UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-04020
Morgan Stanley California Tax-Free Income Fund
(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: December 31, 2003
Date of reporting period: June 30, 2003
Item 1. Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
California Tax-Free Income Fund performed during the semiannual period. The
portfolio management team will provide an overview of the market climate, and
discuss some of the factors that helped or hindered performance during the
reporting period. In addition, this report includes the Fund's financial
statements and a list of Fund investments, as well as other information.
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 the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that the market
values of securities owned by the Fund will decline and, therefore, the value of
the Fund shares may be less than what you paid for them. Accordingly, you can
lose money investing in this Fund.
Fund Report
For the six-month period ended June 30, 2003
TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003
<Table>
<Caption>
LEHMAN
BROTHERS LIPPER
MUNICIPAL CA DEBT
BOND FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
2.82% 2.71% 2.58% 2.96% 3.81% 3.11%
</Table>
The performance of the Fund's four share classes varies because each has
different expenses. The Fund's total return figures assume the reinvestment of
all distributions, but do not reflect the deduction of any applicable sales
charges. Such costs would lower performance. Past performance is no guarantee of
future results. See Performance Summary for standardized performance
information.
MARKET CONDITIONS
The six-month period ended June 30, 2003, was a favorable time for the
fixed-income markets. The U.S. economy continued to recover but at a slow pace.
This led to investor concern that reaching the economy's full growth potential
would be delayed. The Federal Reserve Board shared this concern and cut the
federal funds rate in June. The reduction in the short-term borrowing rate was
felt across the yield curve and drove yields down to levels not seen in decades.
Several factors caused the rally in municipal bonds to lag Treasuries. First,
states and municipalities sold a record amount of debt to meet cash flow needs
and refinance higher cost issues. Municipal yields also adjusted to federal tax
legislation, which included acceleration of scheduled tax bracket reductions and
a lower tax on dividends. Finally, the yields of some credits were affected by
potential budget deficits. These factors caused the municipal market to
establish yield levels that attracted interest from crossover investors such as
insurance companies and hedge funds seeking value relative to taxable bonds.
Institutional crossover investors remained cautious on California exposure
because of the state's budget deficit and potential recall election. However,
retail investors needing state exemption absorbed record new-issue supply.
PERFORMANCE ANALYSIS
With rates at historically low levels, the market appeared to be anticipating a
prolonged, weak economic recovery. This assessment seemed unduly pessimistic in
light of monetary and fiscal policies seeking to stimulate growth. Since this
stimulus should eventually result in stronger economic growth and higher
interest rates, we maintained the Fund's shorter-than-average duration. This
conservative portfolio structure underperformed the Lehman Brothers Municipal
Bond Index during the period.
We sought to preserve shareholder value by maintaining a high-grade portfolio
with over 75 percent of long-term holdings rated either double- or -triple "A".
The portfolio is structured with a greater-than-average weighting of premium
coupon bonds. These bonds are somewhat more defensive than current-coupon (par)
bonds in a rising-rate environment. The Fund benefited by offering securities
with less favorable structure for sale to take advantage of demand for bonds
with California tax-exemption.
Purchases at the sector level focused on high-grade revenue bonds backed by
electric, transportation and water and sewer projects. The Fund has maintained a
cautious stance toward the general obligation sector because of a number of
issuers under budgetary stress face potential credit rating downgrades. The Fund
also benefited by our decision to avoid tobacco bonds.
2
<Table>
<Caption>
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 70%
Aa/AA 6%
A/A 14%
Baa/BBB 8%
Ba/BB or Less 2%
Not Rated 0%
</Table>
<Table>
<Caption>
LONG-TERM SECTORS
Water & Sewer 19%
Transportation 18%
General Obligation 15%
Electric 9%
Tax Allocation 9%
</Table>
Subject to change daily. All percentages are as a percentage of long-term
investments. Provided for informational purposes only and should not be deemed
as a recommendation to buy 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.
INVESTMENT STRATEGY
1. THE FUND SEEKS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME EXEMPT FROM FEDERAL
AND CALIFORNIA INCOME TAX, CONSISTENT WITH THE PRESERVATION OF CAPITAL. THE FUND
INVESTS PRINCIPALLY IN LONG-TERM, INVESTMENT GRADE CALIFORNIA MUNICIPAL
OBLIGATIONS THAT ARE RATED WITHIN THE FOUR HIGHEST GRADES BY MOODY'S, STANDARD &
POOR'S OR FITCH IBCA.
2. THE PORTFOLIO MANAGEMENT TEAM SEEKS TO DIVERSIFY CREDIT AND INTEREST-RATE
RISK BY INVESTING IN A MIX OF SECTORS AND INDIVIDUAL ISSUES THAT HAVE A VARIETY
OF COUPONS, MATURITIES, CALL FEATURES AND DURATIONS.
3
Call and Cost (Book) Yield Structure
PERCENT OF BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS
(Based on Long-Term Portfolio) As of 6/30/03
<Table>
2003(a) 12%
2004 4%
2005 8%
2006 5%
2007 6%
2008 15%
2009 4%
2010 2%
2011 16%
2012 8%
2013+ 20%
</Table>
COST (BOOK) YIELD(b) -- WEIGHTED AVERAGE BOOK YIELD: 5.7%
(Based on Long-Term Portfolio) As of 6/30/03
<Table>
2003(a) 5.9%
2004 6.3%
2005 7.1%
2006 6.1%
2007 6.2%
2008 5.4%
2009 5.2%
2010 6.2%
2011 5.1%
2012 5.0%
2013+ 5.6%
</Table>
(a) Includes issues callable in previous years.
(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Fund's operating expenses.
For example, the Fund is earning a book yield of 5.9% on 12% of the
long-term portfolio that is callable in 2003. Portfolio structure is subject
to change.
4
Performance Summary
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JUNE 30, 2003
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
(since 07/28/97) (since 07/11/84) (since 07/28/97) (since 07/28/97)
CLFAX CLFBX CLFCX CLFDX
1 YEAR 7.80%(3) 7.62%(3) 7.18%(3) 7.99%(3)
3.22(4) 2.62(4) 6.18(4)
5 YEARS 5.18(3) 5.08(3) 4.68(3) 5.47(3)
4.27(4) 4.75(4) 4.68(4)
10 YEARS 5.02(3)
5.02(4)
SINCE INCEPTION 5.25(3) 7.46(3) 4.77(3) 5.53(3)
4.48(4) 7.46(4) 4.77(4)
</Table>
Past performance is not predictive of future returns. Investment return and
principal value will fluctuate. When you sell fund shares, they may be worth
less than their original cost. The table does not reflect the deduction of taxes
that a shareholder would pay on fund distributions or the redemption of fund
shares. Performance for Class A, Class B, Class C, and Class D shares will vary
due to differences in sales charges and expenses.
- --------------------------------------------------------------------------------
Notes on Performance
(1) The Lehman Brothers Municipal Bond Index tracks the performance of
municipal bonds rated at least Baa or BBB by Moody's Investors Service,
Inc. or Standard & Poor's Corporation, respectively and with maturities of
2 years or greater. Indexes are unmanaged and their returns do not include
any expenses, sales charges or fees. Such costs would lower performance. It
is not possible to invest directly in an index.
(2) The Lipper California Municipal Debt Funds Index is an equally weighted
performance index of the largest qualifying funds (based on net assets) in
the Lipper California Municipal Debt Funds classification. The Index is
adjusted for capital gains distributions and income dividends. There are
currently 30 funds represented in this Index. Indexes are unmanaged and
their returns do not include any sales charges or fees. Such costs would
lower performance. It is not possible to invest directly in an index.
(3) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(4) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
* The maximum front-end sales charge for Class A is 4.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%.
The CDSC declines to 0% after six years.
+ The maximum CDSC for Class C is 1% for shares redeemed within one year of
purchase.
++ Class D has no sales charge.
5
Morgan Stanley California Tax-Free Income Fund
PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
California Tax-Exempt Municipal Bonds (92.7%)
General Obligation (14.3%)
California,
$ 5,000 Ser 1990................................................ 7.00 % 08/01/07 $ 5,865,900
5,000 Ser 1990................................................ 7.00 08/01/08 5,977,650
2,000 Veterans Ser AT......................................... 9.50 02/01/10 2,732,520
10,000 Refg Ser 2002........................................... 5.25 02/01/11 11,037,600
2,400 Veterans Ser BH (AMT) (FSA)............................. 5.40 12/01/16 2,590,080
5,000 Various Purpose dtd 04/01/93 (FSA)...................... 5.50 04/01/19 5,141,750
5,000 Various Purpose dtd 04/01/02............................ 6.00 04/01/19 5,820,900
10,000 Various Purpose Ser 1996 (Ambac)........................ 5.25 06/01/21 10,585,900
4,000 Various Purpose dtd 05/01/03............................ 5.00 02/01/32 3,945,920
2,250 Carlsbad Unified School District, Ser 1997 (FGIC)......... 0.00 11/01/16 1,255,950
Los Angeles Community College District,
5,000 2001 Ser A (MBIA)....................................... 5.50 08/01/20 5,528,300
5,000 2001 Ser A (MBIA)....................................... 5.50 08/01/21 5,502,850
Los Angeles Unified School District,
5,000 2003 Ser A (FSA)........................................ 5.25 07/01/20 5,502,450
10,000 1997 Ser B (FGIC)....................................... 5.00 07/01/23 10,379,200
6,500 North Orange County Community College District, Election
of 2002 Ser A (MBIA).................................... 5.375 08/01/21 7,173,335
5,000 Placentia - Yorba Linda United School District, 2002
Election Ser A (FGIC)................................... 5.00 08/01/26 5,226,300
5,000 Solano County Community College District, Election of 2002
Ser A (MBIA)............................................ 4.75 08/01/26 5,100,250
Puerto Rico,
8,000 Public Improvement Ser 1999............................. 4.75 07/01/23 7,908,400
3,000 Public Improvement Ser 1998 (Secondary MBIA)............ 4.875 07/01/23 3,092,370
------------
- --------
110,367,625
103,150
------------
- --------
Educational Facilities Revenue (2.6%)
5,000 California, Educational Facilities Authority, University
of San Diego Ser 1998 (Ambac)........................... 5.00 10/01/22 5,181,850
University of California,
4,000 Multi Purpose Refg Ser 1993 C (Ambac)................... 5.125 09/01/18 4,099,840
5,000 Multi Purpose Ser 2003 Q (FSA).......................... 5.00 09/01/22 5,277,550
5,000 Multi Purpose Ser 2003 Q (FSA).......................... 5.00 09/01/23 5,263,400
------------
- --------
19,822,640
19,000
------------
- --------
</Table>
See Notes to Financial Statements
6
Morgan Stanley California Tax-Free Income Fund
PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Electric Revenue (8.6%)
$ 10,000 California State Department of Water Resources, Power
Supply Ser 2002 A....................................... 5.375% 05/01/21 $ 10,406,100
Los Angeles Department of Water & Power,
11,025 Second Issue of 1993 (Secondary Ambac).................. 5.40 11/15/13 11,387,171
25,000 2001 Ser A (FSA)........................................ 5.25 07/01/22 26,585,500
1,695 Second Issue of 1993 (Secondary Ambac).................. 5.375 09/01/23 1,738,019
Southern California Public Power Authority,
1,750 Transmission Refg Ser 1988 (FGIC)....................... 0.00 07/01/06 1,657,828
3,500 Mead-Adelanto 1994 Ser A (Ambac)........................ 8.67++ 07/01/15 4,375,280
2,500 Mead-Phoenix 1994 Ser A (Ambac)......................... 8.67++ 07/01/15 3,125,200
2,750 Transmission Refg Ser 2002 A (FSA)...................... 5.25 07/01/18 3,036,165
Puerto Rico Electric Power Authority,
2,000 Power Ser II (MBIA)..................................... 5.375 07/01/19 2,250,900
2,000 Power Ser X............................................. 5.50 07/01/25 2,070,100
------------
- --------
66,632,263
62,220
------------
- --------
Hospital Revenue (6.9%)
8,000 Antelope Valley Healthcare District, Refg Ser 1997 A
(FSA)................................................... 5.20 01/01/20 8,412,400
California Health Facilities Financing Authority,
2,500 Sutter/CHS Ser 1996 A (MBIA)............................ 5.875 08/15/16 2,808,800
3,000 Scripps Memorial Hospitals Ser 1992 A (MBIA)............ 6.375 10/01/22 3,061,140
5,000 California Infrastructure & Economic Development Bank,
Kaiser Assistance Ser 2001 A............................ 5.55 08/01/31 5,191,450
2,000 California Statewide Communities Development Authority,
Cedars-Sinai Medical Center Ser 1992 COPs............... 6.50 08/01/12 2,339,920
14,000 Duarte, City of Hope National Medical Center Ser 1999 A
COPs.................................................... 5.25 04/01/19 14,181,160
7,500 Madera County, Valley Children's Hospital Ser 1995 COPs
(MBIA).................................................. 6.50 03/15/15 9,537,750
4,000 Rancho Mirage Joint Powers Financing Authority, Eisenhower
Medical Center Ser 1997 A COPs (MBIA)................... 5.25 07/01/17 4,352,640
3,000 University of California, UCLA Medical Center Refg Ser
1994 (MBIA)............................................. 5.50 12/01/14 3,102,810
------------
- --------
52,988,070
49,000
------------
- --------
Industrial Development/Pollution Control Revenue (2.0%)
California Pollution Control Financing Authority,
5,000 San Diego Gas & Electric Co 1996 Ser A.................. 5.90 06/01/14 5,342,300
10,000 Southern California Edison Co 1992 Ser B (AMT).......... 6.40 12/01/24 10,000,100
------------
- --------
15,342,400
15,000
------------
- --------
Mortgage Revenue - Multi-Family (0.3%)
2,000 California Housing Finance Agency, Rental II 1992 Ser B... 6.70 08/01/15 2,039,000
------------
- --------
</Table>
See Notes to Financial Statements
7
Morgan Stanley California Tax-Free Income Fund
PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Mortgage Revenue - Single Family (1.5%)
California Housing Finance Agency,
$ 4,805 Home 1995 Ser J (Ambac)................................. 6.00 % 08/01/17 $ 5,038,283
3,215 Purchase 1995 Ser B-2 (AMT)............................. 6.30 08/01/24 3,316,433
California Rural Home Financing Authority,
955 Home 1997 Ser D-CL 5 (AMT).............................. 6.70 05/01/29 1,010,180
1,205 1997 Ser A-2 (AMT)...................................... 7.00 09/01/29 1,247,874
805 Home 1998 Ser A (AMT)................................... 6.35 12/01/29 896,802
------------
- --------
11,509,572
10,985
------------
- --------
Public Facilities Revenue (3.1%)
4,000 Anaheim Public Financing Authority, Sub 1997 Ser C
(FSA)................................................... 6.00 09/01/16 4,928,400
10,000 California Public Works Board, Department of Corrections
Refg 1993 Ser A (Ambac)................................. 5.00 12/01/19 11,092,800
4,000 Sacramento City Financing Authority, 2002 Ser A (FSA)..... 5.25 12/01/17 4,455,520
5,000 Puerto Rico Public Buildings Authority, 2002 Ser D
(Ambac)................................................. 0.00# 07/01/31 3,427,700
------------
- --------
23,904,420
23,000
------------
- --------
Recreational Facilities Revenue (0.5%)
2,000 California State University, Fresno Event Center Sr Ser
2002.................................................... 6.00 07/01/26 2,102,900
2,000 San Diego County, San Diego Natural History Museum COPs... 5.70 02/01/28 2,074,100
------------
- --------
4,177,000
4,000
------------
- --------
Tax Allocation Revenue (8.4%)
Garden Grove Community Development Agency,
5,000 Refg Issue of 1993...................................... 5.70 10/01/13 5,117,900
6,000 Refg Issue of 1993...................................... 5.875 10/01/23 6,129,240
Long Beach Bond Finance Authority,
3,205 Downtown, North Long Beach 2002 Ser A (Ambac)........... 5.375 08/01/19 3,550,723
2,380 Downtown, North Long Beach 2002 Ser A (Ambac)........... 5.375 08/01/20 2,621,451
20,000 Long Beach Financing Authority, Ser 1992 (Ambac).......... 6.00 11/01/17 24,702,400
Pleasanton Joint Powers Financing Authority,
10,575 Reassessment 1993 Ser A................................. 6.15 09/02/12 10,854,497
1,500 Reassessment 1993 Ser A................................. 6.20 09/02/17 1,535,085
10,000 San Jose Redevelopment Agency, Ser 1999 (Ambac)........... 4.75 08/01/23 10,147,400
------------
- --------
64,658,696
58,660
------------
- --------
Transportation Facilities Revenue (16.9%)
10,000 Alameda Corridor Transportation Authority, Sr Lien Ser
1999 A (MBIA)........................................... 5.25 10/01/21 10,719,200
4,000 Bay Area Toll Authority, San Francisco Bay Area Toll
Bridge 2001 Ser D....................................... 5.00 04/01/18 4,266,880
</Table>
See Notes to Financial Statements
8
Morgan Stanley California Tax-Free Income Fund
PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
Foothills/Eastern Transportation Corridor Agency,
$ 5,000 Toll Road Ser 1999 (MBIA)............................... 5.125% 01/15/19 $ 5,340,800
14,000 Toll Road Ser 1999...................................... 0.00## 01/15/23 10,352,020
Long Beach,
5,000 Harbor Refg Ser 1998 A (AMT) (FGIC)..................... 6.00 05/15/17 6,074,600
3,000 Harbor Refg Ser 1998 A (AMT) (FGIC)..................... 6.00 05/15/19 3,648,330
10,000 Harbor Ser 1995 (AMT) (MBIA)............................ 5.25 05/15/25 10,188,700
5,000 Orange County, Airport Refg Ser 1997 (AMT) (MBIA)......... 5.50 07/01/11 5,552,700
Port of Oakland,
5,200 Ser 2002 M (FGIC)....................................... 5.25 11/01/19 5,727,540
2,000 Ser 2002 M (FGIC)....................................... 5.25 11/01/20 2,189,800
15,000 San Diego County Regional Transportation Commission, Sales
Tax 1994 Ser A (FGIC)................................... 4.75 04/01/08 16,695,150
5,000 San Francisco Airports Commission, San Francisco Int'l
Airport Second Ser Refg Issue 27B (FGIC)................ 5.125 05/01/26 5,251,300
San Francisco Bay Area Rapid Transit District,
795 Sales Tax Ser 1995 (FGIC)............................... 5.50 07/01/15 854,712
9,500 Sales Tax Ser 1998 (Ambac).............................. 4.75 07/01/23 9,652,665
San Joaquin Hills Transportation Corridor Agency,
6,000 Toll Road Refg Ser 1997 A (MBIA)........................ 0.00 01/15/15 3,688,620
10,000 Toll Road Senior Lien Ser 1993.......................... 5.00 01/01/33 9,526,300
10,000 San Jose, Airport Ser 2001 A (FGIC)....................... 5.00 03/01/25 10,399,600
10,000 Puerto Rico Highway & Transportation Authority, Ser 1998
A....................................................... 4.75 07/01/38 9,799,300
------------
- --------
129,928,217
129,495
------------
- --------
Water & Sewer Revenue (18.0%)
20,000 California Department of Water Resources, Center Valley
Ser Y (FGIC)............................................ 5.00 12/01/25 20,988,200
8,000 Castaic Lake Water Agency, Refg Ser 1994 A COPs (MBIA).... 6.00 08/01/18 8,514,720
10,000 Contra Costa Water District, Ser G (MBIA)................. 5.50 10/01/19 10,606,200
4,000 Corona Public Financing Authority, Water Ser 1998
(FGIC).................................................. 4.75 09/01/23 4,077,640
10,000 East Bay Municipal Utility District, Water Ser 2001
(MBIA).................................................. 5.00 06/01/26 10,404,000
8,000 Eastern Municipal Water District, Water & Sewer Refg Ser
1998 A COPs (FGIC)...................................... 4.75 07/01/23 8,133,440
5,000 Los Angeles Department of Water & Power, Water 2001 Ser
A....................................................... 5.125 07/01/41 5,140,050
15,000 Metropolitan Water District of Southern California,
Waterworks 1997 Ser A................................... 5.00 07/01/26 15,435,750
10,000 Sacramento Financing Authority, Water & Capital
Improvement 2001 Ser A (Ambac).......................... 5.00 12/01/26 10,404,000
3,000 San Diego, Water 1998 Ser (FGIC).......................... 4.75 08/01/28 3,028,200
5,000 San Diego County Water Authority, Ser 2002 A COPs
(MBIA).................................................. 5.00 05/01/27 5,227,800
10,000 San Diego Public Facilities Authority, Sewer Ser 1993 A... 5.25 05/15/20 10,201,400
</Table>
See Notes to Financial Statements
9
Morgan Stanley California Tax-Free Income Fund
PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------
San Francisco Public Utilities Commission,
$ 5,650 Water 2002 Ser A (MBIA)................................. 5.00 % 11/01/20 $ 6,022,787
10,000 Water 1996 Ser A........................................ 5.00 11/01/21 10,286,800
10,000 Water Refg Ser A 2001 (FSA)............................. 5.00 11/01/31 10,400,200
------------
- --------
138,871,187
133,650
------------
- --------
Refunded (9.6%)
Foothill/Eastern Transportation Corridor Agency,
15,000 Toll Road Sr Lien Ser 1995 A............................ 6.00 01/01/07+ 17,239,500
4,000 Toll Road Sr Lien Ser 1995 A............................ 0.00### 01/01/10+ 4,675,280
Los Angeles Convention & Exhibition Center Authority,
10,000 Ser 1985 COPs........................................... 9.00 12/01/05+ 11,848,300
14,000 Ser 1985 COPs........................................... 9.00 12/01/05+ 16,587,620
10,000 Los Angeles, Department of Airports Refg 1995 Ser A
(FGIC).................................................. 5.50 05/15/05+ 10,906,300
6,000 San Diego County Water Authority, Ser 1991 B COPs
(MBIA).................................................. 11.42++ 04/27/06+ 7,832,040
5,250 Southern California Public Power Authority, Transmission
Refg Ser 1988 A (FGIC) (ETM)............................ 0.00 07/01/06 4,998,735
------------
- --------
74,087,775
64,250
------------
- --------
674,410 Total California Tax-Exempt Municipal Bonds (Cost $654,275,779).................. 714,328,865
------------
- --------
Short-Term California Tax-Exempt Municipal Obligations (5.3%)
2,000 California Department of Water Resources, Power Supply Ser
2002 B (Demand 07/01/03)................................ 1.00* 05/01/22 2,000,000
4,800 California Health Facilities Financing Authority,
Adventist Health/West 1998 Ser B (MBIA) (Demand
07/01/03)............................................... 1.00* 09/01/28 4,800,000
1,065 California Housing Finance Agency, Home 1995 Ser M (AMT)
(MBIA) (Called for redemption 08/01/03)................. 6.15 08/01/27 1,069,729
9,500 Los Angeles County, Public Properties Refg of 1987 COPs... 0.00 04/01/04 9,376,880
15,000 Los Angeles County Sanitation Districts Financing
Authority, 1993 Ser A (Called for redemption
10/01/03)............................................... 5.375 10/01/13 15,468,150
8,000 Orange County Sanitation District, Ser 2000 A COPs (Demand
07/01/03)............................................... 0.85* 08/01/30 8,000,000
------------
- --------
40,365 Total Short-Term California Tax-Exempt Municipal Obligations (Cost
$39,520,384)..................................................................... 40,714,759
------------
- --------
</Table>
<Table>
$714,775 Total Investments (Cost $693,796,163) (a).......................... 98.0% 755,043,624
========
Other Assets in Excess of Liabilities.............................. 2.0 15,017,573
----- ------------
Net Assets......................................................... 100.0% $770,061,197
===== ============
</Table>
See Notes to Financial Statements
10
Morgan Stanley California Tax-Free Income Fund
PORTFOLIO OF INVESTMENTS - JUNE 30, 2003 (UNAUDITED) continued
- ---------------------
<Table>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
* Current coupon of variable rate demand obligation.
# Currently a zero coupon security; will convert to 5.45% on
July 1, 2012.
## Currently a zero coupon security; will convert to 5.85% on
July 15, 2009.
### Currently a zero coupon security; will convert to 7.15% on
January 1, 2005.
+ Prerefunded to call date shown.
++ Current coupon rate for residual interest bonds. This rate
resets periodically as the auction rate on the related
short-term security fluctuates.
(a) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $61,365,248 and
the aggregate gross unrealized depreciation is $117,787
resulting in net unrealized appreciation of $61,247,461.
Bond Insurance:
- ---------------
Ambac Ambac Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA MBIA Insurance Corporation.
</Table>
See Notes to Financial Statements
11
Morgan Stanley California Tax-Free Income Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
June 30, 2003 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $693,796,163)................... $755,043,624
Cash................................... 259,378
Receivable for:
Interest........................... 10,340,947
Investments sold................... 5,202,334
Shares of beneficial interest
sold.............................. 559,038
Prepaid expenses and other assets...... 50,901
------------
Total Assets....................... 771,456,222
------------
Liabilities:
Payable for:
Distribution fee................... 442,464
Investment management fee.......... 357,600
Dividends to shareholders.......... 323,238
Shares of beneficial interest
redeemed.......................... 156,246
Accrued expenses....................... 115,477
------------
Total Liabilities.................. 1,395,025
------------
Net Assets......................... $770,061,197
============
Composition of Net Assets:
Paid-in-capital........................ $705,435,658
Net unrealized appreciation............ 61,247,461
Accumulated undistributed net
investment income..................... 770,724
Accumulated undistributed net realized
gain.................................. 2,607,354
------------
Net Assets......................... $770,061,197
============
Class A Shares:
Net Assets............................. $16,829,163
Shares Outstanding (unlimited
authorized, $.01 par value)........... 1,318,789
Net Asset Value Per Share.......... $12.76
======
Maximum Offering Price Per Share,
(net asset value plus 4.44% of net
asset value)....................... $13.33
======
Class B Shares:
Net Assets............................. $651,898,043
Shares Outstanding (unlimited
authorized, $.01 par value)........... 50,773,560
Net Asset Value Per Share.......... $12.84
======
Class C Shares:
Net Assets............................. $29,119,466
Shares Outstanding (unlimited
authorized, $.01 par value)........... 2,269,091
Net Asset Value Per Share.......... $12.83
======
Class D Shares:
Net Assets............................. $72,214,525
Shares Outstanding (unlimited
authorized, $.01 par value)........... 5,642,264
Net Asset Value Per Share.......... $12.80
======
</Table>
Statement of Operations
For the six months ended June 30, 2003 (unaudited)
<Table>
Net Investment Income:
Interest Income........................ $ 19,851,216
-------------
Expenses
Distribution fee (Class A shares)...... 10,444
Distribution fee (Class B shares)...... 2,464,694
Distribution fee (Class C shares)...... 101,032
Investment management fee.............. 2,096,698
Transfer agent fees and expenses....... 109,128
Shareholder reports and notices........ 38,414
Professional fees...................... 22,313
Custodian fees......................... 16,664
Trustees' fees and expenses............ 10,659
Other.................................. 20,560
-------------
Total Expenses..................... 4,890,606
Less: expense offset................... (16,599)
Less: distribution fee rebate (Class B
shares)............................... (1,600,405)
-------------
Net Expenses....................... 3,273,602
-------------
Net Investment Income.............. 16,577,614
-------------
Net Realized and Unrealized Gain:
Net realized gain...................... 3,108,113
Net change in unrealized
appreciation.......................... 2,367,612
-------------
Net Gain........................... 5,475,725
-------------
Net Increase........................... $ 22,053,339
=============
</Table>
See Notes to Financial Statements
12
Morgan Stanley California Tax-Free Income Fund
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 16,577,614 $ 35,877,781
Net realized gain........................................... 3,108,113 6,149,149
Net change in unrealized appreciation....................... 2,367,612 21,160,505
------------ ------------
Net Increase............................................ 22,053,339 63,187,435
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares.......................................... (368,254) (849,237)
Class B shares.......................................... (13,721,688) (30,349,709)
Class C shares.......................................... (504,384) (854,240)
Class D shares.......................................... (1,706,065) (3,701,807)
Net realized gain
Class A shares.......................................... (4,124) (168,726)
Class B shares.......................................... (158,615) (5,503,318)
Class C shares.......................................... (7,071) (205,844)
Class D shares.......................................... (17,623) (609,510)
------------ ------------
Total Dividends and Distributions....................... (16,487,824) (42,242,391)
------------ ------------
Net decrease from transactions in shares of beneficial
interest.................................................. (39,482,666) (30,977,572)
------------ ------------
Net Decrease............................................ (33,917,151) (10,032,528)
Net Assets:
Beginning of period......................................... 803,978,348 814,010,876
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $770,724 and $493,501, respectively)..................... $770,061,197 $803,978,348
============ ============
</Table>
See Notes to Financial Statements
13
Morgan Stanley California Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley California Tax-Free Income Fund (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
provide a high level of current income which is exempt from federal and
California income tax, consistent with the preservation of capital. The Fund was
organized as a Massachusetts business trust on April 9, 1984 and commenced
operations on July 11, 1984. On July 28, 1997, the Fund converted to a multiple
class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The 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 bid side of the market each day. 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; (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; and (3)
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
14
Morgan Stanley California Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued
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. Multiple Class Allocations -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. 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 Fund 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 Fund 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 Fund as unrealized gains and losses. Upon
closing of the contract, the Fund 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.
E. 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.
F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date. The amount of dividends and
distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Dividends and distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in excess
of net investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized capital
gains for tax purposes, they are reported as distributions of paid-in capital.
15
Morgan Stanley California Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued
G. 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 Management Agreement
Pursuant to an Investment Management Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Manager") the Fund pays the Investment Manager a
management fee, accrued daily and payable monthly, by applying the following
annual rates to the Fund's net assets determined as of the close of each
business day: 0.55% to the portion of daily net assets not exceeding $500
million; 0.525% to the portion of daily net assets exceeding $500 million but
not exceeding $750 million; 0.50% to the portion of daily net assets exceeding
$750 million but not exceeding $1 billion; 0.475% to the portion of daily net
assets exceeding $1 billion but not exceeding $1.25 billion; and 0.45% to the
portion of daily net assets in excess of $1.25 billion.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- 0.75% of the lesser of: (a)
the average daily aggregate gross sales of the Class B shares since the
inception of the Fund (not including reinvestment of dividend or capital gain
distributions) less the average daily aggregate net asset value of the Class B
shares redeemed since the Fund's inception upon which a contingent deferred
sales charge has been imposed or waived; or (b) the average daily net assets of
Class B; and (iii) Class C -- up to 0.75% of the average daily net assets of
Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that there were no excess expenses as of
June 30, 2003.
16
Morgan Stanley California Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued
For the six months ended June 30, 2003, the Distributor rebated a portion of the
distribution fees paid by the Fund on Class B shares in the amount of
$1,600,405.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 0.75% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended June 30, 2003, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.12% and 0.75%,
respectively.
The Distributor has informed the Fund that for the six months ended June 30,
2003, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $205,115 and $1,806,
respectively and received $64,245 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended June 30, 2003 aggregated
$24,833,460 and $58,008,184, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At June 30, 2003, the Fund had transfer agent fees
and expenses payable of approximately $3,600.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended June 30, 2003
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,589. At June 30, 2003, the Fund had an accrued pension liability of
$58,189 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. Federal Income Tax Status
At December 31, 2002, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and book amortization of
discounts on debt securities.
17
Morgan Stanley California Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued
6. Risks Relating to Certain Financial Instruments
The Fund may invest a portion of its assets in residual interest bonds, which
are inverse floating rate municipal obligations. The prices of these securities
are subject to greater market fluctuations during periods of changing prevailing
interest rates than are comparable fixed rate obligations.
At June 30, 2003, the Fund held positions in residual interest bonds having a
total value of $15,332,520, which represents 2.0% of the Fund's net assets.
To hedge against adverse interest rate changes, the Fund 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 Fund bears the risk of
an unfavorable change in the value of the underlying securities.
At June 30, 2003, the Fund had no outstanding futures contracts.
18
Morgan Stanley California Tax-Free Income Fund
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2003 (UNAUDITED) continued
7. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 2003 DECEMBER 31, 2002
---------------------------- ----------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
------------- ------------ ------------ -------------
CLASS A SHARES
Sold.......................................... 551,511 $ 6,970,863 1,512,568 $ 19,130,260
Reinvestment of dividends and distributions... 9,874 125,377 24,313 305,853
Redeemed...................................... (881,629) (11,118,502) (1,287,894) (16,262,010)
---------- ------------ ---------- -------------
Net increase (decrease) - Class A............. (320,244) (4,022,262) 248,987 3,174,103
---------- ------------ ---------- -------------
CLASS B SHARES
Sold.......................................... 1,407,844 17,969,128 4,323,553 54,537,774
Reinvestment of dividends and distributions... 533,644 6,814,009 1,476,631 18,642,590
Redeemed...................................... (4,677,115) (59,635,181) (8,364,080) (105,528,439)
---------- ------------ ---------- -------------
Net decrease - Class B........................ (2,735,627) (34,852,044) (2,563,896) (32,348,075)
---------- ------------ ---------- -------------
CLASS C SHARES
Sold.......................................... 467,645 5,974,984 1,819,979 22,969,858
Reinvestment of dividends and distributions... 24,126 308,093 54,241 685,522
Redeemed...................................... (249,338) (3,188,966) (1,195,628) (15,076,874)
---------- ------------ ---------- -------------
Net increase - Class C........................ 242,433 3,094,111 678,592 8,578,506
---------- ------------ ---------- -------------
CLASS D SHARES
Sold.......................................... 686,128 8,718,709 497,912 6,303,223
Reinvestment of dividends and distributions... 65,992 839,927 171,997 2,165,228
Redeemed...................................... (1,036,138) (13,261,107) (1,495,708) (18,850,557)
---------- ------------ ---------- -------------
Net decrease - Class D........................ (284,018) (3,702,471) (825,799) (10,382,106)
---------- ------------ ---------- -------------
Net decrease in Fund.......................... (3,097,456) $(39,482,666) (2,462,116) $ (30,977,572)
========== ============ ========== =============
</Table>
8. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
19
Morgan Stanley California Tax-Free Income Fund
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED ----------------------------------------------------------------------------
JUNE 30, 2003 2002 2001 2000 1999 1998
------------- -------- -------- -------- ------- -------
(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning
of period.................. $12.68 $12.34 $12.49 $11.67 $12.75 $12.89
------ ------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment income... 0.28 0.57 0.57 0.58 0.58 0.59
Net realized and
unrealized gain
(loss).................. 0.08 0.44 (0.10) 0.82 (1.06) 0.10
------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations...... 0.36 1.01 0.47 1.40 (0.48) 0.69
------ ------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment income... (0.28) (0.57) (0.58) (0.58) (0.58) (0.59)
Net realized gain....... (0.00)++ (0.10) (0.04) -- (0.02) (0.24)
------ ------ ------ ------ ------ ------
Total dividends and
distributions.............. (0.28) (0.67) (0.62) (0.58) (0.60) (0.83)
------ ------ ------ ------ ------ ------
Net asset value, end of
period..................... $12.76 $12.68 $12.34 $12.49 $11.67 $12.75
====== ====== ====== ====== ====== ======
Total Return+............... 2.82%(1) 8.37% 3.90% 12.17% (3.91)% 5.50%
Ratios to Average Net
Assets(3):
Expenses (before expense
offset).................... 0.72%(2) 0.80% 0.80% 0.83% 0.78%(4) 0.83%
Net investment income....... 4.39%(2) 4.53% 4.62% 4.80% 4.70% 4.58%
Supplemental Data:
Net assets, end of period,
in thousands............... $16,829 $20,775 $17,147 $12,336 $6,253 $3,788
Portfolio turnover rate..... 3%(1) 12% 13% 4% 5% 20%
</Table>
- ---------------------
<Table>
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
++ Less than $0.005 per share.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall fund ratios for investment income and
non-class specific expenses.
(4) Does not reflect the effect of expense offset of 0.01%.
</Table>
See Notes to Financial Statements
20
Morgan Stanley California Tax-Free Income Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------------------------------------------
JUNE 30, 2003 2002 2001 2000 1999 1998
------------- -------- -------- -------- -------- --------
(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value,
beginning of period..... $12.75 $12.42 $12.57 $11.73 $12.81 $12.92
------ ------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment
income............... 0.27 0.56 0.55 0.57 0.57 0.58
Net realized and
unrealized gain
(loss)............... 0.08 0.42 (0.11) 0.84 (1.06) 0.13
------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations... 0.35 0.98 0.44 1.41 (0.49) 0.71
------ ------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment
income............... (0.26) (0.55) (0.55) (0.57) (0.57) (0.58)
Net realized gain.... (0.00)++ (0.10) (0.04) -- (0.02) (0.24)
------ ------ ------ ------ ------ ------
Total dividends and
distributions........... (0.26) (0.65) (0.59) (0.57) (0.59) (0.82)
------ ------ ------ ------ ------ ------
Net asset value, end of
period.................. $12.84 $12.75 $12.42 $12.57 $11.73 $12.81
====== ====== ====== ====== ====== ======
Total Return+............ 2.71%(1) 8.13% 3.56% 12.29% (3.99)% 5.63%
Ratios to Average Net
Assets(3)(5):
Expenses (before expense
offset)................. 0.86%(2) 0.93% 1.04% 0.93% 0.91%(4) 0.95%
Net investment income.... 4.25%(2) 4.40% 4.38% 4.70% 4.57% 4.46%
Supplemental Data:
Net assets, end of
period, in thousands.... $651,898 $682,046 $696,481 $732,668 $761,548 $896,685
Portfolio turnover
rate.................... 3%(1) 12% 13% 4% 5% 20%
</Table>
- ---------------------
<Table>
+ Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day
of the period.
++ Less than $0.005 per share.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall fund ratios for investment income and non-class specific expenses.
(4) Does not reflect the effect of expense offset of 0.01%.
(5) If the Fund had borne all of its expenses that were reimbursed or waived by the Investment Manager, the annualized
expense and net investment income ratios would have been as follows:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
----------------- ---- ----
June 30, 2003 1.35% 3.76%
December 31, 2002 1.35 3.98
December 31, 2001 1.34 4.06
December 31, 2000 1.34 4.29
December 31, 1999 1.34 4.14
December 31, 1998 1.33 4.08
</Table>
See Notes to Financial Statements
21
Morgan Stanley California Tax-Free Income Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -------------------------------------------------------------------
JUNE 30, 2003 2002 2001 2000 1999 1998
------------- ------- ------- ------- ------- ------
(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of
period............................... $12.74 $12.42 $12.57 $11.73 $12.81 $12.92
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income............. 0.24 0.50 0.51 0.52 0.51 0.53
Net realized and unrealized gain
(loss)............................ 0.09 0.42 (0.11) 0.84 (1.06) 0.13
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations........................... 0.33 0.92 0.40 1.36 (0.55) 0.66
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income............. (0.24) (0.50) (0.51) (0.52) (0.51) (0.53)
Net realized gain................. (0.00)++ (0.10) (0.04) -- (0.02) (0.24)
------ ------ ------ ------ ------ ------
Total dividends and distributions..... (0.24) (0.60) (0.55) (0.52) (0.53) (0.77)
------ ------ ------ ------ ------ ------
Net asset value, end of period........ $12.83 $12.74 $12.42 $12.57 $11.73 $12.81
====== ====== ====== ====== ====== ======
Total Return+......................... 2.58%(1) 7.59% 3.33% 11.74% (4.41)% 5.22%
Ratios to Average Net Assets(3):
Expenses (before expense offset)...... 1.35%(2) 1.35% 1.34% 1.34% 1.34%(4) 1.33%
Net investment income................. 3.76%(2) 3.98% 4.09% 4.29% 4.14% 4.08%
Supplemental Data:
Net assets, end of period, in
thousands............................ $29,119 $25,825 $16,745 $14,534 $13,099 $9,849
Portfolio turnover rate............... 3%(1) 12% 13% 4% 5% 20%
</Table>
- ---------------------
+ Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
++ Less than $0.005 per share.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall fund ratios for investment income and non-class
specific expenses.
(4) Does not reflect the effect of expense offset of 0.01%.
See Notes to Financial Statements
22
Morgan Stanley California Tax-Free Income Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -------------------------------------------------------------------
JUNE 30, 2003 2002 2001 2000 1999 1998
------------- ------- ------- ------- ------ ------
(unaudited)
Class D Shares
Selected Per Share Data:
Net asset value, beginning of
period.............................. $12.71 $12.39 $12.53 $11.71 $12.78 $12.92
------ ------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income............ 0.29 0.60 0.60 0.61 0.60 0.63
Net realized and unrealized gain
(loss)........................... 0.08 0.41 (0.10) 0.82 (1.05) 0.10
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations.......................... 0.37 1.01 0.50 1.43 (0.45) 0.73
------ ------ ------ ------ ------ ------
Less dividends and distributions
from:
Net investment income............ (0.28) (0.59) (0.60) (0.61) (0.60) (0.63)
Net realized gain................ (0.00)++ (0.10) (0.04) -- (0.02) (0.24)
------ ------ ------ ------ ------ ------
Total dividends and distributions.... (0.28) (0.69) (0.64) (0.61) (0.62) (0.87)
------ ------ ------ ------ ------ ------
Net asset value, end of period....... $12.80 $12.71 $12.39 $12.53 $11.71 $12.78
====== ====== ====== ====== ====== ======
Total Return+........................ 2.96%(1) 8.41% 4.12% 12.50% (3.63)% 5.77%
Ratios to Average Net Assets(3):
Expenses (before expense offset)..... 0.60%(2) 0.60% 0.59% 0.59% 0.59%(4) 0.58%
Net investment income................ 4.51%(2) 4.73% 4.84% 5.04% 4.89% 4.83%
Supplemental Data:
Net assets, end of period, in
thousands........................... $72,215 $75,332 $83,638 $95,132 $1,021 $554
Portfolio turnover rate.............. 3%(1) 12% 13% 4% 5% 20%
</Table>
- ---------------------
+ Calculated based on the net asset value as of the last business day of
the period.
++ Less than $0.005 per share.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall fund ratios for investment income and non-class
specific expenses.
(4) Does not reflect the effect of expense offset of 0.01%.
See Notes to Financial Statements
23
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
Philip J. Purcell
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Barry Fink
Vice President and General Counsel
Joseph J. McAlinden
Vice President
Stefanie V. Chang
Vice President
Francis 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 AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of 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) 2003 Morgan Stanley
[MORGAN STANLEY LOGO]
MUNICIPAL CALIFORNIA LONG
Morgan Stanley
California Tax-Free
Income Fund
Semiannual Report
June 30, 2003
[MORGAN STANLEY LOGO]
37900RPT-11785G03-AP-7/03
Item 9 - Controls and Procedures
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.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
Item 10b Exhibits
A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
Items 2 - 8 and Item 10a are not applicable
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 Tax-Free Income Fund
Ronald E. Robison
Principal Executive Officer
August 19, 2003
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.
Ronald E. Robison
Principal Executive Officer
August 19, 2003
Francis Smith
Principal Financial Officer
August 19, 2003
2