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: 811-06350
Active Assets California Tax-Free Trust
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: June 30, 2007
Date of reporting period: December 31, 2006
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Active Assets
California Tax-Free 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 Fund's financial statements and a list of Fund investments.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT A MUTUAL FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AN
INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF AN INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND. PLEASE SEE THE PROSPECTUS FOR MORE
COMPLETE INFORMATION ON INVESTMENT RISKS.
FUND REPORT
For the six months ended December 31, 2006
MARKET CONDITIONS
During the second half of 2006, as economic growth moderated and inflation
concerns eased, the Federal Open Market Committee (the "Fed") finally paused in
its record two-year cycle of monetary tightening, electing to keep the target
federal funds rate unchanged at 5.25 percent, where it had stood since the end
of June. Despite the pause in its tightening campaign, the Fed continued to
stress that policy makers considered inflation to be "uncomfortably high" and
further actions regarding interest rates would be data dependent. In response to
the Fed's decision to maintain a stable monetary policy during the period, U.S.
Treasury rates -- which had been steadily climbing during the first six months
of the year -- reversed course and drifted lower throughout most of the
remaining year. Most of these yield changes, however, occurred on the short end
of the yield curve.
Yields on municipal money-market securities generally declined during the
reporting period and the spread between one-week and one-year tax-exempt paper
contracted from already compressed levels. During periods of technical supply
and demand imbalances in the variable-rate demand note market, the slope of the
short-term municipal curve became inverted wherein shorter-maturity securities
had higher yields than those with longer maturities.
The Bond Buyer One Year Note Index, a benchmark indicator for the longest
maturities in the tax-free money market sector, declined from its high for the
period of 3.77 percent to 3.51 percent in mid-September, then held steady to
finish the year at 3.52 percent. Although yields for daily and weekly variable
rate demand obligations (VRDO) also ended the year lower, yield swings were much
more dramatic due to the fact that these instruments are the most frequently
used to meet changing cash flows. Weekly VRDO yields peaked at 3.97 percent in
July then fell to a low of 3.35 percent in September before rebounding to 3.91
percent at year end.
California's economic and fiscal recovery continued during the reporting period.
Stronger-than-expected personal income tax receipts contributed to growth in
revenues, some of which, however, was offset by softer-than-expected corporate
tax and sales receipts. With the exception of the real estate sector, job
growth, wages and business earnings in most California industries remained
healthy and as of year end, the state's unemployment rate stood at 4.6 percent,
down from 5.1 percent one year earlier.
PERFORMANCE ANALYSIS
As of December 31, 2006, Active Assets California Tax-Free Trust had net assets
of approximately $1.6 billion and an average portfolio maturity of 17 days. For
the six-month period ended December 31, 2006, the Fund provided a total return
of 1.45 percent. For the seven-day period ended December 31, 2006, the Fund
provided an effective annualized yield of 3.23 percent and a current yield of
3.18 percent, while its 30-day moving average yield for December was 2.92
percent. Past performance is no guarantee of future results.
2
Throughout the reporting period, we continued to follow our research-intensive
approach, selectively investing only in those securities that we believed would
add value while still meeting our conservative, risk-conscious criteria. Given
our expectations that the target federal funds rate would remain stable through
the end of the year, we adopted a laddered portfolio structure by investing in
securities with a range of different maturities. We also modestly reduced the
portfolio's allocation to variable-rate securities early in the period,
selectively investing the proceeds in short-term commercial paper and notes in
order to lock in higher yields.
We continued to find reasonable value in securities with maturities of six
months or less. At the end of the reporting period, 98 percent of the
portfolio's assets fell within this maturity range.
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 Fund in
the future.
<Table>
<Caption>
PORTFOLIO COMPOSITION
Variable Rate Municipal Obligations 91.5%
Tax-Exempt Commercial Paper 5.6
Municipal Notes 2.9
</Table>
<Table>
<Caption>
MATURITY SCHEDULE
1 - 30 Days 94.6%
31 - 60 Days 0.6
61 - 90 Days 1.9
91 - 120 Days --
121+ Days 2.9
</Table>
Data as of December 31, 2006. Subject to change daily. All percentages for
portfolio composition and maturity schedule are as a percentage of total
investments. These data are provided for informational purposes only and should
not be deemed a recommendation to buy or sell the securities mentioned. Morgan
Stanley is a full-service securities firm engaged in securities trading and
brokerage activities, investment banking, research and analysis, financing and
financial advisory services.
3
INVESTMENT STRATEGY
THE FUND WILL INVEST IN HIGH QUALITY, SHORT-TERM SECURITIES THAT ARE NORMALLY
MUNICIPAL OBLIGATIONS THAT PAY INTEREST EXEMPT FROM FEDERAL AND CALIFORNIA
INCOME TAXES. THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT
ADVISORS INC., SEEKS TO MAINTAIN THE FUND'S SHARE PRICE AT $1.00. THE SHARE
PRICE REMAINING STABLE AT $1.00 MEANS THAT THE FUND WOULD PRESERVE THE PRINCIPAL
VALUE OF YOUR INVESTMENT.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS. 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 FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM
N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE
SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE
SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF
THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800)
SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A
DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102.
HOUSEHOLDING NOTICE
TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.
4
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including advisory fees;
distribution and service (12b-1) fees; and other Fund expenses. This example is
intended to help you understand your ongoing costs (in dollars) of investing in
the Fund and to compare these costs with the ongoing costs of investing in other
mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 07/01/06 - 12/31/06.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
07/01/06 -
07/01/06 12/31/06 12/31/06
------------- ------------- ---------------
Actual (1.45% return)....................................... $1,000.00 $1,014.50 $2.86
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,022.09 $2.87
</Table>
- ------------------
* Expenses are equal to the Fund's annualized expense ratio of 0.57%
multiplied by the average account value over the period, multiplied by
182/365 (to reflect the one-half year period).
5
Active Assets California Tax-Free Trust
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2006 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------
California Tax-Exempt Short-Term Variable Rate Municipal
Obligations (94.6%)
ABAG Finance Authority for Nonprofit Corporations,
$ 6,000 Elder Care Alliance of San Francisco Ser 2006 A........ 3.80% 01/08/07 $ 6,000,000
7,900 Episcopal Homes Foundation Ser 2000 COPs............... 3.77 01/08/07 7,900,000
6,000 Eskaton Village-Roseville Ser 2006..................... 3.84 01/08/07 6,000,000
5,280 Jewish Community Center Ser 2002....................... 3.92 01/02/07 5,280,000
6,100 Jewish Home of San Francisco Ser 2005.................. 3.92 01/02/07 6,100,000
5,000 Paragon Apartments Ser 2005 A (AMT).................... 3.90 01/08/07 5,000,000
2,600 Alameda-Contra Costa Schools Financing Authority, Ser M
COPs................................................... 3.87 01/08/07 2,600,000
6,400 Anaheim, Ser 1993 COPs (Ambac)........................... 3.71 01/08/07 6,400,000
13,905 Anaheim Public Financing Authority, Distribution System
ROCs II-R Ser 6021 (MBIA).............................. 3.91 01/08/07 13,905,000
Bay Area Toll Authority,
11,900 San Francisco Bay Area Toll Bridge 2006 Ser A-2
(XLCA)................................................. 3.80 01/08/07 11,900,000
6,400 San Francisco Bay Area Toll Bridge 2006 Ser B-2
(XLCA)................................................. 3.69 01/08/07 6,400,000
5,000 Beaumont Unified School District, School Facility Bridge
Funding Ser 2006 COPs (FSA)............................ 3.73 01/08/07 5,000,000
20,800 Big Bear Lake, Southwest Gas Corp 1993 Ser A (AMT)....... 3.85 01/08/07 20,800,000
5,400 Butte-Glenn Community College District, Election of 2002
Ser B P-FLOATs PT-3042 (MBIA).......................... 3.92 01/08/07 5,400,000
California,
4,000 Economic Recovery Ser 2004 A Floater-TRs Ser L27....... 3.90 01/08/07 4,000,000
13,000 Economic Recovery Ser 2004 C-4......................... 3.92 01/02/07 13,000,000
12,000 Economic Recovery Ser 2004 C-11........................ 3.75 01/08/07 12,000,000
11,100 Economic Recovery Ser 2004 C-12 (XLCA)................. 3.72 01/08/07 11,100,000
8,800 Economic Recovery Ser 2004 C-13 (XLCA)................. 3.82 01/08/07 8,800,000
35,500 Economic Recovery Ser 2004 C-14 (XLCA)................. 3.73 01/08/07 35,500,000
15,700 Economic Recovery Ser 2004 C-18 (XLCA)................. 3.75 01/08/07 15,700,000
California,
7,000 Municipal CRVS Ser 2006-1005 (MBIA).................... 3.91 01/08/07 7,000,000
5,700 Municipal Securities Trust Receipts Ser 2001-JPMC3
(MBIA)................................................. 3.97 01/02/07 5,700,000
11,085 Ser 2003 PUTTERs Ser 1460.............................. 3.99 01/08/07 11,085,000
3,825 Ser 2004 A-9........................................... 3.79 01/08/07 3,825,000
19,800 Ser 2004 B-5........................................... 3.73 01/08/07 19,800,000
3,000 Ser 2004 PUTTERs Ser 1461.............................. 3.99 01/08/07 3,000,000
26,300 Ser 2005 B Subser B-1.................................. 3.73 01/08/07 26,300,000
1,240 Ser 2005 P-FLOATs PT-2622 (MBIA)....................... 3.92 01/08/07 1,240,000
California Department of Water Resources,
5,400 Power Supply Ser 2002 B Subser B-1..................... 3.92 01/02/07 5,400,000
7,350 Power Supply Ser 2002 C Subser C-3 (Ambac)............. 3.82 01/08/07 7,350,000
3,300 Power Supply Ser 2002 C Subser C-4..................... 3.84 01/08/07 3,300,000
9,900 Power Supply Ser 2002 C Subser C-7 (FSA)............... 3.75 01/08/07 9,900,000
</Table>
6
See Notes to Financial Statements
Active Assets California Tax-Free Trust
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------
$20,875 Power Supply Ser 2002 C Subser C-10.................... 3.63% 01/08/07 $ 20,875,000
10,000 Power Supply Ser 2002 C Subser C-16.................... 3.79 01/08/07 10,000,000
6,000 Power Supply Ser 2002 C Subser C-18.................... 3.78 01/08/07 6,000,000
4,250 Power Supply Ser 2005 F Subser F-3..................... 3.92 01/02/07 4,250,000
5,000 Power Supply Ser 2005 F Subser G-2..................... 3.84 01/08/07 5,000,000
28,300 Power Supply Ser 2005 G Subser G-14 (FGIC)............. 3.84 01/08/07 28,300,000
California Educational Facilities Authority,
29,550 California Institute of Technology Ser 1994 & 2006 Ser
A...................................................... 3.76 01/08/07 29,550,000
5,465 California Lutheran University Ser 2004 A.............. 3.82 01/08/07 5,465,000
6,800 University of San Francisco Ser 2003................... 3.77 01/08/07 6,800,000
California Health Facilities Financing Authority,
5,600 Adventist Health System/West 1998 Ser B (MBIA)......... 3.92 01/02/07 5,600,000
10,000 Catholic Healthcare West Ser 2004 K.................... 3.80 01/08/07 10,000,000
14,125 Catholic Healthcare West Ser 2005 H.................... 3.73 01/08/07 14,125,000
30,000 Kaiser Permanente Ser 2006 C........................... 3.77 01/08/07 30,000,000
24,985 Northern California Presbyterian Homes & Services Ser
2004................................................... 3.73 01/08/07 24,985,000
900 Sisters of Charity of Leavenworth Health System Ser
2003................................................... 3.82 01/08/07 900,000
California Housing Finance Agency,
10,600 Home Mortgage 2000 Ser U (MBIA) (AMT).................. 3.87 01/08/07 10,600,000
1,500 Home Mortgage 2002 Ser M (AMT)......................... 3.92 01/02/07 1,500,000
25,000 Home Mortgage 2003 Ser F (FSA) (AMT)................... 3.91 01/08/07 25,000,000
7,860 California Infrastructure & Economic Development Bank,
Asian Art Museum Foundation Ser 2005 (MBIA)............ 3.92 01/02/07 7,860,000
5,890 California State University, Systemwide Ser 2005 A
PUTTERs Ser 1320 (Ambac)............................... 3.91 01/08/07 5,890,000
California Statewide Communities Development Authority,
5,000 American Baptist Homes of the West Ser 2006............ 3.77 01/08/07 5,000,000
6,000 Chabad of California Ser 2004.......................... 3.78 01/08/07 6,000,000
3,200 House Ear Institute 1993 Ser A COPs.................... 3.92 01/02/07 3,200,000
9,250 Irvine Apartment Communities Ser W-2 (AMT)............. 3.87 01/08/07 9,250,000
36,700 Kaiser Permanente Ser 2004 J & L....................... 3.77 01/08/07 36,700,000
7,200 Maple Square Apartment Homes 2004 Ser AA (AMT)......... 3.90 01/08/07 7,200,000
6,500 Mariners Pointe Apartments 2006 Ser A.................. 3.75 01/08/07 6,500,000
10,140 Multifamily Housing Martin Luther Tower 2005 Ser D
(AMT).................................................. 3.87 01/08/07 10,140,000
4,900 The California Endowment Ser 2003 PUTTERs Ser 1425..... 3.91 01/08/07 4,900,000
12,000 University of San Diego, Ser 2005...................... 3.88 01/08/07 12,000,000
4,200 YMCA of East Bay Ser 2006.............................. 3.73 01/08/07 4,200,000
5,240 California Transit Finance Authority, Ser 1997 (FSA)..... 3.84 01/08/07 5,240,000
6,765 Cerritos Community College District, Ser 2005
P-FLOATs PT-2934 (Ambac)............................... 3.92 01/08/07 6,765,000
5,500 Chino Redevelopment Agency, Tax Allocation CRVS
Ser 2006-1009 (Ambac).................................. 3.91 01/08/07 5,500,000
</Table>
7
See Notes to Financial Statements
Active Assets California Tax-Free Trust
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------
$ 6,700 Corona-Norco Unified School District, Ser 2005 COPs...... 3.73% 01/08/07 $ 6,700,000
East Bay Municipal Utility District,
17,290 Wastewater Sub Ser 2003 B (XLCA)....................... 3.70 01/08/07 17,290,000
19,835 Water System Sub Refg Ser 2002 B (FSA)................. 3.70 01/08/07 19,835,000
3,000 East Side Union High School District, Santa Clara County
Ser 2006 B MERLOTs Ser B 28 (MBIA)..................... 3.93 01/08/07 3,000,000
4,510 Eastern Municipal Water District, Water & Sewer Ser 1993
B COPs (FGIC).......................................... 3.73 01/08/07 4,510,000
4,750 El Rancho Unified School District,
Ser 2003 A PUTTERs Ser 807T (FGIC)..................... 3.91 01/08/07 4,750,000
21,700 Fremont, Creekside Village Multifamily Ser 1985 D........ 3.72 01/08/07 21,700,000
Fresno,
7,345 Multifamily Housing Heron Pointe Apartments 2001 Ser
A...................................................... 3.75 01/08/07 7,345,000
20,800 Sewer System Sublien Ser 2000 A (FGIC)................. 3.73 01/08/07 20,800,000
10,800 Glendale Financing Authority, 2000 Police Building
COPs................................................... 3.82 01/08/07 10,800,000
5,000 Golden State Tobacco Securitization Corporation, Ser 2005
A ROCs II-R Ser 565 (FGIC)............................. 3.91 01/08/07 5,000,000
2,400 Grant Joint Union High School District, School Facility
Bridge Funding Ser 2005 COPs (FSA)..................... 3.73 01/08/07 2,400,000
2,490 Greenfield Redevelopment Agency, Tax Allocation
Ser 2006 PUTTERs Ser 1595 (Ambac)...................... 3.91 01/08/07 2,490,000
6,225 Hacienda-La Puenta Unified School District,
2000 Ser B P-FLOATs PT-1988 (FSA)...................... 3.92 01/08/07 6,225,000
4,500 Hemet Unified School District, Ser 2006 COPs (Ambac)..... 3.77 01/08/07 4,500,000
6,600 Hillsborough, Water & Sewer System Ser 2006 A COPs....... 3.82 01/08/07 6,600,000
17,500 Irvine Assessment District No 05-21, Improvement Bond Act
1915 Ser 2006 A........................................ 3.88 01/02/07 17,500,000
12,180 Lancaster Redevelopment Agency, Multifamily Sunset
Projects Sub Ser 2003 B Floater-TRs Ser 2003 F 12J..... 3.92 01/08/07 12,180,000
9,745 Long Beach, Harbor PUTTERs Ser 444 (MBIA) (AMT).......... 3.91 01/08/07 9,745,000
Los Angeles,
11,000 Multifamily Fountain Park Ser 1999 P (AMT)............. 3.88 01/08/07 11,000,000
11,005 Wastewater System Ser 2001 A (FGIC).................... 3.73 01/08/07 11,005,000
21,395 Wastewater System Ser 2001 B (FGIC).................... 3.80 01/08/07 21,395,000
5,720 Wastewater System Ser 2006 A (XLCA).................... 3.84 01/08/07 5,720,000
19,300 Los Angeles Community Redevelopment Agency, Grand
Promenade Ser 2002..................................... 3.75 01/08/07 19,300,000
6,000 Los Angeles County Housing Authority, Multifamily Malibu
Meadows 1998 Ser B..................................... 3.75 01/08/07 6,000,000
6,000 Los Angeles County Metropolitan Transportation Authority,
Prop C Sales Tax 2nd Ser 2004-A Eagle #20040046
(MBIA)................................................. 3.92 01/08/07 6,000,000
</Table>
8
See Notes to Financial Statements
Active Assets California Tax-Free Trust
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------
$ 9,000 Los Angeles Department of Airports, Los Angeles
International Airport Sub Ser 2002 C-1................. 3.73% 01/08/07 $ 9,000,000
Los Angeles Department of Water & Power,
16,900 Power System 2001 Ser B Subser B-1..................... 3.75 01/08/07 16,900,000
7,000 Power System 2001 Ser B Subser B-5..................... 3.82 01/08/07 7,000,000
9,000 Power System 2001 Ser B Subser B-6..................... 3.90 01/02/07 9,000,000
8,000 Power System 2002 Ser A Subser A-8..................... 3.79 01/08/07 8,000,000
8,300 Water System 2001 Ser B Subser B-1..................... 3.82 01/08/07 8,300,000
16,495 Los Angeles Housing Authority, Multifamily 2004 Ser A.... 3.75 01/08/07 16,495,000
10,930 Los Angeles Unified School District, P-FLOATs PT-1855
(FSA).................................................. 3.92 01/08/07 10,930,000
14,400 Menlo Park Community Development Agency, Las Pulgas
Community Development Tax Allocation Ser 2006
(Ambac)................................................ 3.85 01/02/07 14,400,000
Metropolitan Water District of Southern California,
8,200 Water 1999 Ser B....................................... 3.71 01/08/07 8,200,000
8,000 Water 1999 Ser C....................................... 3.76 01/08/07 8,000,000
22,400 Waterworks 1996 Ser A (Ambac) & 2005 Ser B-2........... 3.70 01/08/07 22,400,000
10,250 Waterworks 2002 Ser A.................................. 3.80 01/08/07 10,250,000
5,690 Moorpark Unified School District, Refg Ser 2005
P-FLOATs PT-2738 (FSA)................................. 3.92 01/08/07 5,690,000
13,300 Mountain View, Villa Mariposa Multifamily 1985 Ser A..... 3.80 01/08/07 13,300,000
12,410 Northern California Power Agency, Hydroelectric No 1
Ser 2002 B (MBIA)...................................... 3.73 01/08/07 12,410,000
12,760 Northern California Transmission Agency,
California-Oregon Transmission Refg 2002 Ser A (FSA)... 3.75 01/08/07 12,760,000
35,100 Oakland-Alameda County Coliseum Authority, Oakland
Coliseum 2000 Refg Ser C-2 (DD)........................ 3.75 01/08/07 35,100,000
16,000 Oakland Joint Powers Financing Authority, Fruitvale
Transit Village Ser 2001 A............................. 3.73 01/08/07 16,000,000
14,900 Orange County, Park Place Apartments 1989 Issue A
(AMT).................................................. 3.84 01/08/07 14,900,000
9,130 Orange County Housing Authority, Oasis Martinique
Refg 1998 Issue I...................................... 3.76 01/08/07 9,130,000
600 Orange County Sanitation District, Ser 2000 B COPs....... 3.83 01/02/07 600,000
12,000 Pasadena, City Hall & Park Improvement Ser 2003 COPs
(Ambac)................................................ 3.77 01/08/07 12,000,000
4,250 Pittsburg Redevelopment Agency, Los Medanos Community
Development Sub 2004 Ser A (Ambac)..................... 3.85 01/02/07 4,250,000
Pleasanton,
6,000 Assisted Living Facility Ser 2005...................... 3.78 01/08/07 6,000,000
5,850 Greenbriar Bernal Apartments Ser 2001 A (AMT).......... 3.87 01/08/07 5,850,000
9,500 Pomona Redevelopment Agency, Park & Plaza Apartments
Ser 1998 A............................................. 3.78 01/08/07 9,500,000
3,800 Poway Unified School District, Ser 2004 COPs (FSA)....... 3.73 01/08/07 3,800,000
</Table>
9
See Notes to Financial Statements
Active Assets California Tax-Free Trust
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------
$17,500 Rancho Water District Financing Authority, Ser 2001 B
(FGIC)................................................. 3.70% 01/08/07 $ 17,500,000
Riverside County,
10,000 1985 Ser A COPs........................................ 3.80 01/08/07 10,000,000
9,580 2005 Ser A & B COPs P-FLOATs PT-2704 (FGIC)............ 3.92 01/08/07 9,580,000
Roaring Fork Municipal Products,
7,845 California Economic Recovery Class A Certificates Ser
2004-4 (FGIC)........................................ 3.83 01/08/07 7,845,000
8,440 San Diego Community College District Class A
Certificates Ser 2005-22 (FSA)....................... 3.83 01/08/07 8,440,000
7,335 San Diego Housing Authority Market Street Square
Apartments 1996 Issue C Class A Certificates Ser
2006-23.............................................. 3.83 01/08/07 7,335,000
4,400 Roseville, Electric System Ser 2005 A COPs P-FLOATs
PT-3021 (FGIC)......................................... 3.92 01/08/07 4,400,000
5,283 Sacramento City Financing Authority, Tax Allocation
Merged Downtown & Oak Park Ser 2005 A TOCs Ser 2006 Z-3
(FGIC)................................................. 3.97 01/08/07 5,283,000
1,000 Sacramento County Housing Authority, Seasons at Winter
2004 Ser C-2........................................... 3.73 01/08/07 1,000,000
7,800 San Bernardino County, Medical Center Financing Ser 1998
COPs (MBIA)............................................ 3.66 01/08/07 7,800,000
8,000 San Bernardino County Housing Authority, Multifamily
Raintree Apartments Ser 2005 A......................... 3.75 01/08/07 8,000,000
9,350 San Diego County, Ser 2004 COPs.......................... 3.75 01/08/07 9,350,000
6,655 San Diego Unified Port District, 2004 Ser B P-FLOATs
PT-2409 (MBIA)......................................... 3.92 01/08/07 6,655,000
1,735 San Diego Unified School District, 1998 Ser E-1 ROCs II-R
Ser 1067 (MBIA)........................................ 3.91 01/08/07 1,735,000
11,000 San Francisco City & County Airport Commission, 2006
Second Ser 33-I (XLCA)................................. 3.77 01/08/07 11,000,000
8,920 San Francisco City & County Finance Corporation, Moscone
Center Ser 2004 P-FLOATs PT-2249 (Ambac)............... 3.92 01/08/07 8,920,000
1,995 San Francisco City & County Public Utilities Commission,
Water Ser 2006 A ROCs II-R Ser 6085 (FSA).............. 3.91 01/08/07 1,995,000
San Francisco City & County Redevelopment Agency,
21,000 Bayside Village Multifamily Ser 1985 A................. 3.77 01/08/07 21,000,000
6,000 Multifamily Mercy Terrace Ser 2005 A................... 3.75 01/08/07 6,000,000
3,400 San Joaquin Hills Transportation Corridor Agency, Toll
Road
Ser 1997 A Floaters Ser 2006-90TPZ (MBIA)
& Ser 2006-91TPZ (MBIA).............................. 3.94 01/08/07 3,400,000
4,850 San Jose Redevelopment Agency, Merged Area 1996 Ser A.... 3.71 01/08/07 4,850,000
11,830 San Jose-Santa Clara Clean Water Financing Authority,
Sewer Ser 2005 B (FSA)................................. 3.71 01/08/07 11,830,000
11,220 San Leandro, Multifamily Carlton Plaza Ser 1997 A
(AMT).................................................. 3.88 01/08/07 11,220,000
</Table>
10
See Notes to Financial Statements
Active Assets California Tax-Free Trust
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON DEMAND
THOUSANDS RATE+ DATE* VALUE
- ----------------------------------------------------------------------------------------------------------
$ 7,605 San Marcos Public Facilities Authority, Tax Increment
Pass-Through Ser 2006 A ROCs II-R Ser 514 (Ambac)...... 3.91% 01/08/07 $ 7,605,000
Santa Clara,
3,600 Electric Ser 1985 C (Ambac)............................ 3.73 01/08/07 3,600,000
12,400 Multifamily Briarwood Apartments Ser 1996 B............ 3.75 01/08/07 12,400,000
7,200 Multifamily The Grove Garden Apartments Ser 1997 A..... 3.75 01/08/07 7,200,000
7,300 Santa Clara County-El Camino Hospital District Hospital
Facilities Authority, Valley Medical Center 1985 Ser
A...................................................... 3.80 01/08/07 7,300,000
15,800 Santa Clara Valley Transportation Authority, Sales Tax
Ser 2005 B (Ambac)..................................... 3.72 01/08/07 15,800,000
2,200 Snowline Joint Unified School District, Ser 2005 COPs
(FSA).................................................. 3.73 01/08/07 2,200,000
Southern California Public Power Authority,
14,350 Transmission 1991 Refg Ser (Ambac) (DD)................ 3.72 01/08/07 14,350,000
1,300 Transmission Refg Ser 2001 A (FSA)..................... 3.71 01/08/07 1,300,000
4,205 Turlock Irrigation District, Ser 1988 A.................. 3.82 01/08/07 4,205,000
9,400 Vallejo Housing Authority, Multifamily Housing
Crow-Western Phase II Ser 1985 C....................... 3.81 01/08/07 9,400,000
16,000 Vernon Natural Gas Financing Authority, Vernon Gas Ser
2006 B (MBIA).......................................... 3.72 01/08/07 16,000,000
5,260 WaterReuse Finance Authority, Ser 1998 (FSA)............. 3.84 01/08/07 5,260,000
1,990 Yucaipa Valley Water District, Water System Ser 2004 COPs
ROCs II-R Ser 2130 (MBIA).............................. 3.91 01/08/07 1,990,000
--------------
Total California Tax-Exempt Short-Term Variable Rate Municipal Obligations
(Cost $1,555,683,000)....................................................... 1,555,683,000
--------------
</Table>
<Table>
<Caption>
YIELD TO
MATURITY
COUPON MATURITY ON DATE OF
RATE DATE PURCHASE
------ -------- ----------
California Tax-Exempt Commercial Paper (5.8%)
10,000 California, Ser 1996....................... 3.49% 01/11/07 3.49% 10,000,000
10,000 California Educational Facilities
Authority, Stanford University Ser
2003..................................... 3.44 02/07/07 3.44 10,000,000
4,289 California State University Institute, Ser
A........................................ 3.43 01/10/07 3.43 4,289,000
8,000 Chino Basin Financing Authority, Inland
Empire Utilities Agency Ser 2006......... 3.33 01/17/07 3.33 8,000,000
10,000 East Bay Municipal Utility District, Water
Ser 1998................................. 3.50 01/18/07 3.50 10,000,000
10,000 Los Angeles Department of Water & Power,
Power System............................. 3.43 03/01/07 3.43 10,000,000
</Table>
11
See Notes to Financial Statements
Active Assets California Tax-Free Trust
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
<Table>
<Caption>
YIELD TO
PRINCIPAL MATURITY
AMOUNT IN COUPON MATURITY ON DATE OF
THOUSANDS RATE DATE PURCHASE VALUE
- ---------------------------------------------------------------------------------------------------------
Riverside County,
$ 5,000 Teeter Obligation 2005 Ser B-1........... 3.43% 01/10/07 3.43% $ 5,000,000
5,000 Teeter Obligation 2005 Ser B-1........... 3.43 01/16/07 3.43 5,000,000
11,500 San Diego County Water Authority, Ser 1.... 3.53 01/09/07 3.53 11,500,000
4,000 San Francisco County Transportation
Authority, 2004 Ser A.................... 3.45 03/14/07 3.45 4,000,000
18,000 University of California Regents, Ser A.... 3.42 03/05/07 3.42 18,000,000
--------------
Total California Tax-Exempt Commercial Paper
(Cost $95,789,000)......................................................... 95,789,000
--------------
California Tax-Exempt Short-Term Municipal Notes (3.0%)
17,200 California, Ser 2006-2007 RANs, dtd
10/03/06................................. 4.50 06/29/07 3.45 17,286,842
32,000 Bay Area Infrastructure Financing
Authority, State Payment Acceleration
Notes Ser 2006,
dtd 12/14/06............................. 4.00 08/01/07 3.42 32,105,697
--------------
Total California Tax-Exempt Short-Term Municipal Notes
(Cost $49,392,539)......................................................... 49,392,539
--------------
Total Investments (Cost $1,700,864,539) (a) (b)............... 103.4% 1,700,864,539
Liabilities in Excess of Other Assets......................... (3.4) (56,171,514)
----- --------------
Net Assets.................................................... 100.0% $1,644,693,025
===== ==============
</Table>
12
See Notes to Financial Statements
Active Assets California Tax-Free Trust
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
- ---------------------
<Table>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
CRVS Custodial Residual & Variable Securities.
DD A portion of this security has been purchased on a delayed
delivery basis.
Floater-TRs Floating Rate Trust Receipts.
MERLOTs Municipal Exempt Receipts-Liquidity Option Tender.
P-FLOATs Puttable Floating Option Tax-Exempt Receipts.
PUTTERs Puttable Tax-Exempt Receipts.
RANs Revenue Anticipation Notes.
ROCs Reset Option Certificates.
TOCs Tender Option Certificates.
+ Rate shown is the rate in effect at December 31, 2006.
* Date on which the principal amount can be recovered through
demand.
(a) Securities have been designated as collateral in an amount
equal to $25,401,916 in connection with the purchase of
delayed delivery securities.
(b) Cost is the same for federal income tax purposes.
Bond Insurance:
- ---------------
Ambac Ambac Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
XLCA XL Capital Assurance Inc.
</Table>
See Notes to Financial Statements
13
Active Assets California Tax-Free Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
December 31, 2006 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $1,700,864,539)..................................... $1,700,864,539
Cash........................................................ 69,908
Interest receivable......................................... 7,227,693
Prepaid expenses and other assets........................... 41,226
--------------
Total Assets............................................ 1,708,203,366
--------------
Liabilities:
Payable for:
Investments purchased................................... 62,705,800
Investment advisory fee................................. 467,739
Distribution fee........................................ 130,361
Administration fee...................................... 65,181
Shares of beneficial interest redeemed.................. 8,077
Transfer agent fee...................................... 199
Accrued expenses and other payables......................... 132,984
--------------
Total Liabilities....................................... 63,510,341
--------------
Net Assets.............................................. $1,644,693,025
==============
Composition of Net Assets:
Paid-in-capital............................................. $1,644,669,373
Accumulated undistributed net investment income............. 5,607
Accumulated net realized gain............................... 18,045
--------------
Net Assets.............................................. $1,644,693,025
==============
Net Asset Value Per Share
1,644,650,047 shares outstanding (unlimited shares
authorized of $.01 par value)............................... $1.00
==============
</Table>
See Notes to Financial Statements
14
Active Assets California Tax-Free Trust
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended December 31, 2006 (unaudited)
<Table>
Net Investment Income:
Interest Income............................................. $25,675,638
-----------
Expenses
Investment advisory fee..................................... 2,721,260
Distribution fee............................................ 741,902
Administration fee.......................................... 370,951
Transfer agent fees and expenses............................ 133,741
Shareholder reports and notices............................. 92,630
Registration fees........................................... 43,157
Professional fees........................................... 33,616
Custodian fees.............................................. 32,001
Trustees' fees and expenses................................. 10,246
Other....................................................... 43,116
-----------
Total Expenses.......................................... 4,222,620
Less: expense offset........................................ (32,236)
-----------
Net Expenses............................................ 4,190,384
-----------
Net Investment Income................................... 21,485,254
Net Realized Gain....................................... 2,904
-----------
Net Increase................................................ $21,488,158
===========
</Table>
See Notes to Financial Statements
15
Active Assets California Tax-Free Trust
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 2006 JUNE 30, 2006
----------------- --------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 21,485,254 $ 25,026,325
Net realized gain........................................... 2,904 15,141
-------------- --------------
Net Increase............................................ 21,488,158 25,041,466
Dividends to shareholders from net investment income........ (21,484,784) (25,026,145)
Net increase from transactions in shares of beneficial
interest.................................................. 327,685,911 612,697,317
-------------- --------------
Net Increase............................................ 327,689,285 612,712,638
Net Assets:
Beginning of period......................................... 1,317,003,740 704,291,102
-------------- --------------
End of Period
(Including accumulated undistributed net investment income
of $5,607 and $5,137, respectively)......................... $1,644,693,025 $1,317,003,740
============== ==============
</Table>
See Notes to Financial Statements
16
Active Assets California Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2006 (UNAUDITED)
1. Organization and Accounting Policies
Active Assets California Tax-Free Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
provide a high level of daily income which is exempt from federal and California
income tax consistent with stability of principal and liquidity. The Fund was
organized as a Massachusetts business trust on July 10, 1991 and commenced
operations on November 12, 1991.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- Portfolio securities are valued at amortized
cost, which approximates market value, in accordance with Rule 2a-7 under the
Act .
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
D. Dividends and Distributions to Shareholders -- The Fund records dividends and
distributions to shareholders as of the close of each business day.
E. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), the Fund pays the Investment Adviser
an advisory fee, accrued daily and payable monthly, by applying the following
annual rates to the net assets of the Fund determined as of the close of each
business day: 0.45% to the portion of the daily net assets not exceeding $500
million; 0.375% to the portion of the daily net assets exceeding $500 million
but not exceeding $750 million; 0.325% to the portion of the daily net assets
exceeding $750 million but not exceeding $1 billion; 0.30% to the portion of the
daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.275% to
the portion of the daily net assets exceeding $1.5 billion but not exceeding $2
billion; 0.25% to the portion of the daily net assets exceeding $2 billion but
not
17
Active Assets California Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
exceeding $2.5 billion; 0.225% to the portion of the daily net assets exceeding
$2.5 billion but not exceeding $3 billion; and 0.20% to the portion of the daily
net assets exceeding $3 billion.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.05% to the Fund's daily net assets.
3. Plan of Distribution
Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the
Investment Adviser and Administrator, is the distributor of the Fund's shares
and in accordance with a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Act, finances certain expenses in connection with the promotion
of sales of Fund shares.
Reimbursements for these expenses are made in monthly payments by the Fund to
the Distributor, which will in no event exceed an amount equal to a payment at
the annual rate of 0.15% of the Fund's average daily net assets during the
month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal
year will not be reimbursed by the Fund through payments accrued in any
subsequent fiscal year. For the six months ended December 31, 2006, the
distribution fee was accrued at the annual rate of 0.10%.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales/maturities of portfolio securities
for the six months ended December 31, 2006, aggregated $1,798,019,898 and
$1,473,519,904, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation. 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 December 31, 2006, included in Trustees'
fees and expenses in the Statement of Operations amounted to $893. At December
31, 2006, the Fund had an accrued pension liability of $56,703 which is included
in accrued expenses in the Statement of Assets and Liabilities.
18
Active Assets California Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he or she receives for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have the deferred amounts credited with a return
equal to the total return on one or more of the Morgan Stanley funds that are
offered as investment options under the Compensation Plan.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund.
5. Shares of Beneficial Interest
Transactions in shares of beneficial interest, at $1.00 per share, were as
follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 2006 JUNE 30, 2006
----------------- --------------
(unaudited)
Shares sold................................................. 3,793,186,941 5,547,616,118
Shares issued in reinvestment of dividends.................. 21,484,784 25,026,145
-------------- --------------
3,814,671,725 5,572,642,263
Shares redeemed............................................. (3,486,985,814) (4,959,944,946)
-------------- --------------
Net increase in shares outstanding.......................... 327,685,911 612,697,317
============== ==============
</Table>
6. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent and
custodian.
7. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and is to be
applied to all open tax years as of the effective date. Recent SEC guidance
allows implementing FIN 48 in the fund NAV calculations on the fund's last NAV
calculation in the first required financial statement period. As a result, the
Fund will incorporate FIN 48 in its annual report on June 30, 2007. The impact
to the Fund's financial statements, if any, is currently being assessed.
19
Active Assets California Tax-Free Trust
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2006 (UNAUDITED) continued
In addition, 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 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 Fund's financial statement disclosures.
20
Active Assets California Tax-Free Trust
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 JUNE 30,
MONTHS ENDED ---------------------------------------------------------------
DECEMBER 2006 2006 2005 2004 2003 2002
----------------- ----------- --------- --------- --------- ---------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of
period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ---------- -------- -------- -------- --------
Net income from investment
operations.......................... 0.014 0.023 0.012 0.003 0.006 0.011
Less dividends from net investment
income.............................. (0.014) (0.023) (0.012) (0.003) (0.006) (0.011)
-------- ---------- -------- -------- -------- --------
Net asset value, end of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ========== ======== ======== ======== ========
Total Return......................... 1.45%(1) 2.37% 1.17% 0.35% 0.63% 1.15%
Ratios to Average Net Assets:
Total expenses (before expense
offset)............................. 0.57%(2) 0.59%(3) 0.62%(3) 0.61% 0.60% 0.60%
Net investment income................ 2.90%(2) 2.42% 1.16% 0.35% 0.63% 1.14%
Supplemental Data:
Net assets, end of period, in
thousands........................... $1,644,693 $1,317,004 $704,291 $687,800 $762,448 $762,656
</Table>
- ---------------------
<Table>
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
</Table>
21
See Notes to Financial Statements
Active Assets California Tax-Free Trust
RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED)
On August 1, 2006, a Special Meeting of Shareholders of the Fund was scheduled
in order to vote on the proposals set forth below. The proposals failed to
achieve the quorum necessary in order to hold the meeting, and, therefore, the
meeting was adjourned until several times, most recently to November 30, 2006 to
permit further solicitation of proxies. The meeting was held on November 30,
2006 and the voting results with respect to these proposals were as follows:
(1) Election of Trustees:
<Table>
<Caption>
FOR WITHHOLD ABSTAIN BNV*
-----------------------------------------------------
Frank L. Bowman.......................................... 627,269,189 27,109,726 481,777 0
Kathleen A. Dennis....................................... 627,109,412 27,269,503 481,777 0
James F. Higgins......................................... 625,047,451 29,331,464 481,777 0
Joseph J. Kearns......................................... 625,344,793 29,034,122 481,777 0
Michael F. Klein......................................... 626,955,204 27,423,711 481,777 0
W. Allen Reed............................................ 626,675,378 27,703,537 481,777 0
Fergus Reid.............................................. 625,437,844 28,941,071 481,777 0
</Table>
The following Trustees were not standing for reelection at this meeting: Michael
Bozic, Dr. Manuel H. Johnson and Michael E. Nugent.
(2) Elimination of certain fundamental investment restrictions:
<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
-----------------------------------------------------
Elimination of the fundamental policy restricting the
Fund's ability to pledge assets........................ 587,279,124 31,026,706 36,554,862 0
Elimination of the fundamental policy restricting
purchases of securities on margin...................... 586,484,073 31,292,087 37,084,532 0
Elimination of the fundamental policy prohibiting
investments in oil, gas, and other types of minerals or
mineral leases......................................... 587,092,146 30,473,997 37,294,549 0
Elimination of the fundamental policy prohibiting or
restricting the purchase of securities of issuers in
which Trustees or Officers have an interest............ 596,404,026 27,240,981 31,215,685 0
Elimination of the fundamental policy prohibiting
investments for purposes of exercising control......... 596,775,894 27,378,186 30,706,612 0
Elimination of the fundamental policy prohibiting the
purchase of common stocks and other instrument......... 594,195,709 27,898,532 32,766,451 0
</Table>
22
Active Assets California Tax-Free Trust
RESULTS OF SPECIAL SHAREHOLDER MEETING (UNAUDITED) continued
(3) Modify certain fundamental investment restrictions:
<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
-----------------------------------------------------
Modify fundamental policy regarding diversification...... 593,981,031 27,839,051 33,040,610 0
Modify fundamental policy regarding borrowing money...... 592,048,230 30,804,054 32,008,408 0
Modify fundamental policy regarding loans................ 591,885,778 31,872,335 31,102,579 0
Modify fundamental policy regarding investment in
commodities, commodity contracts and futures
contracts.............................................. 592,019,448 30,765,679 32,075,565 0
Modify fundamental policy regarding issuance of senior
securities............................................. 595,980,078 27,667,355 31,213,259 0
</Table>
(4) Reclassify certain fundamental policies as non-fundamental policies:
<Table>
<Caption>
FOR AGAINST ABSTAIN BNV*
-----------------------------------------------------
Reclassification as non-fundamental the fundamental
policy regarding the short sale of securities.......... 594,251,904 31,424,978 29,183,810 0
Reclassification as non-fundamental the fundamental
policy prohibiting investment in other investment
companies.............................................. 594,057,193 30,542,496 30,261,003 0
Reclassification as non-fundamental the fundamental
policy on the purchase or sale of puts, calls, and
combinations thereof................................... 593,300,773 30,344,962 31,214,957 0
</Table>
- ---------------------
* Broker "non-votes" are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial
owners or other persons entitled to vote and for which the broker does not
have discretionary voting authority.
23
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairman of the Board
Ronald E. Robison
President and Principal Executive Officer
J. David Germany
Vice President
Dennis F. Shea
Vice President
Barry Fink
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
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 the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its trustees. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Morgan Stanley Distributors Inc., member NASD.
(c) 2006 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Active Assets
California
Tax-Free Trust
Semiannual Report
December 31, 2006
[MORGAN STANLEY LOGO]
AACSAR-RA07-00166P-Y12/06
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 filed by closed-end funds.
Item 9. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the 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.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Active Assets California Tax-Free Trust
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
February 9, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
- -------------------------------------
Ronald E. Robison
Principal Executive Officer
February 9, 2007
/s/ Francis Smith
- -------------------------------------
Francis Smith
Principal Financial Officer
February 9, 2007
3