) and General Counsel (February 1997-April 2004) of the Retail Funds; Vice President and Assistant General Counsel of the Investment Adviser and the Administrator (February 1997-December 2001). Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment 1221 Avenue of the Americas Management; Managing Director of Morgan Stanley New York, NY 10020 Investment Management Inc. and the Investment Adviser, Vice President of the Institutional and Retail Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); previously, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000-July 2004) and General Counsel, Aeltus Investment Management, Inc. (January 1997-July 2000). Carsten Otto (41) Chief Compliance Since October Executive Director and U.S. Director of Compliance for 1221 Avenue of the Americas Officer 2004 Morgan Stanley Investment Management (since October New York, NY 10020 2004); Executive Director of the Investment Adviser and Morgan Stanley Investment Management Inc.; formerly Assistant Secretary and Assistant General Counsel of the Morgan Stanley Retail Funds.
33
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - ---------------------------------- ---------------- -------------- ------------------------------------------------------ Stefanie V. Chang (38) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. 1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management New York, NY 10020 Inc. and the Investment Adviser; Vice President of the Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance US LLP). Francis J. Smith (39) Treasurer and Treasurer since Executive Director of the Investment Adviser and the c/o Morgan Stanley Trust Chief Financial July 2003 and Administration (since December 2001); previously, Vice Harborside Financial Center, Officer Chief Financial President of the Retail Funds (September 2002-July Plaza Two, Officer since 2003); Vice President of the Investment Adviser and Jersey City, NJ 07311 September 2002 the Administrator (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000). Thomas F. Caloia (59) Vice President Since July 2003 Executive Director (since December 2002) and Assistant c/o Morgan Stanley Trust Treasurer of the Investment Adviser, the Distributor Harborside Financial Center, and the Administrator; previously Treasurer of the Plaza Two, Retail Funds (April 1989-July 2003); formerly First Jersey City, NJ 07311 Vice President of the Investment Adviser, the Distributor and the Administrator. Mary E. Mullin (38) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. 1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management New York, NY 10020 Inc. and the Investment Adviser; Secretary of the Institutional Funds (since June 1999) and the Retail Funds (since July 2003); formerly practiced law with the New York law firms of McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
- ---------- * THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED. ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE. 2005 FEDERAL TAX NOTICE (UNAUDITED) For the year ended June 30, 2005, all of the Fund's dividends from net investment income were exempt interest dividends, excludable from gross income for Federal income tax purposes. 34 (This page has been left blank intentionally.) TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Joseph J. McAlinden VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang VICE PRESIDENT Francis J. Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800)869-NEWS. 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. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2005 Morgan Stanley [MORGAN STANLEY LOGO] RA05-00637P-Y06/05 [GRAPHIC] MORGAN STANLEY FUNDS ACTIVE ASSETS TAX-FREE TRUST ANNUAL REPORT JUNE 30, 2005 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto to delete from the end of the following paragraph on page 2 of the Code the phrase "to the detriment of the Fund.": "Each Covered Officer must not use his personal influence or personal relationship improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly)." (d) Not applicable. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown: 2005
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 28,105 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 540(2) $ 3,215,745(2) TAX FEES $ 5,164(3) $ 24,000(4) ALL OTHER FEES $ - $ - TOTAL NON-AUDIT FEES $ 5,704 $ 3,239,745 TOTAL $ 33,809 $ 3,239,745
2004
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 26,761 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452(2) $ 3,225,276(2) TAX FEES $ 4,529(3) $ 610,053(4) ALL OTHER FEES $ - $ -(5) TOTAL NON-AUDIT FEES $ 4,981 $ 3,835,329 TOTAL $ 31,742 $ 3,835,329
N/A- Not applicable, as not required by Item 4. (1) Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. (2) Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities' and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements. (3) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant's tax returns. (4) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities' tax returns. (5) All other fees represent project management for future business applications and improving business and operational processes. (e)(1) The audit committee's pre-approval policies and procedures are as follows: APPENDIX A AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY AND PROCEDURES OF THE MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS AS ADOPTED AND AMENDED JULY 23, 2004,(1) 1. STATEMENT OF PRINCIPLES The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor's independence from the Fund. The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee's administration of the engagement of the independent auditor. The SEC's rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee. The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations. - ---------- (1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the "POLICY"), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time. The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee's responsibilities to pre-approve services performed by the Independent Auditors to management. The Fund's Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors' independence. 2. DELEGATION As provided in the Act and the SEC's rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting. 3. AUDIT SERVICES The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund's financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items. In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings. The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 4. AUDIT-RELATED SERVICES Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund's financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC's rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters not classified as "Audit services"; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR. The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 5. TAX SERVICES The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor's independence, and the SEC has stated that the Independent Auditors may provide such services. Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 6. ALL OTHER SERVICES The Audit Committee believes, based on the SEC's rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC's rules on auditor independence. The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services. 8. PROCEDURES All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund's Chief Financial Officer and must include a detailed description of the services to be rendered. The Fund's Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund's Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC's rules on auditor independence. The Audit Committee has designated the Fund's Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund's Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund's Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund's Chief Financial Officer or any member of management. 9. ADDITIONAL REQUIREMENTS The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor's independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence. 10. COVERED ENTITIES Covered Entities include the Fund's investment adviser(s) and any entity controlling, controlled by or under common control with the Fund's investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund's audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include: MORGAN STANLEY RETAIL FUNDS Morgan Stanley Investment Advisors Inc. Morgan Stanley & Co. Incorporated Morgan Stanley DW Inc. Morgan Stanley Investment Management Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Van Kampen Asset Management Morgan Stanley Services Company, Inc. Morgan Stanley Distributors Inc. Morgan Stanley Trust FSB MORGAN STANLEY INSTITUTIONAL FUNDS Morgan Stanley Investment Management Inc. Morgan Stanley Investment Advisors Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Morgan Stanley & Co. Incorporated Morgan Stanley Distribution, Inc. Morgan Stanley AIP GP LP Morgan Stanley Alternative Investment Partners LP (e)(2) Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee's pre-approval policies and procedures (attached hereto). (f) Not applicable. (g) See table above. (h) The audit committee of the Board of Trustees has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors' independence in performing audit services. Item 5. Audit Committee of Listed Registrants. (a) The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J. Kearns, Michael Nugent and Fergus Reid. (b) Not applicable. Item 6. Schedule of Investments Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to reports filed by closed-end funds. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable only to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Active Assets Tax-Free Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer August 23, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer August 23, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer August 23, 2005 EX-99.CODEETH 2 a2161645zex-99_codeeth.txt EX 99.CODE ETH Exhibit 99.CODE ETH EXHIBIT 12 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED SEPTEMBER 28, 2004 I. This Code of Ethics (the "Code") for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. - full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: - use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly); - cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or - use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: - service or significant business relationships as a director on the board of any public or private company; - accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; - each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; - annually thereafter affirm to the Boards that he has complied with the requirements of the Code; - not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and - notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(2) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: - the General Counsel will take all appropriate action to investigate any potential violations reported to him; - if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; - any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; - if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable - ---------- (2) Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; - the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. - --------------------------- Date: ---------------------- EXHIBIT B INSTITUTIONAL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer RETAIL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer Frank Smith - Chief Financial Officer and Treasurer EXHIBIT C GENERAL COUNSEL Barry Fink EX-99.CERT 3 a2161645zex-99_cert.txt EX 99.CERT Exhibit 99.CERT EXHIBIT 12 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Active Assets Tax-Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 23, 2005 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 12 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 1. I have reviewed this report on Form N-CSR of Active Assets Tax-Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 23, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 4 a2161645zex-99_906cert.txt EX 99.906CERT Exhibit 99.906CERT SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Active Assets Tax-Free Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended June 30, 2005 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: August 23, 2005 /s/ Ronald E. Robison --------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Active Assets Tax-Free Trust and will be retained by Active Assets Tax-Free Trust and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Active Assets Tax-Free Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended June 30, 2005 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: August 23, 2005 /s/ Francis Smith ----------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Active Assets Tax-Free Trust and will be retained by Active Assets Tax-Free Trust and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----