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: 811-07344
Morgan Stanley California Insured Municipal Income Trust
(Exact name of registrant as specified in charter)
522 Fifth Avenue, New York, New York |
| 10036 |
(Address of principal executive offices) |
| (Zip code) |
Ronald E. Robison
522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
Registrant’s telephone number, including area code: 212-296-6990
Date of fiscal year end: October 31, 2008
Date of reporting period: April 30, 2008
Item 1 – Report to Shareholders
Welcome, Shareholder:
In this report, you’ll learn about how your investment in Morgan Stanley California Insured Municipal Income Trust performed during the semiannual 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 Trust’s financial statements and a list of Trust investments.
Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Trust will achieve its investment objective. The Trust is subject to market risk, which is the possibility that market values of securities owned by the Trust will decline and, therefore, the value of the Trust’s shares may be less than what you paid for them. Accordingly, you can lose money investing in this Trust. |
Income earned by certain securities in the portfolio may be subject to the federal alternative minimum tax (AMT). |
Fund Report | |
For the six months ended April 30, 2008 | |
Market Conditions
The six-month period under review was marked by disrupted credit markets, recession fears, deterioration of the housing market, and markdowns in the mortgage market as a result of forced selling. Although the fixed income market saw some improvements in the last month of the period, many of the same concerns and problems remained.
The Federal Reserve (the ‘‘Fed’’) stepped in several times during the period to minimize the liquidity crisis. Not only did the Federal Open Market Committee reduce the target federal funds rate several times, from 4.5 percent to 2.0 percent, but in an unprecedented move, the Fed granted primary Treasury dealers (mostly brokerage firms) access to its discount window and loosened its collateral requirements, extending loans of Treasury securities in exchange for lower quality, less liquid securities. Finally, in what was most decidedly the biggest headline event, the Fed arranged and supported JPMorgan Chase’s purchase of Bear Stearns, which was viewed by many as necessary to avoid serious market repercussions had the firm failed.
The decline in short-term interest rates, coupled with the risk-averse environment during the period pushed Treasury yields lower, especially on the short end of the yield curve, causing the curve to steepen. The municipal yield curve steepened as well, with the yield differential between one-year and 30-year maturities reaching more than 300 basis points. Overall, municipal bonds underperformed their taxable counterparts as credit rating downgrades of various monoline bond insurers and the deterioration of the auction rate and variable rate markets posed additional challenges for the sector. After a record year for new municipal bond issuance in 2007, the amount of new issues coming to market in the first four months of 2008 declined. Although issuance by the state of California declined as well, the state remained one of the largest issuers of municipal bonds in the country.
Performance Analysis
For the six-month period ended April 30, 2008, the net asset value (NAV) of Morgan Stanley California Insured Municipal Income Trust (IIC) decreased from $14.96 to $14.68 per share. Based on this change plus reinvestment of tax-free dividends totaling $0.33 per share and a long-term capital gain distribution of $0.109047 per share, the Trust’s total NAV return was 1.36 percent. IIC’s value on the New York Stock Exchange (NYSE) moved from $13.69 to $13.49 per share during the same period. Based on this change plus reinvestment of dividends and distributions, the Trust’s total market return was 1.78 percent. IIC’s NYSE market price was at an 8.11 percent discount to its NAV. During the fiscal period, t he Trust purchased and retired 118,533 shares of common stock at a weighted average market discount of 8.83 percent. Past performance is no guarantee of future results.
Monthly dividends for the second quarter of 2008, declared in April, were unchanged at $0.055 per share. The dividend reflects the current level of the
2
Trust’s net investment income. IIC’s level of undistributed net investment income was $0.051 per share on April 30, 2008 versus $0.056 per share six months earlier.1
Throughout the six-month period, the Trust maintained a lower interest rate sensitivity (as measured by duration*), which was implemented through the use of a U.S. Treasury futures hedge. This defensive positioning benefited performance as it helped to minimize the price declines that resulted from rising yields across the intermediate and long end of the municipal yield curve.
In terms of the Trust’s sector positioning, an overweight in the hospital/life care and tobacco sectors detracted from relative performance as spread widening in those sectors hindered returns. Conversely, an overweight in the public utility sector, particularly water and sewer bonds, benefited performance. The flight to quality that took place during the period helped boost the performance of the more solid infrastructure sectors such as utilities and the Trust’s holdings there enhanced returns.
The Trust’s procedure for reinvesting all dividends and distributions in common shares is through purchases in the open market. This method helps support the market value of the Trust’s shares. In addition, we would like to remind you that the Trustees have approved a procedure whereby the Trust may, when appropriate, purchase shares in the open market or in privately negotiated transactions at a price not above market value or net asset value, whichever is lower at the time of purchase. The Trust may also utilize procedures to reduce or eliminate the amount of Auction Rate Preferred Shares (ARPS) outstanding, including their purchase in the open market or in privately negotiated transactions.
Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. Investment return, net asset value and common share market price will fluctuate and Trust shares, when sold, may be worth more or less than their original cost.
There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Trust in the future.
1 Income earned by certain securities in the portfolio may be subject to the federal alternative minimum tax (AMT). |
* A measure of the sensitivity of a bond’s price to changes in interest rates, expressed in years. Each year of duration represents an expected 1 percent change in the price of a bond for every 1 percent change in interest rates. The longer a bond’s duration, the greater the effect of interest-rate movements on its price. Typically, trusts with shorter durations perform better in rising-interest-rate environments, while trusts with longer durations perform better when rates decline. Duration calculations are adjusted for leverage. |
3
TOP FIVE SECTORS AS OF 04/30/08 | ||||||
Appropriation | 16.6 | % | ||||
Water & Sewer | 15.1 | |||||
Dedicated Tax | 13.6 | |||||
Education | 11.3 | |||||
Transportation | 9.2 | |||||
LONG-TERM CREDIT ENHANCEMENTS AS OF 04/30/08 | ||||||
FSA | 27.7 | % | ||||
MBIA | 26.9 | |||||
AMBAC | 24.5 | |||||
FGIC | 17.8 | |||||
U.S. Government Backed | 2.4 | |||||
AGC | 0.7 | |||||
Subject to change daily. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned or securities in the sectors shown above. Top five sectors are as a percentage of total investments. Long-term credit enhancements are as a percentage of long-term investments. Securities are classified by sectors that represent broad groupings of related industries. 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. |
For More Information About Portfolio Holdings
Each Morgan Stanley trust provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the trust’s second and fourth fiscal quarters. The semiannual reports and the annual reports are filed electronically with the Securities and Exchange Commission (SEC) on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semiannual and annual reports to trust shareholders and makes these reports available on its public web site, www.morganstanley.com. Each Morgan Stanley trust also files a complete schedule of portfolio holdings with the SEC for the trust’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 r eview 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.
4
Morgan Stanley California Insured Municipal Income Trust
Portfolio of Investments April 30, 2008 (unaudited)
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
Tax-Exempt Municipal Bonds (139.1%) | ||||||||||||||||||
California (135.8%) | ||||||||||||||||||
$ | 750 | Alameda County Joint Powers Authority, Ser 2008 A (FSA Insd) | 5.00 | % | 12/01/25 | $ | 787,252 | |||||||||||
585 | Alvord Unified School District, Ser 2007 A (FSA Insd) WI | 5.00 | 08/01/28 | 610,237 | ||||||||||||||
4,970 | Anaheim City School District, Ser 2007 (MBIA Insd) | 0.00 | 08/01/24 | 2,155,737 | ||||||||||||||
4,000 | Anaheim Electric, Ser 2007-A (MBIA Insd) | 4.50 | 10/01/37 | 3,788,280 | ||||||||||||||
5,000 | California Department of Veterans Affairs, Home Purchase 2002 Ser A (AMBAC Insd) | 5.35 | 12/01/27 | 5,202,600 | ||||||||||||||
3,000 | California Department of Water Resources, Central Valley Ser Y (FGIC Insd) | 5.25 | 12/01/19 | 3,163,170 | ||||||||||||||
1,000 | California Infrastructure & Economic Development Bank, California Science Center Foundation Ser 2006 B (FGIC Insd) | 5.00 | 05/01/31 | 986,550 | ||||||||||||||
2,000 | California State University, Ser 2003 A (FGIC Insd) | 5.25 | 11/01/21 | 2,076,860 | ||||||||||||||
2,000 | California State University, Ser 2005 A (AMBAC Insd) | 5.00 | 11/01/35 | 2,024,740 | ||||||||||||||
3,000 | California, Economic Recovery Ser 2004 A (MBIA Insd) | 5.00 | 07/01/15 | 3,237,240 | ||||||||||||||
4,000 | California, Refg Dtd 04/01/07 Ser 2007 (MBIA Insd) | 4.25 | 08/01/33 | 3,663,320 | ||||||||||||||
750 | California, Various Purpose Dtd 04/01/93 (FSA Insd) | 5.50 | 04/01/19 | 758,040 | ||||||||||||||
2,000 | California, Veterans Ser BH (AMT) (FSA Insd) | 5.40 | 12/01/16 | 2,024,540 | ||||||||||||||
1,000 | Camarillo Public Finance Authority, California, Wastewater Ser 2005 (AMBAC Insd) | 5.00 | 06/01/36 | 1,005,900 | ||||||||||||||
1,000 | Capistrano Unified School District, Community Facilities District #98-2 Ladera Special Tax Ser 2005 (FGIC Insd) | 5.00 | 09/01/29 | 987,020 | ||||||||||||||
2,000 | Chula Vista Public Financing Authority, Ser A 2005 (MBIA Insd) | 5.00 | 09/01/29 | 2,002,300 | ||||||||||||||
5,060 | Contra Costa Water District, Refg Ser L (FSA Insd) | 5.00 | 10/01/20 | 5,316,289 | ||||||||||||||
2,135 | Contra Costa Water District, Refg Ser L (FSA Insd) | 5.00 | 10/01/21 | 2,226,250 | ||||||||||||||
2,240 | Contra Costa Water District, Refg Ser L (FSA Insd) | 5.00 | 10/01/22 | 2,341,853 | ||||||||||||||
2,000 | Culver City Redevelopment Agency, Ser 2005 A (AMBAC Insd) | 5.00 | 11/01/25 | 2,027,680 | ||||||||||||||
1,000 | Eastern Municipal Water District, Water & Sewer Refg Ser 2006 A COPs (MBIA Insd) (a) | 5.00 | 07/01/32 | 1,020,090 | ||||||||||||||
2,560 | Fontana Unified School District, Ser B (FSA Insd) | 0.00 | 08/01/29 | 836,992 | ||||||||||||||
4,000 | Golden State Tobacco Securitization Corporation, Enhanced Asset Backed Ser 2005 A (FGIC Insd) | 5.00 | 06/01/38 | 3,831,920 | ||||||||||||||
2,475 | Grossmont Union High School District, Ser 2006 (MBIA Insd) | 0.00 | 08/01/24 | 1,102,142 | ||||||||||||||
2,000 | Kern County Board of Education, Refg 2006 Ser A COPs (MBIA Insd) | 5.00 | 06/01/31 | 2,023,780 | ||||||||||||||
770 | Kern County Water Agency, Ser 2008 A COPs (AGC Insd) WI | 5.00 | 05/01/28 | 787,648 | ||||||||||||||
3,000 | La Quinta Financing Authority, Local Agency 2004 Ser A (AMBAC Insd) | 5.25 | 09/01/24 | 3,117,630 | ||||||||||||||
2,000 | La Quinta Redevelopment Agency, Area #1 Ser 2002 (AMBAC Insd) | 5.00 | 09/01/22 | 2,068,960 | ||||||||||||||
See Notes to Financial Statements
5
Morgan Stanley California Insured Municipal Income Trust
Portfolio of Investments April 30, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
$ | 2,750 | Long Beach Harbor, Ser 1995 (AMT) (MBIA Insd) | 5.00 | % | 05/15/24 | $ | 2,734,930 | |||||||||||
2,000 | Los Angeles County Metropolitan Transportation Authority, Sales Tax Ser 2000 A (FGIC Insd) | 4.50 | 07/01/29 | 1,963,440 | ||||||||||||||
4,000 | Los Angeles Department of Water & Power, 2001 Ser A (FSA Insd) | 5.25 | 07/01/21 | 4,186,040 | ||||||||||||||
5,000 | Los Angeles Department of Water & Power, 2003 Ser A Subser A-2 (MBIA Insd) | 5.00 | 07/01/27 | 5,116,150 | ||||||||||||||
3,000 | Los Angeles Municipal Improvement Corporation, Police Headquarters Ser 2006 A (FGIC Insd) | 4.75 | 01/01/31 | 2,859,660 | ||||||||||||||
2,000 | Los Angeles Unified School District, Ser 2006 F (MBIA Insd) | 5.00 | 07/01/30 | 2,045,640 | ||||||||||||||
7,000 | Los Angeles Wastewater, Refg Ser 2003 B (FSA Insd) | 5.00 | 06/01/22 | 7,328,860 | ||||||||||||||
10,000 | Los Angeles, Harbor Department 2001 A (AMBAC Insd) | 5.00 | 08/01/25 | 10,179,300 | ||||||||||||||
4,000 | Metropolitan Waterworks District of Southern California, 2003 Ser B-1 (FGIC Insd) | 5.00 | 10/01/33 | 4,072,000 | ||||||||||||||
2,000 | Metropolitan Waterworks District of Southern California, 2003 Ser B-1 (FGIC Insd) | 5.00 | 10/01/36 | 2,033,120 | ||||||||||||||
3,000 | Milpitas Redevelopment Agency, Area #1 Ser 2003 (MBIA Insd) | 5.00 | 09/01/22 | 3,103,350 | ||||||||||||||
4,000 | Modesto Irrigation District, Ser 2001 A COPs (FSA Insd) | 5.00 | 07/01/26 | 4,076,200 | ||||||||||||||
5,000 | Modesto, Community Center Refg 1993 Ser A COPs (AMBAC Insd) | 5.00 | 11/01/23 | 5,242,650 | ||||||||||||||
3,000 | Oakland, Ser 2003 A (MBIA Insd) | 5.00 | 01/15/33 | 3,029,850 | ||||||||||||||
750 | Oakland Joint Powers Financing Authority, Oakland Administration Buildings 2008 Ser B (AGC Insd) WI | 5.00 | 08/01/25 | 786,765 | ||||||||||||||
790 | Placer County Water Agency, Ser 2008 (FSA Insd) | 4.75 | 07/01/29 | 797,568 | ||||||||||||||
3,000 | Port of Oakland, 2000 Ser K (AMT) (FGIC Insd) | 5.875 | 11/01/17 | 3,043,860 | ||||||||||||||
4,000 | Poway Redevelopment Agency, Paguay Redev 2003 Ser (MBIA Insd) (b) | 5.25 | 06/15/22 | 4,195,720 | ||||||||||||||
4,000 | Poway Redevelopment Agency, Paguay Redev 2003 Ser (MBIA Insd) (b) | 5.25 | 06/15/23 | 4,195,720 | ||||||||||||||
4,000 | Poway Redevelopment Agency, Paguay Redev 2003 Ser (MBIA Insd) (b) | 5.25 | 06/15/24 | 4,195,720 | ||||||||||||||
4,000 | Poway Uniform School District Public Financiing Authority, Ser 2007 (AMBAC Insd) | 4.625 | 09/15/42 | 3,750,360 | ||||||||||||||
770 | Redding, Electric System Ser 2008 A (FSA Insd) WI | 5.00 | 06/01/26 | 789,581 | ||||||||||||||
365 | Redding, Electric System Ser 2008 A (FSA Insd) WI | 5.00 | 06/01/27 | 372,811 | ||||||||||||||
4,000 | San Diego County Water Authority, California, Ser 2004 A COPs (FSA Insd) | 5.00 | 05/01/29 | 4,094,880 | ||||||||||||||
5,000 | San Francisco Airports Commission, San Francisco Int’l Airport Refg Issue 27A (AMT) (MBIA Insd) | 5.25 | 05/01/26 | 5,008,250 | ||||||||||||||
1,125 | San Francisco Bay Area Rapid Transit District, Sales Tax Ser 1998 (AMBAC Insd) | 5.00 | 07/01/28 | 1,135,744 | ||||||||||||||
See Notes to Financial Statements
6
Morgan Stanley California Insured Municipal Income Trust
Portfolio of Investments April 30, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
$ | 4,000 | San Francisco City & County, City Buildings Ser 2007 A COPs (FGIC Insd) | 4.50 | % | 09/01/37 | $ | 3,647,880 | |||||||||||
1,000 | San Francisco City & County, Laguna Honda Hospital RITES PA 1387 (FSA Insd) | 12.20 | (c) | 06/15/30 | 1,095,080 | |||||||||||||
5,000 | San Francisco Public Utilities Commission, Water Refg Ser A 2001 (FSA Insd) | 5.00 | 11/01/31 | 5,070,500 | ||||||||||||||
2,000 | San Joaquin Hills Transportation Corridor Agency, Toll Road Refg Ser 1997 A (MBIA Insd) | 5.25 | 01/15/30 | 1,978,640 | ||||||||||||||
8,000 | San Jose Financing Authority, Civic Center Ser 2002 B (AMBAC Insd) | 5.00 | 06/01/37 | 8,090,880 | ||||||||||||||
4,000 | San Jose, Airport Ser 2001 A (FGIC Insd) | 5.00 | 03/01/25 | 4,041,840 | ||||||||||||||
4,690 | Santa Maria, Local Water & Refg Ser 1993 COPs (FGIC Insd) | 5.50 | 08/01/21 | 4,696,613 | ||||||||||||||
1,000 | Simi Valley Public Financing Authority, Ser 2004 COPs (AMBAC Insd) | 5.00 | 09/01/30 | 1,005,320 | ||||||||||||||
2,150 | Turlock Irrigation District, Refg 1998 Ser A (MBIA Insd) | 5.00 | 01/01/26 | 2,166,620 | ||||||||||||||
770 | Tustin Unified School District, Ser 2008 C (FSA Insd) WI | 5.00 | 06/01/25 | 810,487 | ||||||||||||||
2,000 | University of California, Ser 2003 B (AMBAC Insd) | 5.00 | 05/15/22 | 2,076,580 | ||||||||||||||
5,000 | University of California, Multi Purpose Ser 2003 Q (FSA Insd) | 5.00 | 09/01/23 | 5,228,400 | ||||||||||||||
3,775 | University of California, USLA Medical Center Ser 2004A (AMBAC Insd) | 5.25 | 05/15/12 (d) | 4,144,271 | ||||||||||||||
2,225 | University of California, USLA Medical Center Ser 2004A (AMBAC Insd) | 5.25 | 05/15/30 | 2,294,420 | ||||||||||||||
1,000 | University of California, Limited Projects Ser 2005 B (FSA Insd) | 5.00 | 05/15/30 | 1,023,520 | ||||||||||||||
4,000 | University of California, Ser 2007 J (FSA Insd) | 4.50 | 05/15/31 | 3,877,120 | ||||||||||||||
4,000 | University of California, Ser 2007 J (FSA Insd) | 4.50 | 05/15/35 | 3,830,920 | ||||||||||||||
4,000 | University of California, Ser 2007 A (MBIA Insd) | 4.50 | 05/15/37 | 3,777,080 | ||||||||||||||
1,330 | Val Verde Unified School District, Ser 2005 B COPs (FGIC Insd) | 5.00 | 01/01/35 | 1,306,831 | ||||||||||||||
1,465 | Yosemite Community College District, Ser 2008 C (FSA Insd) | 0.00 | 08/01/22 | 733,804 | ||||||||||||||
212,409,995 | ||||||||||||||||||
Puerto Rico (3.3%) | ||||||||||||||||||
5,000 | Puerto Rico Infrastructure Financing Authority, 2000 Ser A (ETM) | 5.50 | 10/01/32 | 5,196,350 | ||||||||||||||
Total Tax-Exempt Municipal Obligations (Cost $215,177,384) | 217,606,345 | |||||||||||||||||
California Tax-Exempt Short-Term Municipal Bonds (6.9%) | ||||||||||||||||||
4,100 | California Department of Water (Demand 05/01/08) | 2.55 | † | 05/01/22 | 4,100,000 | |||||||||||||
925 | California Housing Finance Agency, Ser 2000 B (Demand 05/01/08) | 2.40 | † | 02/01/31 | 925,000 | |||||||||||||
2,200 | California, Ser B (Demand 05/01/08) | 2.40 | † | 05/01/40 | 2,200,000 | |||||||||||||
300 | Metropolitan Waterworks District of Southern California, Ser B-3 (Demand 05/01/08) | 2.19 | † | 07/01/35 | 300,000 | |||||||||||||
See Notes to Financial Statements
7
Morgan Stanley California Insured Municipal Income Trust
Portfolio of Investments April 30, 2008 (unaudited) continued
PRINCIPAL AMOUNT IN THOUSANDS | COUPON RATE | MATURITY DATE | VALUE | |||||||||||||||
$ | 1,700 | Orange County Sanitation Districts, Ser B (Demand 05/01/08) | 2.20 | †% | 08/01/30 | $ | 1,700,000 | |||||||||||
1,600 | Tustin, Improvement Board Act 1915 (Demand 05/01/08) | 2.19 | † | 09/02/13 | 1,600,000 | |||||||||||||
Total California Tax-Exempt Short-Term Municipal Bonds (Cost $10,825,000) | 10,825,000 | |||||||||||||||||
Total Investments (Cost $226,002,384) | 228,431,345 | |||||||||||||||||
Floating Rate Note Obligations Related to Securities Held (−3.8%) | ||||||||||||||||||
(6,000 | ) | Note with an interest rate of 3.18% at April 30, 2008 and contractual maturities of collateral ranging from 06/15/22 to 06/15/24 (See Note 1D) (e) (Cost $(6,000,000)) | (6,000,000 | ) | ||||||||||||||
Total Net Investments (Cost $220,002,384) (f) (g) | 142.2% | 222,431,345 | ||||||||||||||||
Liabilities in Excess of Other Assets | (0.6) | (970,946 | ) | |||||||||||||||
Preferred Shares of Beneficial Interest | (41.6) | (65,000,000 | ) | |||||||||||||||
Net Assets Applicable to Common Shareholders | 100.0% | $ | 156,460,399 | |||||||||||||||
Note: The categories of investments are shown as a percentage of net assets applicable to common shareholders. |
AMT | Alternative Minimum Tax. |
COPs | Certificates of Participation. |
ETM | Escrowed to Maturity. |
RITES | Residual Interest Tax-Exempt Security. |
WI | Security purchased on a when-issued basis. |
† | Current coupon of variable rate demand obligation. |
(a) | A portion of this security has been physically segregated in connection with open futures contracts in the amount of $254,163. |
(b) | Underlying security related to inverse floaters entered into by the Trust (See Note 1D). |
(c) | Current coupon rate for inverse floating rate municipal obligation (See Note 8). This rate resets periodically as the auction rate on the related security changes. Position in an inverse floating rate municipal obligation has a total value of $1,095,080 which represents 0.7% of net assets applicable to common shareholders. |
(d) | Prerefunded to call date shown. |
(e) | Floating rate note obligations related to securities held. The interest rate shown reflects the rate in effect at April 30, 2008. |
(f) | Securities have been designated as collateral in an amount equal to $41,087,630 in connection with open futures and swap contracts. |
(g) | The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $4,844,084 and the aggregate gross unrealized depreciation is $2,415,123, resulting in net unrealized appreciation of $2,428,961. |
Bond Insurance: |
AGC | Assured Guaranty Corporation. |
AMBAC | AMBAC Assurance Corporation. |
FGIC | Financial Guaranty Insurance Company. |
FSA | Financial Security Assurance Inc. |
MBIA | Municipal Bond Investors Assurance Corporation. |
See Notes to Financial Statements
8
Morgan Stanley California Insured Municipal Income Trust
Portfolio of Investments April 30, 2008 (unaudited) continued
Futures Contracts Open at April 30, 2008:
NUMBER OF CONTRACTS | LONG/SHORT | DESCRIPTION, DELIVERY MONTH AND YEAR | UNDERLYING FACE AMOUNT AT VALUE | UNREALIZED APPRECIATION (DEPRECIATION) | ||||||||||||||
215 | Long | Swap Future 10 year | ||||||||||||||||
June 2008 | $ | 24,254,688 | $ | 78,308 | ||||||||||||||
19 | Long | U.S. Treasury Notes 10 year | ||||||||||||||||
June 2008 | 2,200,438 | (5,543 | ) | |||||||||||||||
3 | Long | U.S. Treasury Notes 2 year | ||||||||||||||||
June 2008 | 638,063 | 697 | ||||||||||||||||
191 | Short | U.S. Treasury Bonds 20 year | ||||||||||||||||
June 2008 | (22,326,110 | ) | 161,652 | |||||||||||||||
Net Unrealized Appreciation | $ | 235,114 | ||||||||||||||||
Interest Rate Swap Contracts Open at April 30, 2008:
COUNTERPARTY | NOTIONAL AMOUNT (000’S) | PAYMENTS RECEIVED BY TRUST | PAYMENTS MADE BY TRUST | TERMINATION DATE | UNREALIZED APPRECIATION (DEPRECIATION) | |||||||||||||||||
Bank of America N.A. | $ | 9,890 | Fixed Rate 5.580% | Floating Rate 0.000%@ | February 28, 2018 | $ | 180,591 | |||||||||||||||
Bank of America N.A. | 2,960 | Fixed Rate 5.070 | Floating Rate 0.000@ | April 14, 2018 | (3,108 | ) | ||||||||||||||||
Bank of America N.A. | 2,975 | Fixed Rate 4.982 | Floating Rate 0.000@ | April 15, 2018 | (12,555 | ) | ||||||||||||||||
Bank of America N.A. | 12,640 | Floating Rate 0.000@ | Fixed Rate 5.990 | February 28, 2023 | (193,772 | ) | ||||||||||||||||
Bank of America N.A. | 3,790 | Floating Rate 0.000@ | Fixed Rate 5.470 | April 14, 2023 | (2,501 | ) | ||||||||||||||||
Bank of America N.A. | 3,645 | Floating Rate 0.000@ | Fixed Rate 5.380 | April 15, 2023 | 6,743 | |||||||||||||||||
JPMorgan Chase Bank N.A. | 10,410 | Fixed Rate 5.385 | Floating Rate 0.000@ | February 14, 2018 | 118,362 | |||||||||||||||||
JPMorgan Chase Bank N.A. | 13,270 | Floating Rate 0.000@ | Fixed Rate 5.831 | February 14, 2023 | (144,908 | ) | ||||||||||||||||
Merrill Lynch & Co., Inc. | 3,975 | Fixed Rate 5.000 | Floating Rate 0.000@ | April 15, 2018 | (14,270 | ) | ||||||||||||||||
Merrill Lynch & Co., Inc. | 5,125 | Floating Rate 0.000@ | Fixed Rate 5.395 | April 15, 2023 | 7,329 | |||||||||||||||||
Net Unrealized Depreciation | $ | (58,089 | ) | |||||||||||||||||||
@ | Floating rate represents USD-3 months LIBOR. |
See Notes to Financial Statements
9
Morgan Stanley California Insured Municipal Income Trust
Financial Statements
Statement of Assets and Liabilities
April 30, 2008 (unaudited)
Assets: | ||||||
Investments in securities, at value (cost $226,002,384) | $228,431,345 | |||||
Unrealized appreciation on open swap contracts | 313,025 | |||||
Cash | 77,798 | |||||
Receivable for: | ||||||
Interest | 3,280,464 | |||||
Variation margin | 9,423 | |||||
Prepaid expenses and other assets | 49,403 | |||||
Total Assets | 232,161,458 | |||||
Liabilities: | ||||||
Floating rate note obligations | 6,000,000 | |||||
Unrealized depreciation on open swap contracts | 371,114 | |||||
Payable for: | ||||||
Investments purchased | 4,148,577 | |||||
Investment advisory fee | 53,659 | |||||
Administration fee | 15,899 | |||||
Transfer agent fee | 934 | |||||
Accrued expenses and other payables | 110,876 | |||||
Total Liabilities | 10,701,059 | |||||
Preferred shares of beneficial interest (at liquidation value) (1,000,000 shares authorized of non-participating $.01 par value, 1,300 shares outstanding) | 65,000,000 | |||||
Net Assets Applicable to Common Shareholders | $156,460,399 | |||||
Composition of Net Assets Applicable to Common Shareholders: | ||||||
Common shares of beneficial interest (unlimited shares authorized of $.01 par value, 10,660,578 shares outstanding) | $151,565,183 | |||||
Net unrealized appreciation | 2,605,986 | |||||
Accumulated undistributed net investment income | 544,410 | |||||
Accumulated undistributed net realized gain | 1,744,820 | |||||
Net Assets Applicable to Common Shareholders | $156,460,399 | |||||
Net Asset Value Per Common Share ($156,460,399 divided by 10,660,578 common shares outstanding) | $14.68 | |||||
Statement of Operations
For the six months ended April 30, 2008 (unaudited)
Net Investment Income: | ||||||
Interest Income | $ | 5,357,499 | ||||
Expenses | ||||||
Investment advisory fee | 300,088 | |||||
Interest and residual trust expenses | 105,107 | |||||
Administration fee | 88,915 | |||||
Auction commission fees | 81,119 | |||||
Professional fees | 27,742 | |||||
Custodian fees | 25,626 | |||||
Auction agent fees | 18,437 | |||||
Shareholder reports and notices | 12,392 | |||||
Listing fees | 10,095 | |||||
Transfer agent fees and expenses | 5,806 | |||||
Trustees’ fees and expenses | 4,335 | |||||
Other | 28,937 | |||||
Total Expenses | 708,599 | |||||
Less: expense offset | (25,627 | ) | ||||
Net Expenses | 682,972 | |||||
Net Investment Income | 4,674,527 | |||||
Realized and Unrealized Gain (Loss): | ||||||
Realized Gain on: | ||||||
Investments | 1,159,172 | |||||
Futures contracts | 520,768 | |||||
Net Realized Gain | 1,679,940 | |||||
Change in Unrealized Appreciation/Depreciation on: | ||||||
Investments | (3,894,471 | ) | ||||
Futures contracts | 300,095 | |||||
Swap contracts | (58,089 | ) | ||||
Net Change in Unrealized Appreciation/Depreciation | (3,652,465 | ) | ||||
Net Loss | (1,972,525 | ) | ||||
Dividends to preferred shareholders from net investment income | (1,202,353 | ) | ||||
Net Increase | $ | 1,499,649 | ||||
See Notes to Financial Statements
10
Morgan Stanley California Insured Municipal Income Trust
Financial Statements continued
Statements of Changes in Net Assets
FOR THE SIX MONTHS ENDED APRIL 30, 2008 | FOR THE YEAR ENDED OCTOBER 31, 2007 | |||||||||
(unaudited) | ||||||||||
Increase (Decrease) in Net Assets: | ||||||||||
Operations: | ||||||||||
Net investment income | $ | 4,674,527 | $ | 9,481,015 | ||||||
Net realized gain | 1,679,940 | 1,237,790 | ||||||||
Net change in unrealized appreciation/depreciation | (3,652,465 | ) | (5,370,221 | ) | ||||||
Dividends to preferred shareholders from net investment income | (1,202,353 | ) | (2,190,950 | ) | ||||||
Net Increase | 1,499,649 | 3,157,634 | ||||||||
Dividends and Distributions to Common Shareholders from: | ||||||||||
Net investment income | (3,532,225 | ) | (7,454,532 | ) | ||||||
Net realized gain | (1,172,878 | ) | (341,559 | ) | ||||||
Total Dividends and Distributions | (4,705,103 | ) | (7,796,091 | ) | ||||||
Decrease from transactions in common shares of beneficial interest | (1,610,157 | ) | (1,943,783 | ) | ||||||
Net Decrease | (4,815,611 | ) | (6,582,240 | ) | ||||||
Net Assets Applicable to Common Shareholders: | ||||||||||
Beginning of period | 161,276,010 | 167,858,250 | ||||||||
End of Period | ||||||||||
(Including accumulated undistributed net investment income of $544,410 and $604,461 respectively) | $ | 156,460,399 | $ | 161,276,010 | ||||||
See Notes to Financial Statements
11
Morgan Stanley California Insured Municipal Income Trust
Notes to Financial Statements April 30, 2008 (unaudited)
1. Organization and Accounting Policies
Morgan Stanley California Insured Municipal Income Trust (the ‘‘Trust’’) is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The Trust’s investment objective is to provide current income which is exempt from both federal and California income taxes. The Trust was organized as a Massachusetts business trust on November 2, 1992 and commenced operations on February 26, 1993.
The following is a summary of significant accounting policies:
A. Valuation of Investments — (1) portfolio securities are valued by an outside independent pricing service approved by the Trustees. The pricing service uses both a computerized grid matrix of tax-exempt securities and evaluations by its staff, in each case based on information concerning market transactions and quotations from dealers which reflect the mean between the last reported bid and asked price. The portfolio securities are thus valued by reference to a combination of transactions and quotations for the same or other securities believed to be comparable in quality, coupon, maturity, type of issue, call provisions, trading characteristics and other features deemed to be relevant. The Trustees believe that timely and reliable market quotations are generally not readily available for purposes of valuing tax-exempt securities and that the valuations supplied by the pricing service are more likely to approximate the fair value of such securities; (2) futures are valued at the latest sale price on the commodities exchange on which they trade unless it is determined that such price does not reflect their market value, in which case they will be valued at their fair value as determined in good faith under procedures established by and under the supervision of the Trustees; (3) interest rate swaps are marked-to-market daily based upon quotations from market makers; and (4) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost.
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 and are included in interest income. Interest income is accrued daily.
C. Futures Contracts — A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Trust is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Trust agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Trust as unrealized gains and losses. Upon closing of the contract, the Trust realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
12
Morgan Stanley California Insured Municipal Income Trust
Notes to Financial Statements April 30, 2008 (unaudited) continued
D. Floating Rate Note Obligations Related to Securities Held — The Trust enters into transactions in which it transfers to Dealer Trusts (‘‘Dealer Trusts’’), fixed rate bonds in exchange for cash and residual interests in the Dealer Trusts’ assets and cash flows, which are in the form of inverse floating rate investments. The Dealer Trusts fund the purchases of the fixed rate bonds by issuing floating rate notes to third parties and allowing the Trust to retain residual interest in the bonds. The Trust enters into shortfall agreements with the Dealer Trusts which commit the Trust to pay the Dealer Trusts, in certain circumstances, the difference between the liquidation value of the fixed rate bonds held by the Dealer Trusts and the liquidations value of the floating rate notes held by third parties, as well as any shortfalls in interest cash flows. The resid ual interests held by the Trust (inverse floating rate investments) include the right of the Trust (1) to cause the holders of the floating rate notes to tender their notes at par at the next interest rate reset date, and (2) to transfer the municipal bond from the Dealer Trusts to the Trust, thereby collapsing the Dealer Trusts. The Trust accounts for the transfer of bonds to the Dealer Trusts as secured borrowings, with the securities transferred remaining in the Trust’s investment assets, and the related floating rate notes reflected as Trust liabilities under the caption ‘‘floating rate note obligations’’ on the Statement of Assets and Liabilities. The Trust records the interest income from the fixed rate bonds under the caption ‘‘Interest Income’’ and records the expenses related to floating rate obligations and any administrative expenses of the Dealer Trusts under the caption ‘‘Interest and residual trust expenses’’ in the T rust’s Statement of Operations. The notes issued by the Dealer Trusts have interest rates that reset weekly and the floating rate note holders have the option to tender their notes to the Dealer Trusts for redemption at par at each reset date. At April 30, 2008, Trust investments with a value of $12,587,160 are held by the Dealer Trusts and serve as collateral for the $6,000,000 in the floating rate note and dealer trusts obligations outstanding at that date. Contractual maturities of the floating rate note obligations and interest rates in effect at April 30, 2008 are presented in the Portfolio of Investments.
E. Interest Rate Swaps — Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional principal amount. Net periodic interest payments to be received or paid are accrued daily and are recorded as realized gains or losses in the Statement of Operations. The Trust may pay or receive cash to collateralize interest rate swap contracts. This cash collateral is recorded as assets/liabilities on the Trust’s books.
F. Federal Income Tax Policy — It is the Trust’s policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable and nontaxable income to its shareholders. Therefore, no provision for federal income tax is required. The Trust files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Trust adopted the provisions of the Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 48 (‘‘FIN 48’’) Accounting for Uncertainty in Income Taxes on April 29, 2008. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. If applicable, the Trust recognizes interest accrued related to unrecognized tax benefits in interest
13
Morgan Stanley California Insured Municipal Income Trust
Notes to Financial Statements April 30, 2008 (unaudited) continued
expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four year period ended April 30, 2008, remains subject to examination by taxing authorities.
G. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date.
H. 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
Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment Advisors Inc. (the ‘‘Investment Adviser’’), the Trust pays the Investment Adviser an advisory fee, calculated weekly and payable monthly, by applying the annual rate of 0.27% to the Trust’s average weekly net assets including preferred shares.
Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the ‘‘Administrator’’), an affiliate of the Investment Adviser, the Trust pays an administration fee, calculated weekly and payable monthly, by applying the annual rate of 0.08% to the Trust’s average weekly net assets including preferred shares.
Under an agreement between the Administrator and State Street Bank and Trust Company (‘‘State Street’’), State Street provides certain administrative services to the Trust. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Trust.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended April 30, 2008, aggregated $8,270,842 and $11,852,510, respectively.
The Trust has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Trust who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. 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. Aggregate pension costs for the six months ended April 30, 2008, included in Trustees’ fees and expenses in the Statement of Operations amounted to $2,308. At April 30, 2008, the Trust had an accrued pension liability of $52,794 which is included in accrued e xpenses in the Statement of Assets and Liabilities.
The Trust 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 or she receives for serving on the
14
Morgan Stanley California Insured Municipal Income Trust
Notes to Financial Statements April 30, 2008 (unaudited) continued
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 Trust.
4. Preferred Shares of Beneficial Interest
The Trust is authorized to issue up to 1,000,000 non-participating preferred shares of beneficial interest having a par value of $.01 per share, in one or more series, with rights as determined by the Trustees, without approval of the common shareholders. The Trust has issued Series 1 through 4 Auction Rate Preferred Shares (‘‘preferred shares’’) which have a liquidation value of $50,000 per share plus the redemption premium, if any, plus accumulated but unpaid dividends, whether or not declared, thereon to the date of distribution. The Trust may redeem such shares, in whole or in part, at the original purchase price of $50,000 per share plus accumulated but unpaid dividends, whether or not declared, t hereon to the date of redemption.
Dividends, which are cumulative, are reset through auction procedures.
SERIES | SHARES+ | AMOUNT IN THOUSANDS+ | RATE+ | RESET DATE | RANGE OF DIVIDEND RATES++ | |||||||||||||||||
1 | 200 | $ | 10,000 | 3.59 | % | 05/05/08 | 1.77% − 4.51% | |||||||||||||||
2 | 400 | 20,000 | 3.59 | 05/05/08 | 2.50 − 4.51 | |||||||||||||||||
3 | 500 | 25,000 | 3.59 | 05/05/08 | 2.78 − 4.51 | |||||||||||||||||
4 | 200 | 10,000 | 3.59 | 05/05/08 | 2.75 − 4.51 | |||||||||||||||||
+ | As of April 30, 2008. |
++ | For the six months ended April 30, 2008. |
Subsequent to April 30, 2008 and up through June 6, 2008, the Trust paid dividends to Series 1 through 4 at rates ranging from 2.59% to 3.95%, in the aggregate amount of $206,063.
The Trust is subject to certain restrictions relating to the preferred shares. Failure to comply with these restrictions could preclude the Trust from declaring any distributions to common shareholders or purchasing common shares and/or could trigger the mandatory redemption of preferred shares at liquidation value.
The preferred shares, which are entitled to one vote per share, generally vote with the common shares but vote separately as a class to elect two Trustees and on any matters affecting the rights of the preferred shares.
15
Morgan Stanley California Insured Municipal Income Trust
Notes to Financial Statements April 30, 2008 (unaudited) continued
5. Common Shares of Beneficial Interest
Transactions in common shares of beneficial interest were as follows:
SHARES | PAR VALUE | CAPITAL PAID IN EXCESS OF PAR VALUE | ||||||||||||
Balance, October 31, 2006 | 10,915,211 | $ | 109,152 | $ | 155,009,971 | |||||||||
Treasury shares purchased and retired (weighted average discount 5.76%)+++ | (136,100 | ) | (1,361 | ) | (1,942,422 | ) | ||||||||
Balance, October 31, 2007 | 10,779,111 | 107,791 | 153,067,549 | |||||||||||
Treasury shares purchased and retired (weighted average discount 8.83%)+++ | (118,533 | ) | (1,185 | ) | (1,608,972 | ) | ||||||||
Balance, April 30, 2008 | 10,660,578 | $ | 106,606 | $ | 151,458,577 | |||||||||
+++ | The Trustees have voted to retire the shares purchased. |
6. Dividends to Common Shareholders
On April 8, 2008, the Trust declared the following dividends from net investment income:
AMOUNT PER SHARE | RECORD DATE | PAYABLE DATE | ||||||||
$0.055 | May 23, 2008 | May 30, 2008 | ||||||||
$0.055 | June 20, 2008 | June 27, 2008 | ||||||||
7. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Trust with the transfer agent and custodian.
8. Purposes of and Risks Relating to Certain Financial Instruments
The Trust may invest a portion of its assets in inverse floating rate instruments, either through outright purchases of inverse floating rate securities or through the transfer of bonds to a Dealer Trusts in exchange for cash and residual interests in the Dealer Trusts (See Note 1D). These investments are typically used by the Trust in seeking to enhance the yield of the portfolio. These instruments typically involve greater risks than a fixed rate municipal bond. In particular, these instruments are acquired through leverage or may have leverage embedded in them and therefore involve many of the risks associated with leverage. Leverage is a speculative technique that may expose the Trust to greater risk and increased costs. L everage may cause the Trust’s net asset value to be more volatile than if it had not been leveraged because leverage tends to magnify the effect of any increases or decreases in the value of the Trust’s portfolio securities. The use of leverage may also cause the Trust to liquidate portfolio positions when it may not be advantageous to do so in order to satisfy its obligations with respect to inverse floating rate instruments.
16
Morgan Stanley California Insured Municipal Income Trust
Notes to Financial Statements April 30, 2008 (unaudited) continued
To hedge against adverse interest rate changes, the Trust may invest in financial futures contracts or municipal bond index futures contracts (‘‘futures contracts’’).
These futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Trust bears the risk of an unfavorable change in the value of the underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
The Trust may enter into interest rate swaps and may purchase or sell interest rate caps, floors and collars. The Trust expects to enter into these transactions primarily to manage interest rate risk, hedge portfolio positions and preserve a return or spread on a particular investment or portion of its portfolio. The Trust may also enter into these transactions to protect against any increase in the price of securities the Trust anticipates purchasing at a later date. Interest rate swap transactions are subject to market risk, risk of default by the other party to the transaction, risk of imperfect correlation and manager risk. Such risks may exceed the related amounts shown in the Statements of Assets and Liabilities.
9. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These ‘‘book/tax’’ differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital.
As of October 31, 2007, the Trust had temporary book/tax differences primarily attributable to book amortization of discounts on debt securities and mark-to-market of open futures contracts.
10. Accounting Pronouncements
On March 19, 2008, FASB released Statement of Financial Accounting Standards No. 161, ‘‘Disclosures about Derivative Instruments and Hedging Activities’’ (‘‘FAS 161’’). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit- risk-related contingent features in derivative agreements. The application of FAS 161 is required for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 161 and its impact on the fin ancial statements has not yet been determined.
In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157
17
Morgan Stanley California Insured Municipal Income Trust
Notes to Financial Statements April 30, 2008 (unaudited) continued
defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Trust’s financial statement disclosures.
18
Morgan Stanley California Insured Municipal Income Trust
Financial Highlights
Selected ratios and per share data for a common share of beneficial interest outstanding throughout each period:
FOR THE SIX MONTHS ENDED APRIL 30, 2008 | FOR THE YEAR ENDED OCTOBER 31, | |||||||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||
Selected Per Share Data: | ||||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.96 | $ | 15.38 | $ | 15.04 | $ | 15.00 | $ | 14.84 | $ | 15.00 | ||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||
Net investment income(1) | 0.44 | 0.87 | 0.87 | 0.86 | 0.86 | 0.92 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.18 | ) | (0.38 | ) | 0.35 | (0.05 | ) | 0.22 | (0.12 | ) | ||||||||||||||||
Common share equivalent of dividends paid to preferred shareholders(1) | (0.11 | ) | (0.20 | ) | (0.17 | ) | (0.11 | ) | (0.10 | ) | (0.08 | ) | ||||||||||||||
Total income from investment operations | 0.15 | 0.29 | 1.05 | 0.70 | 0.98 | 0.72 | ||||||||||||||||||||
Less dividends and distributions from: | ||||||||||||||||||||||||||
Net investment income | (0.33 | ) | (0.69 | ) | (0.72 | ) | (0.72 | ) | (0.80 | ) | (0.89 | ) | ||||||||||||||
Net realized gain | (0.11 | ) | (0.03 | ) | (0.02 | ) | — | (0.07 | ) | — | ||||||||||||||||
Total dividends and distributions | (0.44 | ) | (0.72 | ) | (0.74 | ) | (0.72 | ) | (0.87 | ) | (0.89 | ) | ||||||||||||||
Anti-dilutive effect of acquiring treasury shares(1) | 0.01 | 0.01 | 0.03 | 0.06 | 0.05 | 0.01 | ||||||||||||||||||||
Net asset value, end of period | $ | 14.68 | $ | 14.96 | $ | 15.38 | $ | 15.04 | $ | 15.00 | $ | 14.84 | ||||||||||||||
Market value, end of period | $ | 13.49 | $ | 13.69 | $ | 14.46 | $ | 13.54 | $ | 13.63 | $ | 13.87 | ||||||||||||||
Total Return(2) | 1.78 | %(5) | (0.48 | )% | 12.51 | % | 4.74 | % | 4.78 | % | 2.61 | % | ||||||||||||||
Ratios to Average Net Assets of Common Shareholders: | ||||||||||||||||||||||||||
Total expenses (before expense offset) | 0.90 | %(6)(4) | 1.04 | %(3) | 0.89 | % | 0.79 | %(3) | 0.81 | %(3) | 0.77 | %(3) | ||||||||||||||
Total expenses (before expense offset, exclusive of interest and residual trust expenses) | 0.76 | %(6)(4) | 0.75 | %(3) | 0.76 | % | 0.79 | %(3) | 0.81 | %(3) | 0.77 | %(3) | ||||||||||||||
Net investment income before preferred stock dividends | 5.93 | %(6) | 5.80 | % | 5.75 | % | 5.63 | % | 5.82 | % | 6.14 | % | ||||||||||||||
Preferred stock dividends | 1.53 | %(6) | 1.34 | % | 1.14 | % | 0.74 | % | 0.67 | % | 0.56 | % | ||||||||||||||
Net investment income available to common shareholders | 4.40 | %(6) | 4.46 | % | 4.61 | % | 4.89 | % | 5.15 | % | 5.58 | % | ||||||||||||||
Supplemental Data: | ||||||||||||||||||||||||||
Net assets applicable to common shareholders, end of period, in thousands | $ | 156,460 | $ | 161,276 | $ | 167,858 | $ | 168,195 | $ | 173,758 | $ | 178,537 | ||||||||||||||
Asset coverage on preferred shares at end of period | 341 | % | 348 | % | 358 | % | 359 | % | 367 | % | 374 | % | ||||||||||||||
Portfolio turnover rate | 4 | %(5) | 16 | % | 5 | % | 13 | % | 16 | % | 64 | % | ||||||||||||||
(1) | The per share amounts were computed using an average number of common shares outstanding during the period. |
(2) | Total return is based upon the current market value on the last day of each period reported. Dividends and distributions are assumed to be reinvested at the prices obtained under the Trust’s dividend reinvestment plan. Total return does not reflect brokerage commissions. |
(3) | Does not reflect the effect of expense offset of 0.01%. |
(4) | Does not reflect the effect of expense offset of 0.03%. |
(5) | Not annualized. |
(6) | Annualized. |
See Notes to Financial Statements
19
Morgan Stanley California Insured Municipal Income Trust
Revised Investment Policy (unaudited)
While the Trust’s policy is to emphasize investments in municipal obligations with longer-term maturities because generally longer-term obligations, while more susceptible to market fluctuations resulting from changes in interest rates, produce higher yields than short-term obligations, the Trust no longer expects to maintain a specific average weighted maturity of its portfolio. As a result of changes in the fixed-income and municipal marketplace, the Trust’s average portfolio maturity will vary depending upon market conditions and other factors.
20
Morgan Stanley California Insured Municipal Income Trust
Morgan Stanley Advisor Closed End Funds
An Important Notice Concerning Our U.S. Privacy Policy (unaudited)
We are required by federal law to provide you with a copy of our Privacy Policy annually.
The following Policy applies to current and former individual investors in Morgan Stanley Advisor closed end funds. This Policy is not applicable to partnerships, corporations, trusts or other non-individual clients or account holders. Please note that we may amend this Policy at any time, and will inform you of any changes to this Policy as required by law.
We Respect Your Privacy
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1. What Personal Information Do We Collect About You?
To serve you better and manage our business, it is important that we collect and maintain accurate information about you. We may obtain this information from applications and other forms you submit to us, from your dealings with us, from consumer reporting agencies, from our Web sites and from third parties and other sources.
For example:
▪ | We may collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through applications and other forms you submit to us. |
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▪ | We may obtain information about your creditworthiness and credit history from consumer reporting agencies. |
▪ | We may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements. |
▪ | If you interact with us through our public and private Web sites, we may collect information that you provide directly through online communications (such as an e-mail address). We may also collect information about your Internet service provider, your domain name, your computer’s operating system and Web browser, your use of our Web sites and your product and service preferences, through the use of |
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Morgan Stanley California Insured Municipal Income Trust
Morgan Stanley Advisor Closed End Funds
An Important Notice Concerning Our U.S. Privacy Policy (unaudited) continued
‘‘cookies.’’ ‘‘Cookies’’ recognize your computer each time you return to one of our sites, and help to improve our sites’ content and personalize your experience on our sites by, for example, suggesting offerings that may interest you. Please consult the Terms of Use of these sites for more details on our use of cookies. |
2. When Do We Disclose Personal Information We Collect About You?
To provide you with the products and services you request, to serve you better and to manage our business, we may disclose personal information we collect about you to our affiliated companies and to non-affiliated third parties as required or permitted by law.
A. Information We Disclose to Our Affiliated Companies. We do not disclose personal information that we collect about you to our affiliated companies except to enable them to provide services on our behalf or as otherwise required or permitted by law.
B. Information We Disclose to Third Parties. We do not disclose personal information that we collect about you to non-affiliated third parties except to enable them to provide services on our behalf, to perform joint marketing agreements with other financial institutions, or as otherwise required or permitted by law. For example, some instances where we may disclose information about you to non-affiliated third parties include: for servicing and processing transactions, to offer our own products and services, to protect against fraud, for institutional risk control, to respond to judicial process or to perform services on our behalf. When we share personal information with these companies, they are required to limit their use of personal information to the particular purpose for which it was shared and they are not allowed to share personal information with others except to fulfill that limited purpose.
3. How Do We Protect the Security and Confidentiality of Personal Information We Collect
About You?
We maintain physical, electronic and procedural security measures to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information. Third parties that provide support or marketing services on our behalf may also receive personal information, and we require them to adhere to confidentiality standards with respect to such information.
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Trustees Frank L. Bowman Officers Michael E. Nugent Ronald E. Robison Kevin Klingert Dennis F. Shea Amy R. Doberman Carsten Otto Stefanie V. Chang Yu Francis J. Smith Mary E. Mullin Transfer Agent Computershare Trust Company, N.A. Independent Registered Public Accounting Firm Deloitte & Touche LLP Legal Counsel Clifford Chance US LLP Counsel to the Independent Trustees Kramer Levin Naftalis & Frankel LLP Investment Adviser Morgan Stanley Investment Advisors Inc. The financial statements included herein have been taken from the records of the Trust without examination by the independent auditors and accordingly they do not express an opinion thereon. © 2008 Morgan Stanley IICSANIU08-03279P-Y04/08 | MORGAN STANLEY FUNDS | |
Morgan Stanley California Insured Municipal Income Trust Semiannual Report April 30, 2008 | ||
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports covering periods ending on or after December 31, 2005.
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
Period |
| (a) Total Number of Shares (or Units) Purchased |
| (b) Average Price Paid per Share (or Unit) |
| (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
| (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
|
November 1, – November 30, 2007 |
| 23,400 |
| 13.2347 |
| N/A |
| N/A |
|
December 1, – December 31, 2007 |
| 51,901 |
| 13.3479 |
| N/A |
| N/A |
|
January 1, – January 31, 2008 |
| 30,432 |
| 14.2856 |
| N/A |
| N/A |
|
February 1 – February 29, 2008 |
| 12,800 |
| 13.7577 |
| N/A |
| N/A |
|
March 1 – March 31, 2008 |
|
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| N/A |
| N/A |
|
April 1, – April 30, 2008 |
|
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| N/A |
| N/A |
|
Total |
| 118,533 |
| 13.6565 |
| N/A |
| N/A |
|
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Trust’s/Fund’s principal executive officer and principal financial officer have concluded that the Trust’s/Fund’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Trust/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.
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(b) There were no changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a) Code of Ethics – Not applicable for semiannual reports.
(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.
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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.
Morgan Stanley California Insured Municipal Income Trust |
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Principal Executive Officer |
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June 19, 2008 |
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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.
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Ronald E. Robison |
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Principal Executive Officer |
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June 19, 2008 |
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Francis Smith |
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Principal Financial Officer |
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June 19, 2008 |
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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 Morgan Stanley California Insured Municipal Income 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 second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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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: June 19, 2008,
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| Ronald E. Robison |
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| Principal Executive Officer |
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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 Morgan Stanley California Insured Municipal Income 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 second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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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: June 19, 2008
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| Francis Smith |
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| Principal Financial Officer |
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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
Morgan Stanley California Insured Municipal Income Trust
In connection with the Report on Form N-CSR (the “Report”) of the above-named issuer for the period ended April 30, 2008 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: June 19, 2008
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| /s/ Ronald E. Robison |
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| Ronald E. Robison |
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| Principal Executive Officer |
A signed original of this written statement required by Section 906 has been provided to Morgan Stanley California Insured Municipal Income Trust and will be retained by Morgan Stanley California Insured Municipal Income Trust and furnished to the Securities and Exchange Commission or its staff upon request.
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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
Morgan Stanley California Insured Municipal Income Trust
In connection with the Report on Form N-CSR (the “Report”) of the above-named issuer for the period ended April 30, 2008 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: June 19, 2008
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| Francis Smith |
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| Principal Executive Officer |
A signed original of this written statement required by Section 906 has been provided to Morgan Stanley California Insured Municipal Income Trust and will be retained by Morgan Stanley California Insured Municipal Income Trust and furnished to the Securities and Exchange Commission or its staff upon request.
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